Banking Review Series 2012 - Bangladesh Institute of Bank ...ssadmin.bibm.org.bd/notice/29-06-19/Banking Review Series 2012.pdfperformance review of broad groups of banks (SOCBs, PCBs,

Banking Review Series 2012

A Compilation of the Review of

Banking Activities for the year 2011

BANGLADESH INSTITUTE OF BANK MANAGEMENT

Mirpur, Dhaka

Banking Review Series 2012

Published: February 2013

Editorial Team : Dr. Toufic Ahmad Choudhury

: Dr. Shah Md. Ahsan Habib

: Abed Ali

Support Team : Sharmina Nargish

: Md. Golam Quader

: Sujan Kumar Ghosh

: Sarder Aktaruzzaman

: Md. Nasir Uddin

: Tarannum Purween

Published by Bangladesh Institute of Bank Management (BIBM)

Plot No. 4, Main Road No. 1 (South), Section No. 2

Mirpur, Dhaka-1216, Bangladesh

PABX : 9003031-5, 9003051-2

Fax : 88-02-9006756

E-mail : [email protected]

[email protected]

Web : www.bibm.org.bd

Printed by Nahida Art Press, Gopibag, Dhaka, Bangladesh

The views in this publication are those of authors only and do not necessarily reflect the

views of the institution involved in this publication.

Foreword

Bangladesh Institute of Bank Management (BIBM) has introduced a number of review

workshops to review overall activities of different departments of banks since 2012. In these

review workshops, keynote papers are prepared by research teams comprising the faculty

members of BIBM and experienced bankers from different banks, highlighting overall

activities of different functional areas of banks. The research papers are finalized after

discussion in review workshops with the concerned heads of departments of different banks.

The present compendium, the first of the Banking Review Series would, we hope, attract

attention of not only bankers, but of other professionals like credit analysts, economic

consultants, economists, development practitioners as well as the academic community.

BIBM would also welcome comments, critiques and suggestions on the themes contained in

these review-based workshops.

Dr. Toufic Ahmad Choudhury

Director General

Contents

Paper One

A Summary Review of the Banking Activities in Bangladesh

Dr. Toufic Ahmad Choudhury

01

Paper Two

Credit Operations of Banks

Dr. Prashanta Kumar Banerjee, Sk. Harun-ar-Rashid, Quazi Golam Morshed

Farooqi, Atul Chandra Pandit and Mohammad Mahfuzur Rahman

11

Paper Three

Trade Services Operations of Banks Dr. Shah Md. Ahsan Habib, Mahmood-ur-Rahman, Antara Zareen, A. T. M. Nessarul Haque and Nasir Hossain

65

Paper Four

Treasury Operations of Banks Md. Nehal Ahmed, Md. Shahid Ullah , Md. Zakir Hossain and

Labonnya S. Chowdhury

135

Paper Five

Internal Control and Compliance of Banks Md. Mohiuddin Siddique, Sk. Nazibul Islam, Md. Alamgir, Md. Shahid Ullah, Md. Mahabbat Hossain and Amzad Hossain

183

Paper Six

Human Resource Management of Banks Fahmida Chowdhury, Mahammad Tazul Islam, Md. Masudul Haque,

Rexona Yesmin and A. K. M. Nurul Islam

215

Paper Seven

IT Operations of Banks Md. Shihab Uddin Khan, Md. Mahbubur Rahman Alam, Kaniz Rabbi,

Shamsur Rahman Chowdhury and Shah Alam Patwary

249

Banking Review Series-2012

Paper One

A Summary Review of the Banking

Activities in Bangladesh*

Dr. Toufic Ahmad Choudhury**

** Professor and Director General of Bangladesh Institute of Bank Management (BIBM) * The summary review is mainly based on the review papers prepared on six functional areas by BIBM and

was presented in the “Annual Banking Conference 2012”.

Banking Review Series-2012 1

A Summary Review of the Banking Activities in Bangladesh

1. BIBM Annual Banking Conference 2012 is an attempt to bring academicians,

researchers and banker on the same platform to share their knowledge and

experiences. The conference will have discussions under six thematic areas on

different banking issues. Before moving into the issue based discussion, I believe

the forum demands a generic review of the banking activities of the country. In

Bangladesh, different published sources capture comparative information on the

performance review of broad groups of banks (SOCBs, PCBs, FCBs, SPBs).

However, reviewing the desk level activities and operations of banks had largely

remained absent. In order to address the “gap”, BIBM has undertaken 6(six)

review studies on 6(six) important areas of operations (namely, credit, trade

services, treasury, IT, ICC and HR) of the banking system in 2012. This paper is

an attempt of presenting the findings of review studies of BIBM. It also identifies

some recent challenges of the banking industry and put forward some remarks.

2. Currently there are four state-owned commercial banks (SOCBs), 4 specialized

banks (SPB), 30 domestic private commercial banks (PCBs), and 9 foreign

commercial banks (FCBs), in the banking sector of Bangladesh. The operational

and competitive environment of all categories of banks are not same. Full

commercially motivated operational environment is mainly enjoyed by the PCBs

and FCBs. Government directed expansion of credit and some other relevant

services are performed by SOCBs and specialized banks of the country. In recent

time though the government has corporatized SOCBs and made them more

autonomous to operate under better commercial environment, no visible impact

is observed. Though a number of NBFIs have been allowed in the financial

market and efforts are on to consolidate capital market, banking sector remains

the key constituent of the financial sector of Bangladesh.

3. Role of regulatory and supervisory authority is particularly important for

ensuring the safety and soundness of a banking system. In this connection some

recent initiatives of the Bangladesh Bank is remarkable. Bangladesh Bank

adopted financial sector regulatory and supervisory frameworks with sharper risk

and systemic stability focus in line with post-global crisis revisions of


international best practice standards. Currently it is implementing Basel II capital

regime, and preparations are on for phasing in Basel III capital and liquidity

standards. Bangladesh Bank sharpened its supervisory vigilance for improving

corporate governance, risk management and disclosure practices in the financial

sector. Bangladesh Bank started publishing Financial Stability Reports since

2011 to identify the risks that could affect individual bank, financial sector,

and/or the economy. Scheduled banks were instructed to establish a separate

Risk Management Unit to develop risk management capacity among them to

manage the risks that can cause systemic threats and jeopardize the stability of

the entire financial system. Periodical stress testing has also been made

mandatory to bring out vulnerabilities of banks and financial institutions.

Initiatives are also undertaken to upgrade BB‟s regulatory and supervisory

capabilities continually to meet the emerging new challenges.

4. It is well known that credit is the core activity of banks and the main asset

component. According to the recent BIBM Review Study (2012), Credit and

investment assets of scheduled banks amounted to a minuscule Taka 7.07 billion

in December 1972 and it stood 654 fold higher at Taka 4625.85 billion as of

December 2011. After having a number of reform programs related to credit

operation of banks, current banking activities has reached a stage of reliability

and heading for maturity. Banks have been given almost full freedom for their

own credit operation. In addition, availability of different tools like Credit Risk

Management (CRM) manual, Credit Risk Grading (CRG) manual, existence of

online Credit Information Bureau (CIB) and legal support both for credit

operation and loan recovery, accessibility to tailored software and, most

importantly, injection of a pool of talented bankers in the banking sector truly

upgraded the credit operation of commercial banks. One indicator may be that

status of classified loan that came down to around 7 percent (of total outstanding

loans) in June 2012 as compared to 27 percent in 1990. It is to be mentioned here

that the improvement may even be considered greater as over the years the loan-

classification norms have been made more and more stringent.

5. BIBM review of credit operation (2012) finds that the cost of raising funds for

loans has increased substantially in 2011 reflecting inappropriate asset liability


management on the part of banks. Different types of credit concentration (such

as urban concentration, trade concentration, etc.) are also evident from the

review. Such inequitable distribution of advance by banks will not only create

economic disparity, but also add credit concentration risk to the risk profile of

the banks, requiring additional capital under Basel-II. Slow recovery has been

observed in the real estate, RMG and commodity sector in 2011, compelling the

entrepreneurs to reschedule their repayment. In many instances, ambitious profit

target forced bank employees to compromise loan quality.

6. The contribution of Agriculture sector to GDP is almost 20 percent but the flow

of credit to this sector is only around 5.59 percent total advance in 2011.

Particularly, the participation of PCBs and FCBs in this sector is very negligible

compared to their total loan portfolio. To ensure greater credit flows to the

agricultural sector, Bangladesh Bank has made it mandatory for all the banks to

disburse at least 2 percent of their total loans to the agricultural sector. According

to BB statistics (as of end 2011), of the industrial credit over 85 percent goes to

the large and medium industries. Small and cottage industries accounts for less

than 5 percent. Bangladesh Bank has undertaken notable initiatives and

introduced refinancing facilities to promote greater credit flows to the SME

sectors. Flows of banks credit to the rural areas remained very limited.

7. Though CRM requires updating of the lending guidelines at least annually, but it

has been noticed that only 40 percent of sample banks follow it meticulously.

The banks are not maintaining any electronic database of the CRG score of the

borrowers although it is required by the CRM. Maintaining data base will help

banks in developing more rigorous internal risk rating model as required by

Basel-II for switching over to advance approach, In some of the banks, effective

segregation among relationship management, credit administration and approval

function has not been found.

8. Trade payment is at the heart of international banking activities of banks in

Bangladesh. Letter of Credit (LC) is the most widely used method of payment

both in import and export transactions. According to BIBM Review Study on

Trade Services (2012), in 2011, 97 percent (number of cases) import payments


from the country were made through LC. In case of export the figure is 66

percent. Documentary collection is the second most popular method. In contrast

to the most global economies, the use of open account is very low. It is the

explicit and implicit regulatory compulsions that forced banks to facilitate

payments through LC. Banks also offer financing facilities to the exporters and

importers. Though generally interest rate is not regulated by the Bangladesh

Bank, in export financing banks interest rates cannot exceed 7 percent. Back-to-

back is a very popular trade financing technique used by the banks to support

garments exporters of the country.

9. Bangladesh Bank accepted UCP 600 as the regulatory framework for LC

operation for cross border trade in 2007. However, there is no such circular about

URR 725. No guideline is there for ISP 98 and URDG 758. Current version of

Inco-terms 2010 came into effect from January -2011. But Import Policy Order

2009-12 still contains the Inco-terms which are not in use. These create

confusion among practitioners. Instead of scattered and piecemeal directives, a

comprehensive master guideline on trade service practices of EPZ might help

bankers to act uniformly and correctly.

10. Late payment has been found as a common practice by the trade service

providing banks, which do not only harm institutional reputations of banks but

also the country‟s image. Banks also face problems in regard to reporting of

unutilized LCAF, timely receipt of BOE (from customs), delay in disbursement

of EDF fund etc, which need to be resolved.

11. Remarkable changes may be observed in the operational efficiency of the trade

services departments of banks. Information technology is rapidly changing the

nature of international trade services in the country. ICT based activities like

internet banking on trade services, online reporting to BB, new avenues for

remittance can be identified as adaptation of advanced ICT by the banking

sector. Basically, it has enabled them to go for faster decision making, prompt

documentation and processing. Internally, quite a few banks are fully relying on

software based operations. It is a remarkable achievement that almost all

executives working in the trade services departments of different banks have


training exposures. A considerable number of employees of the concerned

departments have received training from BIBM. A remarkable improvement in

connection with the development of professional bankers in the trade services

area reflects with the growing number of Certified Documentary Credit

Specialist (CDCS) in the banking sector of the country. The number of CDCS

holders in the country was only 1 till 2008, which increased to over 100 by the

end of 2011.

12. In Bangladesh, treasury management function of banks received importance only

in recent years. With the liberalization of interest rates, exchange rates, and

currency convertibility necessitates establishment of treasury management unit in

the commercial banks of the country. Considering the paramount importance of

the treasury operations, Bangladesh Bank has issued a guideline to establish a

separate treasury department in each bank. In Bangladesh money market is still

very thin, because of lack of diversified market participants and market

instruments. Foreign exchange market is spot dominated, even two-way

quotation is not always available. Because of risk risk averse attitude and lack of

skill on the part of big players, they do not take the lead of market making.

Absence of secondary market forces the bond market to stay at nascent stage. As

a result, banks especially PD banks are suffering from severe liquidity problem.

13. Bangladesh Bank was very active throughout (2011) the year for managing the

liquidity pressure of banks. BB has allowed PDs to enjoy assured liquidity

support (ALS) for a period of 75 days against their holdings of T-bills and

T-bonds. The illiquidity of financial markets may also be attributed to heavy

government borrowing, huge L/C payments of BPC by SOCBs and over lending

by the banks, specially PCBs. In response to the development, Bangladesh Bank

announced contractionary monetary policy, advised the commercial banks to

reduce the Loan-Deposit ratio, provided Assured Liquidity Support (ALS) and

special REPO. Again central bank sold the USD from time to time in the market

in order to ease the demand pressure of foreign currency, provided OD facility to

the state-owned commercial banks for their LC payments against oil import for

BPC, keeping stability of the price and liquidity of foreign currency in the


interbank market on spot, forward, and swap through moral suasion. All these

initiatives have proved to be effective to manage the market.

14. It is the Human Resources (HR) that really matters for efficient services of banks

and ultimately for the performances of the banks. Without efficient employees,

the best ideas, strategies and business plans fail to achieve goals. In fact, banks in

Bangladesh have started giving due emphasis to HR only in the recent years.

BIBM survey shows that the banks have their individual HR policy, but in many

cases, these are not up to date and fully implemented. Major challenges for many

banks are to develop the core competencies and skills for different operational

areas like credit appraisal, risk management and handling trade and treasury

activities. Even for most of the banks, there is no scientific method of selection

of trainees. Though performance appraisal is done jointly in many banks, yet in

reality subordinates hardly contradict bosses. Compensation discrepancies, and

recruitment and retention of qualified employees are other HRM challenges of

the banks.

15. Banking sector of Bangladesh has undertaken remarkable initiatives to adopt

global technological improvement and to offer IT based financial services. At

present, several PCBs and FCBs of the country offer limited services of Tele

banking, Internet banking, and M-banking facilities. As a part of stepping

towards online banking, the FCBs have played the pioneer role with the adoption

of modern technology in retail banking since the early 1990s, whereas the

SOCBs and PCBs came forward with such services on a limited scale following

the late 1990s. Bangladesh Bank has been playing notable role to maintain and

promote smooth and secured e-banking operations. Banks have been allowed to

make online money transactions, payment of utility bills, transfer of funds,

payments for trading goods and services through e-channels like Internet, ATM,

Mobile phone, etc. BB has issued Mobile Banking guidelines to facilitate and

oversee these initiatives in the financial sector. Considering the importance of

information systems security in banks BB has issued ICT security guidelines for

banking and financial institutions. In regard to the use of ICT in the banking

operation, online access to Credit Information Bureau (CIB), installation of


Bangladesh Automated Clearing House (BACH), introducing MICR cheques

and EFT are remarkable events.

16. Bangladesh Bank has been guiding banks and financial institutions into

mainstreaming Corporate Social Responsibility (CSR) in their institutional goals

and objectives in line with inclusive growth objectives of the country. The basic

target is to engage the entire financial sector in a sustained financial inclusion

campaign to reach out the unserved and underserved population. In response to

these, the expenditure of banks on CSR activities increased by over ten times in

last three years. As part of inclusion campaign, priority attention of the

Bangladesh Bank has been directed to adequacy of credit flows to agriculture,

SMEs, renewable energy generation and women entrepreneurship. Currently,

banks may sanction loan of BDT 2.5 million to women entrepreneurs without

collateral but against personal guarantee under refinance facilities by BB if the

borrower is a women entrepreneur or if 51 percent shareholders of the borrowing

enterprise are women. In order to include large number of women micro

entrepreneurs in the SME credit facilities, a policy of group based lending of up

to BDT 50,000 or above has been adopted. In response to the inclusion campaign

SOCBs have by now opened over ten million new bank accounts in favor of

small farmers and other low income groups with nominal Taka ten initial

deposits; enabling them to receive government agricultural input subsidies/social

safety net payments in these accounts, besides making other transactions.

17. Banking sector of Bangladesh initiated green banking activities in recent period

as part of their social and environmental responsibilities. To foster green

banking practices in the country, BB formulated the „Green Banking Policy and

Strategy framework‟ and „Environmental Risk Management Guidelines‟ in a

consultative manner. Many banks are now financing environmental friendly

projects. BB has also introduced a refinance scheme worth BDT 2 billion

refinance loans to effluent treatment plants (ETPs), solar panels, bio-gas plants

and HHK technology in brick making industry at a 5 percent interest rate

provided by banks. It is to be noted that banking sector of Bangladesh responded

remarkably by undertaking a number of initiatives in regard to in-house

environment management, environmental risk management and environmental


reporting. Recently, honorable Governor of BB has been adorned as „Green

Governor‟ in recognition of the green initiatives undertaken by the central bank

in the Doha Climate Change Conference.

18. Our banking sector recently experienced a few cases of unethical practices and

irregularities. The frequency and magnitude of such fraudulent activities inflicted

huge burden on the banking sector and has impacted the public confidence and

reputation of the banking sector- a sector which has shown significant growth,

strength and discipline for a long period of time. The occurrence of fund

embezzlement also raised serious doubt in the minds of the depositors, regulators

and other stakeholders of the banking sectors about the financial discipline and

operational standards. It is generally recognized that such types of unscrupulous

activity can‟t take place without the active collaboration or passive approval of

the concerned bankers. Practically, the incidences reflect the importance as well

as failure of internal control mechanism of banks.

19. BIBM review of Internal Control and Compliance of Banks-2011 reveals that in

spite of rapid changes in banking operations due to technological developments,

ICC manuals of individual banks are not reviewed regularly. Even some of the

banks have not yet introduced risk based audit plan. The personnel of ICC

department actually do not have the freedom to take corrective actions. The

review also finds that most of the banks have Risk Management Units (RMU)

which are separate from ICC. However, in reality, a close cooperation between

ICC and RMU is supposed to improve risk management capacity of a bank.

20. With the growing complexity and challenges, effective risk based supervision is

the need of the time. Having a set of prudent regulatory measures, effective

supervision depends upon adequate power, sufficient resources and

independence to foster good supervision. Central bank needs strong support from

the government to enforce its authority and supervisory power. In Bangladesh,

Bangladesh Bank is the true supervisor of the private sector and foreign banks

only. Recent evidences of irregularities demonstrate that Bangladesh Bank is not

in a position to take corrective measures on its own. Incidentally, Bangladesh

Bank does not have enough supervisory grips over the state owned commercial


banks. That is a grey area in our system and one of the major obstacles to ensure

the proper functioning of the state owned banks. So, the way out of the fund

misappropriation that is observed in recent times in the banking sector rests upon

a comprehensive and risk focused internal control and internal audit in banks,

sufficient autonomy of Bangladesh Bank, and zero tolerance by the government

and the central bank against any major violations of the banking norms. Only

these can offer an enabling environment where a risk based supervision approach

by Bangladesh bank with a set of skilled central bankers can truly deliver. This is

a necessity for improving the performance and ensuring a sustainable banking

sector of the country.


Paper Two


Dr. Prashanta Kumar Banerjee1

Sk. Harun-ar-Rashid2

Quazi Golam Morshed Farooqi3

Atul Chandra Pandit4

Mohammad Mahfuzur Rahman5

1 Professor and Director (RD&C) of Bangladesh Institute of Bank Management (BIBM) 2 Senior Associate Professor of Bangladesh Institute of Bank Management (BIBM) 3 Faculty Member (on Contract) of Bangladesh Institute of Bank Management (BIBM)

4 Assistant Professor of Bangladesh Institute of Bank Management (BIBM)

5 Deputy General Manager of Janata Bank Limited



1. Introduction

The credit operation of banks mainly bank finance contributes to the development of

the economy in all countries. Bangladesh is no exception. Moreover, Bangladesh

economy distinctly depends on bank finance as the other two sources, namely, equity

and bond finance are either irregular or inactive as sources of finance in Bangladesh1.

Credit and investment assets of scheduled banks amounted to a minuscule Taka 7.07

billion in December 1972 and it stood 654 fold higher at Taka 4625.85 billion as of

December 2011.

Bank finance directly influences the economic development of a country. A large

body of literature also supports this linkage. Bagehot (1873) and Schumpeter (1912)

emphasize the critical importance of banking system on the level and the rate of

growth of a country‟s per capita income. They highlight circumstances when banks

can actively spur innovations and future growth by identifying and funding

productive investments. A burgeoning empirical literature also suggests that well

functioning banks accelerate economic growth. Goldsmith (1969) on the basis of data

from the banking sector of 35 countries between 1860 and 1963 concludes that some

parallels can be drawn between economic growth and financial development if

periods of several decades are considered. King and Levine (1993a, 1993b) show

that banking development measured by the total liquid liabilities of financial

intermediaries divided by Gross Domestic Product (GDP) helps explain economic

growth in a sample of more than 80 countries. By improving upon King and Levine

(1993a, 1993b) measures of banking development that include credit to the private

sector and using instrumental variable procedures to control simultaneity bias , Beck

et al. (2000) and Levine et al. (2000) confirm these findings. Jayaratne and Strahan

(1996) find that rates of real per capita income growth and output increase

significantly after interstate bank branching reform in the USA in 1994 (Reigle –Neal

Act). They argue that improvements in the quality of bank lending, not increased

volume of bank lending appear to be responsible for faster growth. In contrast,

a minority view, for example, Robinson (1952) argues that banks respond passively to

economic growth. However, additional empirical literature is not available to support

this argument.

1 Bank financing precedes equity and bond financing as the important source of finance when a country‟s economy evolves from agriculture to more industrial and service based. As Bangladesh is in that stage of development, credit operation particularly bank finance heavily influenced economic development of the country.


Since independence, the credit operation of banks has traversed a long but uneven

route. In the 1970s and 1980s, the quality of credit operation of banks has been

seriously eroded. This operation was then mostly marked by directed lending, making

loans and advances on extraneous consideration, absence of sound credit appraisal

techniques, giving less importance on credit risk management and large scale default

in repayment.

After having a number of reform programs2 where credit operation of banks got more

attention, currently this organ of bank activities has reached a stage of reliability and

heading for maturity. Banks have been given almost full freedom for their own credit

operation. In addition, availability of different tools like Credit Risk Management

(CRM) manual, Credit Risk Grading (CRG) manual, existence of online Credit

Information Bureau (CIB) and legal support both for credit operation and loan

recovery, accessibility to tailored software and, most importantly, injection of a pool

of talented bankers in the banking sector truly upgraded the credit operation of

commercial banks to a satisfactory level. One indicator may be cited to support this

upgradation. Classified loan as percentage of total outstanding loan was 27% in 1990

which came down to 7.1% in June, 2012.

Although credit operation of banks of Bangladesh reached a satisfactory level as

mentioned above, still lending resources of banks continue to being channeled largely

to well-off borrowers, often with insufficient diversification and inappropriate

asset‐liability maturity matches. Corporate governance weaknesses linger in many

banks, allowing dominant equity holders to manipulate credit access, credit appraisal

and internal control processes to their own advantage.

In this perspective, A.B. Mirza Md. Azizul Islam, Former Advisor of the Ministries of

Finance and Planning, Caretaker Government of Bangladesh, defines social

responsibility of a bank in the article titled “Ethics in Banking” recently presented in

the Eleventh Nurul Matin Memorial Lecture. He mentioned that many of our

corporate entities, including banks, gloat with satisfaction about fulfillment of social

responsibility by offering a few scholarships, making donation to some clinics or

offering some support for some charitable activities. While such initiatives are

2 The banking sector of Bangladesh has continuously been undertaking a number of reform programs namely the Ownership Reform Program (1982-1989), Financial Sector Reform Program (1990-1995), Banking Reform Committee (BRC)/ Commercial Bank Restructuring Project (CBRP) (1996-2002) and other reform programs from 2003 onwards.


welcome, these touch only the fringe. He opined that social responsibility must be

viewed from a wider perspective, taking into account the impact of bank's activities

on growth, employment and, emphatically in our case, poverty alleviation as well.

He adds that banks determine allocation of credits by sectors, regions and group of

population. No doubt, he indicates about the expected picture of the credit operation

of a bank which is the true indicator of fulfilling social responsibility of a bank.

In his paper, he suggested a few do‟s and don‟ts.

In the section on do‟s, relevant to credit operation in banks his suggestions are:

financing activities which contribute to environmental protection, employment

creation, poverty alleviation and women's empowerment; minimizing spread between

cost of funds and lending rates ; complying with all laws, rules and regulations

promulgated by relevant regulatory authorities; developing effective risk

management systems, devising innovative products without assumption of undue risk

,trying to expand operations to unbanked or under banked sectors, regions and

population groups and emphasizing recovery, but with a human face. On the other

hand, as for the don‟ts, he suggests not to finance activities which aggravate

pollution, employ child labor and injure human health; not to finance unsustainable

bubble in real estate or stock prices; not to bow down to illegitimate pressures exerted

by political personalities, bureaucrats or musclemen and not to reschedule loans at the

last moment to enable powerful, but delinquent borrowers to participate in elections.

The aforementioned do‟s and don‟ts relevant to credit operation in banks may be

considered as the guiding light for the credit operations of a bank.

In 2011, Bangladesh experienced robust economic growth (6.7%) amid slowdown of

the world economy. This accelerated economic growth increased the amount of credit

substantially. The credit to the public sector grew by 39.9 percent and private sector

by 25.8 percent in 2011 (Bangladesh Bank, Annual Report, 2010-2011). To meet

these huge extra funds of the real sector, banks, the lone source of finance in

Bangladesh, more or less faced funding problems throughout the year. In the midst of

turmoil in the world economy but moderately healthy Bangladesh economy, it seems

that credit operation in banks demonstrated apparently a moderate level of resilience.

To examine the credit operation of banks in Bangladesh in detail, an initiative is

therefore taken here to review the credit operation of banks in 2011.

The main objective of this paper is to review the credit operation of banks in 2011.

To do review, the remainder of the paper proceeds as follows. Section two presents


data and methodology used in the review. Section three reviews activities associated

with credit operations in banks. Section four examines regulatory and supervisory

requirements for credit operations. Section five evaluates the credit portfolio of

banks. Section six reviews the norms followed by banks in their credit operations as

per CRM manual. Section seven discusses the problems faced by banks in their

credit operation in 2011 including two case studies, one on a successful and the other

on a failed project. Finally, section eight places some issues derived from the review

of credit operation of banks in 2011 but required to be discussed in detail for the

betterment of the credit operations of banks in future.

2. Data and Methodology

Both primary and secondary data have been used in this review study. Primary data

have been collected by administering an open-ended questionnaire to the heads of

Credit Risk Management of Banks. The sample drawn randomly consists of 15 banks

including SCBs, PCBs (including Islamic Banks), and FCBs. However, the

willingness and availability of the respective bank‟s CRM in a few cases were also

taken into consideration in selecting sample.

Secondary data sources include various publications of Bangladesh Bank like

Bangladesh Bank Annual Reports, Economic Trends, Bangladesh Bank Bulletin,

Scheduled Banks Statistics and circulars issued and manuals prepared by Bangladesh

Bank from time to time. In addition, credit policies of the commercial banks have also

been used as sources. Data only for 2010 and 2011 have been used. This study is

mostly qualitative in nature. After data collection, necessary screening has been

performed before tabulation. The concerns expressed by the CRM have been

analyzed. Simple financial and accounting tools have been applied in this study

wherever necessary. Two cases - one successful and the other failed – have been

analyzed to gain an insight about the causes for success and failure of the projects.

3. Activities Associated with Credit Operations of Banks

Credit operations of a bank are always guided by the bank‟s own credit policy and

lending strategy formulated in the light of the Bangladesh Bank‟s guideline and

vision of the bank. It may therefore vary from bank to bank. Nevertheless, an overall

picture of the activities of the credit operation of a bank is delineated sequentially

below.


3.1 Origination

At the beginning of the each calendar year, the head office prepares a credit budget

for the whole year highlighting the amount of credit to be sanctioned and disbursed in

different categories and sectors. As per credit budget, sector wise allocation has to be

given to different divisions, areas, regions and branches for the respective year.

In each bank usually there is a credit committee/CRM in every region, area, division

and head office which review the every aspect of loan proposal to be considered in

approving and sanctioning a loan. With the recommendation of the credit committee,

the delegated authority sanctions loan within the limit of credit budget. However,

some banks follow a head office based centralized system of credit operation where

all tasks relating to loan proposal are executed in the head office and branch offices

work as deposit collection and service delivery points.

3.2 Appraisal

After receiving loan application by RM from the prospective borrower, the branch

starts the processing of loan case with a view to selecting the right type of borrower

and business. The bank assesses the credit worthiness and risk profile of the

borrower. By and large, this assessment covers the following : investigation about the

identity of the borrower; enquiry as to the nature of business of the borrower,

verification of the academic qualification and experience of the borrower, equity

given in the business by the borrower, history of accounts operated mainly to know

the repayment history of the borrower, purpose of credit, source of repayment,

payment capacity and other sources of income of the borrower, expected future cash

flows of the borrower consistent with the past history, terms, conditions and

covenants for the credit agreement, adequacy, enforceability and liquidity status of

collaterals, approval from the appropriate authority, assessment of the borrower‟s

industry, and macro-economic factors and firm-specific analysis. The above

assessment about a prospective borrower is normally done by collecting information

from the loan application form, market reports, study of accounts, financial

statements, on line CIB and personal interview. In case of corporate credits where the

borrower is a group of companies, banks conduct credit assessment on a consolidated

or group basis. In case of credit syndication, besides the lead bank, all participatory

banks also perform their own independent assessment, analysis and review of terms


of the syndicate loan. In addition, online CIB3 is very helpful to check mainly

whether the borrower seeking loan has any classified loan or not.

Apart from determining the commercial viability of the project with respect to

marketing, financial, managerial, organizational and technical aspects, socio-

economic appraisal of the project is also viewed from the society‟s angle as a whole.

3.3 Approval4

Each bank has thresholds, above which, the recommendation5 of the head of

corporate (HOCB), small and medium enterprise (HOSME), consumer credit

(HOCC) and off-balance sheet activities (HOOBA) is required prior to onward

recommendation to Credit Risk Manager (CRM) for approval. Before that,

relationship manager is to place his recommendation. Approval process more or less

uses the following line of approval depending on the loan amount and internal policy

of the bank.

Credit

Application

Recommended

by Relationship

Manager (RM)/

Marketing

Zonal

Credit

Officer

(ZCO)

Head of Credit (HOC) & Head

of Corporate Banking (HOCB),

and Head of Small and Medium

Enterprise (HOSME), Head of

Consumer Credit (HOCC) and

Head of Off –Balance Sheet

Activities (HOOBA)

Head of

Credit Risk

Management

(HOCRM)

Managing

Director

Executive

Committee/

Board

Delegation of approval limits should be such that all proposals where the facilities are

up to 15% of the bank‟s capital should be approved at the Zonal level, facilities up to

3 After inauguration of CIB online services in July, 2011, Bangladesh Bank supplies all the CIB reports of its clients using online system. They can also upload credit information of their clients to the online system without any physical interaction. CIB collects credit information having outstanding balance of TK. 50,000/- and above on monthly basis from banks and FIs. It also collects defaulted credit card information having outstanding balance of TK. 10,000 and above on monthly basis from banks and FIs. On the basis of the information contained in CIB database, CIB reports are generated.

4 The approval process must reinforce the segregation of Relationship Management/ Marketing from the approving authority. The responsibility for preparing the Credit Application should rest with the RM within the corporate/ commercial banking department.

5 It varies from bank to bank.


25% of capital should be approved by CEO/ MD, facilities in excess of 25% of

capital to be approved by the EC/ Board only after recommendation of CRM and

MD/CEO. In addition, a monthly summary of ZCO approvals is sent to

HOCB/HOSME/ HOOBA/HOCC. The head office is supposed to review at least 10%

of ZCO approvals to ensure adherence to lending guidelines and bank policies.

The recommending or approving executives should take responsibility for and be held

accountable for their recommendations or approval.

3.4 Appeal Process

Any declined credit proposal may be re-presented to the next higher authority for

assessment/ approval. However, there should be no appeal process beyond the

Managing Director.

3.5 Credit Administration6

The credit administration function is basically a back office activity which aims at

ensuring the proper documentation prior to disbursement of credit facilities and

monitoring the credit afterwards. A typical credit administration unit performs

the disbursement7, custodian

8, monitoring

9 and compliance

10 function. Main

responsibilities of credit administration are: ensuring that all security documentation

complies with the terms of approval and is enforceable, examining insurance

coverage to ensure appropriate coverage in place over assets pledged as collateral,

and is properly assigned to the bank, controlling loan disbursements only after all

6 Credit administration should be strictly segregated from the relationship management/marketing in order to avoid the possibility of controls being compromised.

7 The credit administration ensures that the credit application has proper approval before entering facility limits

into computer systems. Disbursement should be effected only after completion of covenants, and receipt of collateral holdings. In case of exceptions necessary approval should be obtained from competent authorities.

8 Custodian refers to obtaining security documentation as per approval, ensuring storing of loan security

documents safely, doing periodic review of documentation and ensuring proper insurance of collateral.

9 Credit monitoring procedures and systems should be in place that provides an early indication of the deteriorating financial health of a borrower. After the credit is approved and draw down allowed, the credit should be continuously monitored. These include keeping track of borrowers‟ compliance with credit terms, identifying early signs of irregularity such as loan proceeds being used other than for the intended purpose, conducting periodical valuation of collateral and monitoring timely repayments.

10 The credit administration department ensures that the bank properly reports to CIB, circulates default lists,

maintains BB circulars, ensures compliance by all departments and makes sure all valuers, lawyers, insurers

approved & enlisted and their performance reviewed periodically.


terms and conditions of approval have been met, and all security documentations are

in place; maintaining control over all security documentation and monitoring

borrower‟s compliance with covenants and agreed terms and conditions and general

monitoring of performance of account conduct.

3.6 NPL Management and Recovery

This function is entrusted to a separate recovery division in banks. This division takes

over the files of classified loans from the RM office and makes all out efforts to

ensure maximum recovery from these accounts. Specific activities of the recovery

division include preparation of the action plan/strategy, holding meeting with

borrowers, conducting review, ensure adequate and timely loss provision.

4. Regulatory and Supervisory Requirements for Credit Operations

In order to ensure the quality and balanced credit operations, besides Bank

Companies Act 1991, Bangladesh Bank issues prudential regulations, guidelines,

circulars from time to time. Relevant sections and regulations of importance in credit

operation are briefly summarized in this section.

4.1 Instructions of Relevant Sections11

of The Bank Companies Act, 1991 (BCA, 1991)

As per The Bank Companies Act (BCA), 1991, a banking company is not allowed to

make any loans or advances against the security of its own share, against the

guarantee of any of its directors, family members of directors, firm where directors or

their family members are interested as director, proprietor or partner, any public

limited company which is managed by any director of the banking company and

holds such share by which he is empowered to vote for 20% or more of the share

holding of the company. Regarding loans to directors, the managing director of every

banking company shall, before the close of the month succeeding that to which the

return relates, submit to the Bangladesh Bank a return in the prescribed form and

manner, showing particulars of all loans and advances granted by it to companies,

private as well as public in which it or any of its directors is interested as a director;

and all loans and advances granted by it to public companies in which it or any of its

directors is interested as managing agent or guarantor.12

The resignation of any 11 Section 27, 27A, 27AA, 28, 28A, 29 of The Bank Companies Act, 1991.

12 Section 27 of The Bank Companies Act, 1991 captioned “Restrictions on Loans and Advances.”


Director of any debtor company shall not be effective without the consent of the

Board of Directors of the lending bank or financial institution and no such Director

shall transfer or sell his share.13

Every banking company or financial institution shall,

from time to time, send list of defaulted borrowers to the Bangladesh Bank.

The Bangladesh Bank shall send the list received to all banking companies or

financial institutions of the country. No banking company or financial institution shall

provide any credit facility to any defaulted borrower. Notwithstanding anything

contained in any other law for the time being in force, the lending banking company

or, the financial institution, as the case may be, shall file suit against the defaulted

borrower according to law in force.14

A banking company shall not, except with the prior approval of the Bangladesh Bank,

remit in whole or in part any debt due to it by any of its directors, the members of

their family; any firm or company in which any of its directors is interested as

director, partner, managing agent or guarantor; any individual, who has interest with

any of its directors as his partner or guarantor. Any remission made in contravention

of the provisions of this act shall be void and of no effect, and any person committing

such remission shall be punishable with imprisonment which may extend to three

years and shall also be liable with a fine not exceeding Taka thirty thousand or with

both.15

Notwithstanding anything contained in this Act or any other law for the time being in

force, in spite of any loan, advance or any other due being written off by any banking

company, such writing off shall not bar initiation of any legal proceeding for

recovery of such written off loan, advance or due.16

Bangladesh Bank may in public interest determine the policy in relation to advances

to be followed by banking companies generally or by any banking company in

particular, and, when the policy has been so determined, all banking companies or the

banking company concerned, as the case may be, shall be bound to follow the policy

so determined. In addition, Bangladesh Bank may give directions to banking

companies in the following matters, namely, credit ceilings to be maintained; the

13 Section 27A of The Bank Companies Act, 1991 captioned “Restriction upon Directors of Debtor Company.”

14 Section 27AA of The Bank Companies Act, 1991 captioned “List of Defaulted Borrower, etc.”

15 Section 28 of The Bank Companies Act, 1991 captioned “Restriction on Power to Remit Debts.”

16 Section 28A of The Bank Companies Act, 1991 captioned “Special Provision relating to Classified or Bad-debt.”


minimum ratio of small loans or other loans to the total advances to be maintained;

the purpose for which advances may or may not be made; the limit upto which

advances may be given to any banking company or group of banking companies, a

person or group of persons; secured advance and ceiling of interest on advance; the

rates of interest to be charged on advances.17

4.2 Prudential Regulations Relevant to Credit Operations of Banks

4.2.1 Policy on Loan Classification and Provisioning18

Policy on loan classification and provisioning requires loans and advances to be

grouped into various categories namely continuous loan19

, demand loan20

, fixed

term21

loan repayable within five years, fixed term loan repayable in more than five

years and short-term agricultural and micro credit.

Determining the quality of the loans is a precondition for determining the provision

requirement for loans. The better the quality of loans the lower the provision

requirement. Quality based loan classes are Unclassified (UC), Special Mention

Account (SMA), Substandard (SS), Doubtful (DF), and Bad and Loss (BL)

representing best to worst quality of loans, respectively. As per the requirement of the

policy, loans are to be classified either by using the objective criteria (overdue period)

or qualitative judgement.

This policy also requires keeping provision on different quality of loans at different

rates ranging from 1% to 100%. Provision rates are mainly22

1%, 5%, 20%, 50% and

100% on Unclassified and Off Balance Sheet Activities, Special Mention Account

(SMA), Substandard (SS), Doubtful (DF) and Bad and Loss (BL), respectively.

Interest on Substandard (SS), Doubtful (DF) and Bad and Loss (BL) category loans

17 Section 29 of The Bank Companies Act, 1991 captioned “Power of Bangladesh Bank to Control Advances by Banking Companies.”

18 BRPD Circular No. 05, dated June 05, 2006.

19 The loan Accounts in which transactions may be made within certain limit and have an expiry date for full adjustment will be treated as Continuous Loans. Examples are: CC, OD, etc. 20 The loans that become repayable on demand by the bank will be treated as Demand Loans. If any contingent or any other liabilities are turned to forced loans (i.e. without any prior approval as regular loan) those too will be treated as Demand Loans. Such as: Forced LIM, PAD, FBP, and IBP, etc. 21 The loans, which are repayable within a specific time period under a specific repayment schedule, will be treated as Fixed Term Loans. 22 Few exceptional areas are agricultural credit, Consumer credit, SME, Housing finance etc. where the rates of

provision differ.


are required to be transferred to interest suspense account instead of crediting to

interest revenue account. This exercise on loan classification and provisioning will be

done by the banks in every quarter and be reported to Bangladesh Bank.

It is mentionable here that BB has issued a new master circular on the issue in 2012

which is more comprehensive and conservative than that of the existing one23

.

4.2.2 Policy on Single Borrower Exposure and Large Loans24

For reducing credit concentration risk of banks, Bangladesh Bank advises the

scheduled banks from time to time to fix limits on their large credit exposures and

their exposures to single and group borrowers. In general, and as practiced

internationally, exposure ceiling is derived from a bank's total capital as defined

under capital adequacy standards of Basel II.

In general case, single borrower exposure limit is 35% of the total capital including

non-funded facilities subject to the condition that the maximum outstanding against

fund based financing facilities (funded facilities) do not exceed 15%. In case of

export sector, single borrower exposure limit is 50% of the total capital including

non-funded facilities subject to the condition that the maximum outstanding against

fund based financing facilities do not exceed 15%.

A loan to any individual or enterprise or any organization of a group will be treated as

large loan if it amounts to 10% or more of a bank's total capital. Banks will be able to

sanction large loans as per the limits set against their respective classified loans as

presented in Table-1 below.

23 BRPD Circular No. 07, dated June 14, 2012 24 BRPD Circular No. 05, dated April 09, 2005


Table-1: Large Loans Limits Based on Bank’s Classified Loan Percentage

Rate of Net Classified Loans

The Highest Rate Fixed for Large Loan

Against

Bank's Total Loans & Advances

Upto 5% 56%

More than 5% but upto 10% 52%



More than 20% 40%

Source: Bangladesh Bank

In order to determine the above maximum rates of large loans, all non-funded credit

facilities e.g. letter of credit, guarantee, etc. included in the loan shall be considered

as 50% credit equivalent. However, the entire amount of non-funded credit facilities

shall be included in determining the total credit facilities provided to an individual or

enterprises or an organization of a group.

A public limited company, which has 50% or more public shareholdings, shall not be

considered as an enterprise/organization of any group. In the cases of loans backed by

cash and en-cashable securities (e.g. FDR), the actual lending facilities shall be

determined by deducting the amount of such securities from the outstanding balance

of the loans. In the cases of credit facilities provided against government guarantees

and AAA rated Multilateral Development Banks (MDBs) guarantee, the

aforementioned restrictions shall not be applicable.25

Considering power sector

development as a government priority it has been decided that Single Borrower

Exposure will not be applicable for the banks financing in order to produce and

distribute electricity against the award provided by the Electricity Department or the

institutions controlled by the said department (Such as- BPDB, REB, PGCB, EGCB,

DPDC, DESCO, APSCL, WZPDCO, NWZPGC).26

Sanctioning, renewing or rescheduling of large loans should be approved by the

Board of Directors in case of local banks. Such decisions should be taken by the

25 BRPD Circular No.02, dated February 19, 2007.



Chief Executives in case of foreign banks. However, while approving proposals of

large loans, among other things, compliance with the above guidelines must be

ensured. Banks shall submit the monthly statement of large loan in the specified

format (Form-L) to the department of Off-site Supervision of Bangladesh Bank

within 10 days after the end of the respective month.

4.2.3 Policy for Rescheduling of Loans27

For requesting rescheduling of loans, the banks shall examine the causes as to why

the loan has become non-performing. If it is found from such review that the

borrower has diverted the funds elsewhere or the borrower is a habitual loan defaulter

the bank shall not consider the application for loan rescheduling. Instead, the bank

shall take/continue all legal steps for recovery of the loans.28

At the time of considering loan rescheduling proposal, bank must review the

borrower's cash flow statement, audited balance sheet, income statement and other

financial statements, conduct spot inspection to assess the borrower's overall capacity

to repay rescheduled liability. If a bank is satisfied after reviewing above mentioned

statements that the borrower will be able to repay, the loan may be rescheduled.

Otherwise, bank shall take all legal steps to realize the loan, make necessary

provision and take measures to write-off.

In case of rescheduling of term loans, application for first rescheduling will be

considered only after cash payment of at least 15% of the overdue installments or

10% of the total outstanding amount of loan, whichever, is less. Rescheduling

application for the second time will be considered after cash payment of minimum

30% of the overdue installments or 20% of the total outstanding amount of loan,

whichever is less. Finally, application for rescheduling for more than two times will

be considered after cash payment of minimum 50% of the overdue installments or

30% of the total outstanding amount of loan, whichever is less.

For rescheduling of Demand and Continuous Loans the rates of down payment,

depending on the loan amount, shall be as under:

27 BRPD Circular No. 01 dated January 13, 2003.

28 BCD Circular No. 18 dated December 11, 1995.


Table-2: Amount of Overdue Loan and Rates of Down Payment

for Rescheduling

Amount of Overdue Loan Rates of Down Payment

Up to Tk.1.00 (one) crore 15%

Tk. 1.00(one) crore to Tk. 5.00 (five) crore 10% (but not less than Tk.15.00 lac)

Tk. 5.00(five) crore and above 5% (but not less than Tk.50.00 lac)

Source: Bangladesh Bank

If any Continuous or Demand Loan is rescheduled by restructuring/converting partly

or wholly into Term Loan and repayment installments have been fixed, application

for rescheduling such loans shall be considered on cash payment of minimum 30% of

the overdue installments or 20% of the total outstanding amount of loan, whichever is

less. For subsequent rescheduling, minimum 50% of the overdue installments or 30%

of the total outstanding amount of loan amount shall have to be deposited in cash.

New loan facility may be extended to borrowers whose credit facility has been

rescheduled subject to fulfillment of the following conditions.29

The defaulting borrower who has availed of interest waiver must settle at least

15% of the compromise amount (excluding the down payment on rescheduling

as per present guidelines) to avail of any further credit facility from any Bank.

In case of borrowing from other Banks, the same rule will be applicable, i.e. the

borrower will have to settle at least 15% of compromise amount (excluding the

down payment on rescheduling as per present guidelines), before being allowed

to take regular facility from other banks subject to the submission of NOC

(No Objection Certificate) from the rescheduling bank.

Export borrowers may be granted further credit facility (after being identified as

not a willful defaulter), if required, subject to settlement of at least 7.5% of the

compromise amount (excluding the down payment on rescheduling as per

present guidelines) being paid.

Information on the loan accounts rescheduled shall be reported to the Credit

Information Bureau (CIB) of Bangladesh Bank. While reporting to the CIB, such

rescheduled loans/advances may be shown as RS 1 for first rescheduling, RS 2

for second and so on. Interest waivers given to the entity should be mentioned as

RSIW.

29 BRPD Circular No. 02, dated February 14, 2006 & BRPD Circular No. 03, dated March 19, 2006.


It is mentionable here that a new master circular has been issued in this regard in the

year 2012 which is expected to restrict the scope of loan rescheduling.30

4.2.4 Policy for Loan Write Off 31

Writing off bad loans having adequate provision is an internationally accepted normal

phenomenon in the banking business. Owing to the reluctance of banks in Bangladesh

in following this system, their balance sheets were becoming unnecessarily and

artificially inflated. In order to avoid possible legal complications in retaining the

claims of the banks over the loans written off section 28 ka has been incorporated in

2001 to the Bank Company Act, 1991. In this context the following policies for

writing off loans have been issued for compliance by banks:

Banks may, at any time, write off loans classified as bad/loss. Those loans

which have been classified as bad/loss for the last five years and for which

100% provisions have been kept should be written off without delay. After

issuance of this circular the process of writing off all other loans classified as

bad/loss should be started immediately. Under the process the oldest bad/loss

classified loans should be considered first for writing off.

Banks may write off loans by debit to their current year's income account

where making 100% provision is not found adequate for writing off such

loans.

All out efforts should be continued for realizing written off loans. Cases must

be filed in the court of law before writing off any loan for which no legal

action has been initiated earlier.

A separate "Debt Collection Unit" should be set up in the bank for recovery of

written off loans.

In order to accelerate the settlement of law suits filed against the written off

loans or to realize the receivable written off loans, any agency outside the

bank may be engaged.

A separate ledger must be maintained for written off loans and in the Annual

Report/Balance Sheet of banks there must be a separate "notes to the

accounts" containing amount of cumulative and current year's loan written off.


31 BRPD Circular No. 02, dated January 13, 2003.


4.2.5 Interest Rates on Deposit and Lending

Banks in general are free to charge/fix their deposit and lending rate. However, the

maximum cap of 7% interest rate on export credit has been fixed since January 10,

200432

by Bangladesh Bank to facilitate export earnings. The maximum rate of

interest on agriculture and term loans to industrial sector is 13%. The maximum rate

of interest on import financing of rice, wheat, edible oil (crude and refined), pulse,

gram, onions, dates and sugar (refined & raw sugar/raw cane sugar) is in force at

12%. In addition, the other key features covered by this prudential regulation are

penal interest rate, maximum rate to be charged for risk premium, basis for charging

interest, rules for additional charge, rules of displaying of deposit and lending interest

rate on the website and reporting system about maximum cap, etc.

4.2.6 Guidelines on Managing Core Risks in Banking 33

In recognition of the importance of an effective risk management system, guidelines

on managing core risks in banking has been issued in 2003 and the five core risks that

have been advised to manage in these guidelines are: a) Credit Risks, b) Asset and

Liability/Balance Sheet Risks, c) Foreign Exchange Risks, d) Internal Control and

Compliance Risks and e) Money Laundering Risks. A credit officer needs to have an

in-depth knowledge about Credit Risk Management guidelines and functional

knowledge on the others for the successful credit operation.

4.2.7 Guidelines on Environmental Risk Management (ERM) 34

A detailed guideline on Environmental Risk Management has been introduced to

assess Environmental Risk along with the Credit Risk for an overall credit rating prior

to disbursement of loan/credit facility.

4.2.8 Corporate Governance in Bank Management 35

As per Bangladesh Bank circular on corporate governance in bank management, the

policies, strategies, procedures etc. in respect of appraisal of loan/investment

proposal, sanction, disbursement, recovery, rescheduling and write-off thereof shall


33 BRPD Circular No. 17, dated October 07, 2003.


35 BRPD Circular No. 16, dated July 24 2003.


be made with the board's approval under the purview of the existing laws, rules and

regulations. The board shall specifically delegate the power of sanction of

loan/investment and such delegation should preferably be made among the CEO and

his subordinate executives as much as possible. No director, however, shall interfere,

directly or indirectly, into the process of loan approval. The board shall frame policies

for risk management and get them complied with and shall monitor quarterly to

ensure the compliance thereof.

4.2.9 Restriction on Lending to Directors of Private Banks

Any loan facility or guarantee or security provided to a Director of a bank or to his

relatives must be sanctioned by the Board of Directors of the bank and has to be

specifically mentioned in the Balance Sheet of the bank. However the total amount of

the loan facilities extendable to a Director or to his relatives should not exceed 50%

of the paid-up value of the shares of that bank held in Director's own name. No such

loan wherein the borrower is exempted fully or partially from bearing the loss

including Mudaraba or Musharaka systems of loan can be extended to any Director or

any relatives of him.

Loan facilities in excess of Tk.10 lacs for funded loan and Tk.50 lacs (funded and

non-funded) in favor of any Director or his relatives or proprietorship or partnership

firms and private or public limited companies wherein those persons have interests,

can be extended subject to obtaining no-objection from Bangladesh Bank.

Any change/cancellation/return of security, collateral security, guarantee, etc.

provided against the loan and in the conditions of loan of any Director or Ex-Director

of a bank will require prior permission from Bangladesh Bank. No remission facilities

(including A/C blocking) to any loan accounts wherein bank's Director or Ex-Director

has interest can be allowed without prior permission from Bangladesh Bank.

The quarterly statement of liabilities of the Directors and Ex-Directors of the bank as

defined in the latest amendment of Bank Companies Act, 1991, will have to be

submitted to Bangladesh Bank in the format as enclosed with the BRPD Circular

Letter No. 8, dated June19, 1997.


4.2.10 Implementation of Credit Risk Grading Manual

An integrated Credit Risk Grading Manual (CRGM) has been developed and

forwarded to the banks and banks were advised to implement Credit Risk Grading

(as described in the manual) by March 31, 2006 for all exposures (irrespective of

amount) other than Consumer Financing, Small Enterprises Financing and The Short-

Term Agricultural and Micro-Credit Financing. Risk Grading Matrix provided in the

Manual is the minimum standard of risk rating and banks may adopt more

sophisticated risk grades in line with the size and complexity of their business. Banks

have also been advised to adopt the credit risk grading system outlined in the other

two separate manuals(Credit Risk Grading Manual-Bank, Credit Risk Grading

Manual-NBFI) for assessing credit risk in case of taking exposure on another

Bank/NBFI.

4.2.11 Prudential Guidelines for Consumer Financing and Small Enterprise Financing36

Prudential Guidelines on Consumer Financing and Small Enterprise Financing has

been issued by Bangladesh Bank containing the minimum set of regulations in 2004.

Two separate guidelines have been issued to the banks for better management of

credit in those two sectors. Banks had been advised to implement the guidelines by 31

December, 2005. Some important aspects of the regulations are maximum per party

limit, maximum debt equity ratio37

maximum period of repayment.38

Latest circular

on the issue was given in 2012 to re-fix the loan margin ratio for housing

finance and car loan.39

4.2.12 Other Prudential Regulations

A good number of other regulations linked with the credit operations of banks issued

by Bangladesh Bank from time to time are guidelines on Islamic Banking,40

Bank

Charges,41

Credit Rating of Banks,42

Disclosure Requirements for Banks,43

36 BRPD Circular No. 07 dated November 3 2004. 37 BRPD Circular No. 23 dated June 16, 2010.

38 BRPD Circular No. 23 dated June 16, 2010.

39 BRPD Circular No.03 dated January 22, 2012.

40 BRPD Circular No. 15 dated November 11 2009.

41 BRPD Circular No. 19, dated May 13, 2010.

42 BRPD Circular Letter No. 05, dated May 29, 2004.

43 .BRPD Circular No. 14, dated June 25, 2003.


Prohibition on Bank Loan for Purchasing Land,44

Policy Guidelines on Green

Banking,45

Inclusion of Solar Energy System for Establishment of New SME/

Agricultural Branch.46

4.3 Some Other Guidelines Relevant for Credit Operations of Banks

Instructions of some other guidelines or policies are also relevant for the credit

operations in banks. These guidelines include SME Credit Policy & Programs,

Agricultural/Rural Credit Policy and Programme, Policies and Guidelines for CIB

Online Services 2011, Risk Based Capital Adequacy for Banks (Basel II), 2010, Risk

Management Guideline for Banks, 2012, Foreign Exchange Guidelines Vol. I and

Vol. II, etc.

4.4 Some other Laws Relevant for Credit Operations of Banks

Some other laws relevant for the credit operations in banks are The Contract Act,

1872, The Companies Act, 1994, The Partnership Act, 1932, The Negotiable

Instrument Act, 1881, The Transfer of Property Act, 1882, The Registration Act,

2004, The Artha Rin Adalat Ain, 2003, The Public Demands Recovery Act, 1913,

The Bankruptcy Act, 1997, Money Laundering Prevention Act, 2012, Anti Terrorism

Act, 2012, Stamp Act, 1899, The Trust Act, 1882 The Limitation Act, 1908.

4.5 Some Other Circulars Relevant for Credit Operations of Banks

Bangladesh Bank issued many circulars in the year 2011, a few of which are relevant

for the credit operations in Banks including but not limited to the circular on

charging rate of interest other than the announced rate47

, re-fixing the time limit for

repayment of the loans for the procurement of rice by mill owners and traders48

,

fixing rate of interest on import financing49

, rate of interest on lending50

, disclosure of

information on loan services of banks51

enlistment of insurance company by bank52

,

44 BRPD Circular No. 16, dated April 27, 2010. 45 BRPD Circular No. 02, dated February 02, 2011. 46 BRPD Circular Letter No. 02, dated June 20, 2011. 47 BRPD Circular No. 01, dated January 04, 2011. 48 BRPD Circular No. 03, dated February 14, 2011. 49 BRPD Circular No- 04, dated February 14, 2011. 50 BRPD Circular No. 03, dated March 09, 2011. 51 BRPD Circular No. 05, dated Mach 09, 2011.

52 BRPD Circular No. 06, dated March 13, 2011.


regarding fixation of rate of interest, it's disclosure and reporting53

, guidelines for

banking services at customer premises54

, credit norms for salt cultivation55

, target

setting of agri/rural credit & its implementation by the private and foreign banks56

,

re-fixation of concessional interest rate at 4% from 2% on agricultural credit to be

disbursed for the purpose of cultivation of pulses, oil seeds, spices and maize from

2011-2012 fiscal year57

, re-fixation of interest rate for refinance scheme on solar

energy, bio-gas and effluent treatment plant58

, inclusion of "fish cultivation in cage"

in agricultural/ rural credit policy and programme for the FY 2011-201259

, regarding

definition of cottage, micro, small and medium industry/enterprise60

, etc.

5. Review of Credit61

Portfolio of Banks

A well diversified and balanced credit portfolio of the banking sector as a whole is a

pre-requisite at the macro level of an economy to ensure its balanced and sustainable

growth. In micro level, effective management of credit portfolio is also a fundamental

requirement of a bank‟s safety and soundness.

5.1 Advances by Major Economic Purposes

5.1.1 Advances by Major Economic Purposes: Allocation of Each Group of Banks to Different

Economic Purposes

In giving advance to major economic purposes, SCBs disbursed 35.43 percent of their

total disbursement to trade which is the highest percentage of disbursement of this

bank group followed by 26.13 percent in industry, 15.13 percent in working capital

and 6.38 percent in agriculture, fishing and forestry (Table-3). Like SCBs, high

concentration of disbursement of credit to trade is also seen among other bank


54 BRPD Circular No. 10, dated November 30, 2011.

55 ACD Circular Letter No. 01, dated Jan 25, 2011.

56 ACD Circular No. 01, dated May 16, 2011.

57 ACD Circular No. 02, dated May 30, 2011.

58 ACD Circular Letter No. 02, dated September 11, 2011.

59 ACD Circular Letter No. 03, dated September 22, 2011.

60 SMESPD Circular No. 01, dated September 4, 2011.

61 As per the Bangladesh Bank data sources, credit covers both advances and investments. This section of the review paper covers only advances.


categories except SBs whose highest portion of disbursement is on agriculture which

is 48.52 percent. However, an excessive concentration of PCBs to the trade sector has

been observed indicating PCBs‟ more priority to lend to that sector. Truly no major

differences have been observed in 2010 and 2011 in channeling advances to different

economic purposes of each category of Banks. The concentration of trade financing

by bank groups has slightly decreased in the year 2011 compared to the year 2010

except FCBs that increased their finance on trade. This indicates that all bank groups

except SBs have focused on financing trade rather than financing agriculture and

industry that significantly contributes to the GDP growth of the country. This may be

because of the limited supply of utilities, entrepreneurial capacity, availability of

human resources, etc.

Table 3: Advances by Major Economic Purposes: Allocation of Each Group of

Banks to Different Economic Purposes (%)

Economic

Purposes

2010 2011

SCBs PCBs SBs FCBs All

Banks SCBs PCBs SBs FCBs

All

Banks

1. Agriculture,

Fishing &

Forestry

6.60 1.15 49.88 0.58 5.69 6.38 1.43 48.52 1.77 5.59

2. Industry

( Except W/C) 24.94 20.56 17.80 9.07 20.65 26.13 20.44 17.68 9.35 20.86

3. Working

Capital 15.46 14.42 8.77 28.41 15.08 15.13 14.04 7.49 19.20 14.13

4. Construction 7.96 7.71 2.30 1.11 7.00 7.66 9.35 3.15 1.32 8.14

5. Transport and

Communications 0.74 1.70 0.19 2.81 1.45 0.68 2.28 0.95 5.87 2.05

6. Trade 37.33 41.92 16.71 24.29 38.13 35.43 40.72 16.16 28.83 37.32

7. Others* 6.97 12.53 4.35 33.72 11.99 8.58 11.74 6.05 33.67 11.92

Total 100 100 100 100 100 100 100 100 100 100

*Others category includes water, works and sanitary services, storage, and miscellaneous

Source: Scheduled Banks Statistics, Bangladesh Bank

5.1.2 Advances by Major Economic Purposes: Allocation to a Particular Economic Purpose by

Different Groups of Banks

It is observed that in 2011, the contribution of SBs in making advances to agriculture,

fishing and forestry sector was the highest which was 56.84 percent followed by

SCBs (24.37 percent), PCBs (17.02 percent) and FCBs (1.77 percent) (Table-4). This


indicates that the SBs play the vital role in financing this sector though their

contribution has decreased in 2011 compared to 2010. But the share of advances

extended by the FCBs was negligible in 2011 which was only 1.77 percent. The

contribution of PCBs in extending advances to industry sector was the highest which

was 65.23 percent followed by SCBs (26.73 percent), SBs (5.5 percent) and FCBs

(2.50 percent). In addition, PCBs are found to hold their leading position in financing

other activities compared to other bank groups. It is also observed that (Table-4)

SCBs and SBs lost their share of finance in most of the economic purposes in 2011

compared to 2010 where as PCBs and FCBs increased their share.

Table 4: Advances by Major Economic Purposes: Allocation to a Particular

Economic Purpose by Different Groups of Banks (%)

Economic

Purposes

2010 2011



All

Banks

1. Agriculture,

Fishing &

Forestry

25.29 13.21 60.90 0.60 100 24.37 17.02 56.84 1.77 100

2. Industry

(Except W/C) 26.33 65.10 5.99 2.58 100 26.73 65.23 5.55 2.50 100

3. Working

Capital 22.36 62.55 4.04 11.05 100 22.83 66.12 3.47 7.58 100

4. Construction 24.76 72.02 2.29 0.93 100 20.08 76.48 2.53 0.90 100

5. Transport and

Communications 11.12 76.62 0.90 11.36 100 7.09 73.92 3.02 15.97 100

6. Trade 21.34 71.88 3.05 3.74 100 20.25 72.61 2.83 4.31 100

7. Others* 12.67 68.33 2.52 16.49 100 15.36 65.56 3.32 15.76 100

Total 21.80 65.39 6.95 5.86 100 21.33 66.55 6.54 5.58 100



5.1.3 Advances by Major Economic Purposes: Growth in 2011 over 2010

In 2011, average growth rate in transport and communication sector was the highest

which is 67.38 percent followed by 37.66 percent in construction, 19.66 percent in

industry, 16.23 percent in agriculture, fishing and forestry sector and 15.95 percent in

trade (Table-5). In achieving 16.23 percent growth in agriculture, fishing and forestry

sector, the FCBs showed the highest percentage of growth followed by PCBs, SCBs

and SBs. In achieving 67.38 percent growth in transport and communication sector,

the FCBs showed the highest percentage of growth followed by PCBs, SCBs and


SBs. In working capital financing category, the FCBs and the SBs, however,

experienced negative growth in the year 2011 which is -23.86 percent and -4.65

percent, respectively. It is interesting to note that all categories of banks except SCBs

have achieved high growth rates in credit disbursement in the transport and

communication sector in the year 2011. It implies that the transport and

communication sector is emerging as a prospective sector for investment by the

banks.

Table 5: Advances by Major Economic Purposes: Growth in 2011 over 2010 (%)

Economic Purposes 2011

SCBs PCBs SBs FCBs All Banks

1. Agriculture, Fishing & Forestry 12.02 49.74 8.48 242.86 16.23

2. Industry ( Except W/C) 21.45 19.89 10.74 16.13 19.66

3. Working Capital 13.40 17.36 -4.65 -23.86 11.03

4. Construction 11.65 46.18 52.44 33.44 37.66

5. Transport and Communications 6.70 61.47 463.25 135.31 67.38

6. Trade 10.03 17.13 7.88 33.71 15.95

7. Others* 42.76 12.95 55.30 12.50 17.72

Total 15.92 20.57 11.53 12.67 18.47



5.2 Industrial Loan by Sector

5.2.1 Industrial Loan by Sector: Allocation of Each Group of Banks to Different Sectors

In examining industrial loan by sector, Table-6 shows that in 2011 SCBs disbursed

92.27 percent of their total disbursement to the large and medium scale industries.

This is the highest percentage of advances made by this bank group followed by 4.20

percent in service industries and 3.53 percent in small scale and cottage industries.

It is also evident that, like SCBs all other bank groups have also disbursed lion‟s

share of their disbursement to large and medium scale industries implying that the

small scale and cottage industries and service industries received least attention from

SCBs, PCBs, SBs and FCBs in 2011. In the field of financing small scale and cottage

industries, FCB‟s contribution is disappointing which is only 1.68 percent of its total


advances. It may also be noted from the Table that the quantum of advances to the

large and medium scale industries has been slightly decreased in 2011 compared to

2010. In this case, FCBs decreased their advances to the large and medium scale

industries by almost 10 percent and increased advances to service industries by

almost 7 percent.

Table 6: Industrial Loan by Sector: Allocation of Each Group of Banks

to Different Sectors (%)

Size and Nature of

Industrial Credit

2010 2011



All

Banks

1. Large and

Medium Scale

Industries

93.69 86.22 83.61 93.61 88.22 92.27 86.29 83.68 86.68 87.75

2. Small Scale and

Cottage Industries 2.71 3.72 11.94 1.56 3.89 3.53 3.87 10.94 1.68 4.12

3. Service Industries 3.59 10.06 4.45 4.83 7.89 4.20 9.84 5.38 11.63 8.13

Total 100 100 100 100 100 100 100 100 100 100


5.2.2 Industrial Loan by Sector: Allocation by Different Groups of Banks

Table-7 reveals that in 2011 the PCBs disbursed 78.95% of the total advances of all

banks to service industries which is the highest amongst all bank groups followed by

13.81 percent, 3.67 percent and 3.58 percent by SCBs, SBs, and FCBs, respectively.

However, compared to 2010 PCBs advances to this sector has been decreased in

2011. In respect of financing small scale and cottage industries PCBs disbursed 61.32

percent and the SCBs 22.93 percent. FCBs disbursed only 1.02 percent to this sector

which is very negligible. In distributing credit to the large and medium scale

industries PCBs are seen taking active part. SCBs‟ contribution in this respect is not

more encouraging as it is only 28.10 percent in 2011 as against 27.97 percent in 2010.


Table 7: Industrial Loan by Sector: Allocation to a Particular Sector by Different

Groups of Banks (%)


5.2.3 Industrial Loan by Sector: Growth in 2011 over 2010

Table-8 shows that in 2011, average growth rate of advances to small scale and

cottage industries is the highest which is 26.79 percent followed by 23.33 percent in

service industries and 19.01 percent in large and medium scale industries.

In achieving the highest percent of growth in small scale and cottage industries, the

SCBs contributed the highest percentage of growth followed by PCBs, FCBs and

SBs. In achieving 23.33 percent growth in service industries, the FCBs showed the

highest percentage of growth which is 179.68 percent followed by SCBs, SBs and

PCBs. It is also evident from the Table that PCBs focused on financing large and

medium scale industries and achieved the highest percent of growth whereas the

FCBs achieved the lowest growth in the category. But the focus of FCBs on financing

the service industries is clear from their highest growth.

Table 8: Industrial Loan by Sector: Growth in 2011 over 2010 (%)

Size and Nature of

Industrial Credit

2011


Large and Medium Scale

Industries 19.60 19.98 10.84 7.53 19.01

Small Scale and Cottage

Industries 58.40 24.98 1.46 25.62 26.79

Service Industries 41.89 17.25 33.79 179.68 23.33

Total 21.45 19.89 10.74 16.13 19.66


Size and Nature of

Industrial Credit

2010 2011



All

Banks

1. Large and

Medium Scale

Industries

27.97 63.62 5.68 2.73 100 28.10 64.14 5.29 2.47 100

2. Small Scale and

Cottage Industries 18.36 62.21 18.40 1.03 100 22.93 61.32 14.73 1.02 100

3. Service Industries 12.00 83.04 3.38 1.58 100 13.81 78.95 3.67 3.58 100

Total 26.33 65.10 5.99 2.58 100 26.73 65.23 5.55 2.50 100


5.3 Advances by Geographical Distribution

5.3.1 Advances by Geographical Distribution: Allocation of Each Group of Banks to Different

Divisions

As regards geographical distribution of advances it appears from Table-9 that in 2011

out of total advances of all banks 66.75 percent is disbursed in Dhaka Division

compared to 66.56 percent in 2010. About 86.69 percent of advances of all banks are

concentrated in Dhaka and Chittagong Division in 2011 which means only 13.31

percent of the advances of all banks are made in five other Divisions. This trend is

acute in case of FCBs as this group advanced upto 98.20 percent of its total loan in

these two divisions. Banks gave least priority on distribution advances in Barisal

Division and Sylhet Division in both the years. In Barisal and Rangpur Divisions

FCBs disbursed no advances. Such inequitable distribution of advances by the banks

may create regional economic disparity. Such concentration of advances in two

regions of the country will add concentration risk to the risk profile of the banks and

will require them to maintain additional capital under Basel-II.

Table 9: Advances by Geographical Distribution: Allocation of Each Group of

Banks to Different Divisions (%)

Divisions

2010 2011


Banks SCBs PCBs SBs FCBs All Banks

Chittagong 13.56 22.83 16.69 15.09 19.92 14.97 22.28 17.68 13.75 19.94

Dhaka 66.20 67.06 49.05 83.11 66.56 65.55 67.44 48.59 84.46 66.75

Khulna 9.30 3.44 8.93 0.19 4.91 7.95 3.41 9.20 0.19 4.58

Rajshahi 4.15 3.37 8.54 0.39 3.72 4.41 3.42 8.11 0.35 3.76

Barisal 1.67 0.51 4.64 0.00 1.02 1.77 0.57 4.77 0.00 1.07

Sylhet 1.04 1.73 3.51 1.22 1.67 1.12 1.65 3.43 1.26 1.63

Rangpur 4.09 1.07 8.64 0.00 2.19 4.23 1.23 8.22 0.00 2.26

Total 100 100 100 100 100 100 100 100 100 100


5.3.2 Advances by Geographical Distribution: Allocation to a Particular Division by Different

Groups of Banks

In 2011, 74.34 percent of total advances of all banks in Chittagong Division were

made by PCBs followed by 16.01 percent, 5.80 percent and 3.84 percent by SCBs,

SBs, and FCBs respectively (Table-10). PCBs are also seen to distribute maximum

share of the total advances of all banks in 2011 in other divisions except in Rangpur

Division where SCBs are taking the lead. Although SCBs are taking the lead, their

share has decreased in 2011 compared to 2010.


Table 10: Advances by Geographical Distribution: Allocation to a Particular Division

by Different Groups of Banks (%)

Divisions

2010 2011



All

Banks

Chittagong 14.83 74.91 5.82 4.44 100 16.01 74.34 5.80 3.84 100

Dhaka 21.68 65.88 5.12 7.32 100 20.94 67.24 4.76 7.06 100

Khulna 41.29 45.84 12.64 0.23 100 37.03 49.59 13.15 0.23 100

Rajshahi 24.29 59.15 15.94 0.62 100 25.01 60.39 14.09 0.52 100

Barisal 35.66 32.71 31.63 0.00 100 35.24 35.61 29.15 0.00 100

Sylhet 13.53 67.59 14.60 4.28 100 14.60 67.35 13.75 4.30 100

Rangpur 40.69 31.91 27.39 0.00 100 39.97 36.20 23.82 0.00 100

Total 21.80 65.39 6.95 5.86 100 21.33 66.55 6.54 5.58 100


5.3.3 Advances by Geographical Distribution Growth in 2011 over 2010

From the growth rate of advances in 2011 as depicted in Table-11, it is evident that

advances in the Barisal division experienced the highest growth which is 24.36

percent. This highest growth is mostly contributed by the PCBs and SCBs followed

by SBs. Growth of advances in Khulna division marks the lowest. This is mainly

because of the negative growth of advances of the SCBs in the division. It is

worthwhile to note that the second highest growth of advances is found in Rangpur

division which is largely contributed by the PCBs that achieved the highest growth

rate in the division. Advances of SCBs in Chittagong division increased at 27.99

percent in 2011 which is the highest rate of growth of this bank group.


Table 11: Advances by Geographical Distribution Growth in 2011 over 2010 (%)

Divisions 2011


Chittagong 27.99 17.67 18.13 2.66 18.56

Dhaka 14.78 21.27 10.50 14.50 18.82

Khulna -0.91 19.52 14.97 10.23 10.49

Rajshahi 23.32 22.25 5.81 0.60 19.75

Barisal 22.90 35.39 14.61 0.00 24.36

Sylhet 24.85 15.33 9.06 16.35 15.75

Rangpur 19.86 38.43 6.11 0.00 22.02

Total 15.92 20.57 11.53 12.67 18.47


5.4 Advances by Size of Loan Account

5.4.1 Advances by Size of Loan Account: Allocation of Each Group of Banks to Different Size of

Loan Accounts

In examining advances by size of accounts, Table-12 depicts that out of the total

advances of all banks in 2011, 42.29 percent belongs to 10 million to 200 million

category compared to 43.75 percent in 2010. This indicates a slight decrease in the

amount of advance in this category. In the said category the contribution of the PCBs

is highest which is 46.12 percent followed by FCBs, SCBs and SBs. Of the total

advances of SBs, 52.70 percent belong to loan size category upto 1 million followed

by 28.32 percent in the range of 10 million to 200 million, 11.72 percent in the

category of 1 million to 10 million and 7.26 percent in the category of 200 million

and above. It indicates that maximum loans of SBs are disbursed to the small

borrowers. In case of creating large loans, SCBs hold the leading position.

Table 12: Advances by Size of Loan Account: Allocation of Each Group of

Banks to Different Size of Loan Accounts (%)

Size of Loan

Accounts

2010 2011

SCBs PCBs SBs FCBs

All


All

Banks

Upto Tk. 1

Million(M) 16.86 11.02 54.87 17.05 15.69 16.15 10.04 52.70 16.50 14.50

AboveTk.1M-

Tk.10M 14.55 23.15 12.19 28.86 20.85 14.92 21.80 11.72 28.27 20.03

AboveTk.10M-

Tk.200M 36.14 48.11 27.45 42.84 43.75 34.91 46.12 28.32 41.14 42.29

Above Tk.200M 32.45 17.72 5.49 11.25 19.70 34.01 22.04 7.26 14.08 23.18

Total 100 100 100 100 100 100 100 100 100 100



5.4.2 Advances by Size of Loan Account: Allocation to a Particular Size of Loan Accounts by

Different Groups of Banks

As seen in Table 13, PCBs mostly dealt with large size of loan constituting 200

million and above. In 2011, PCBs advanced 63.27 percent of the total advances of all

banks in the largest category, followed by SCBs, FCBs and SBs. Similar scenario is

also visible in 2010. It may be mentioned here that financing a few large borrowers

instead of many small ones is always discouraged from the point of view of

management of risks in banks as it increases credit concentration risk.

Table 13: Advances by Size of Loan Account: Allocation to a Particular Size of

Loan Accounts by Different Groups of Banks (%)

Size of Loan

Accounts

2010 2011


Banks SCBs PCBs SBs FCBs All

Banks

Upto Tk. 1

Million (M) 23.42 45.91 24.30 6.37 100 23.77 46.10 23.79 6.35 100

AboveTk.1M-

Tk.10M 15.21 72.61 4.06 8.12 100 15.89 72.41 3.83 7.87 100

AboveTk.10M-

Tk.200M 18.01 71.89 4.36 5.74 100 17.61 72.58 4.38 5.43 100

Above Tk.200M 35.90 58.81 1.94 3.35 100 31.29 63.27 2.05 3.39 100

Total 21.80 65.39 6.95 5.86 100 21.33 66.55 6.54 5.58 100


5.4.3 Advances by Size of Loan Account: Growth in 2011 over 2010

From the information in Table-14, it is observed that the highest growth was achieved

in the largest size of loan accounts i.e. 200 million and above which is 39.40 percent

by all banks. In achieving this highest growth rate, PCBs, SBs, and FCBs each

contributed more than 40 percent with SCBs contributing only 21.49 percent.

Increasing large category loans indicates the eagerness of the banks to deal with

bigger projects, on the one hand, and thrust for earning more profit through the

undertaking of additional concentration risks, on the other.


Table 14: Advances by Size of Loan Account: Growth in 2011 over 2010 (%)

Size of Loan Accounts 2011


Upto Tk. 1 Million(M) 11.06 9.87 7.11 9.09 9.43

AboveTk.1M- Tk.10M 18.88 13.51 7.23 10.36 13.82

AboveTk.10M-

Tk.200M 11.98 15.59 15.06 8.22 14.50

Above Tk.200M 21.49 49.98 47.59 40.99 39.40

Total 15.92 20.57 11.53 12.67 18.47


5.5 Advances by Urban and Rural

5.5.1 Advances by Urban and Rural: Allocation of Each Group of Banks to Different Areas

It is evident from Table-15 that 92.27 percent of the total advances of all banks are

extended in the urban areas in 2011 compared to 92.16 percent in 2010. In case of

providing rural advances SBs play a vital role that gives 42.71 percent of their total

advances in rural areas. FCBs concentrate 100 percent in the urban areas. Such

financing pattern may create urban rural disparity in terms of industrialization,

opportunities for employment generation, purchasing power, etc. which may

ultimately attract more and more rural citizens to come to the urban areas making the

job of urban service providers difficult. It also deprives rural people from their right

to get credit. These types of advancing practices are also unethical considering that

most of the low cost deposits are mobilized from the rural areas.

Table 15: Advances by Urban and Rural: Allocation of Each Group of Banks to

Different Areas (%)

Urban/

Rural

Area

2010 2011

SCBs PCBs SBs FCBs

All


All

Banks

Urban 90.36 95.88 56.13 100 92.16 90.30 95.69 57.29 100 92.27

Rural 9.64 4.12 43.87 0.00 7.84 9.70 4.31 42.71 0.00 7.73

Total 100 100 100 100 100 100 100 100 100 100



5.5.2 Advances by Urban and Rural: Allocation to a Particular Area by Different Groups of Banks

It can be seen from Table-16 that in 2011, PCBs advanced 69.02 percent of the total

advances of all banks in the urban areas, followed by SCBs, FCBs and SBs. The same

has happened in 2010 too. In case of providing rural advance, the share of SBs is

approximately 1 percent less than the share of PCBs which is 37.11 percent in 2011.

Table 16: Advances by Urban and Rural: Allocation to a Particular Area by

Different Groups of Banks (%)

Urban/

Rural

Area

2010 2011



All

Banks

Urban 21.37 68.03 4.23 6.36 100 20.87 69.02 4.06 6.04 100

Rural 26.80 34.33 38.87 0.00 100 26.75 37.11 36.14 0.00 100

Total 21.80 65.39 6.95 5.86 100 21.33 66.55 6.54 5.58 100


5.5.3 Advances by Urban and Rural: Growth in 2011 over 2010

From the last column of Table-17, it is observed that the growth of advances in the

urban area and rural area is 18.61 percent and 16.80 percent, respectively.

In achieving the growth rate in rural advance, the contribution of PCBs is the highest

in 2011 which is 26.29 percent followed by SCBs and SBs.

Table 17: Advances by Urban and Rural: Growth in 2011 over 2010 (%)

Urban/ Rural Area 2011


Urban 15.85 20.33 13.83 12.67 18.61

Rural 16.57 26.29 8.59 0.00 16.80

Total 15.92 20.57 11.53 12.67 18.47



5.6 Advances by Interest Rate

5.6.1 Advances by Interest Rate: Allocation of Each Group of Banks to Different Interest Rate

Ranges

In case of advances by interest rates, according to Table-18, maximum 53.86 percent

of the total advances of all banks in 2011 was made at the interest rate above 10

percent to 15 percent followed by 29.07 percent in the range of above 15 percent to

20 percent, 16.36 percent in the range upto 10 percent and 0.72 percent in the range

of above 20 percent. It is also evident from the Table that the proportion of advances

of all banks in the interest rate ranging from 15 percent to 20 percent has substantially

increased in 2011 to 29.07 percent from only 5.07 percent in 2010. This substantial

increase of loan amount in the range of 15 percent to 20 percent interest rate will

increase the cost of production and cost of trade of the real sector of the economy

which will ultimately increase inflation in the economy.

Table 18: Advances by Interest Rate: Allocation of Each Group of Bank to

Different Interest Rate Ranges (%)

Interest Rate

Range

2010 2011



All

Banks

Up to 10% 41.18 11.14 56.10 35.05 22.22 31.06 8.86 50.68 9.25 16.36

Above 10% -

15% 58.75 81.79 43.85 49.33 72.23 61.04 51.42 39.39 72.51 53.86

Above 15% -

20% 0.06 6.70 0.05 11.41 5.07 7.90 38.94 9.93 14.66 29.07

Above 20% 0.00 0.37 0.00 4.22 0.49 0.00 0.78 0.00 3.59 0.72

Total 100 100 100 100 100 100 100 100 100 100


5.6.2 Advances by Interest Rate: Allocation to Interest Rate Range by Different Groups of Banks

As seen in Table-19, SCBs appear to be the leader in providing advance at a low

interest rate. In 2011 SCBs provided the highest which is 40.50 percent of the total

loans of all banks in the interest rate of upto 10 percent. Of the total loans and

advances of all banks in the interest rate of above 15 percent to 20 percent, PCBs


provided the maximum which is 89.15 percent in 2011. PCBs are also seen to take the

lead in the highest interest rate range followed by FCBs.

Table 19: Advances by Interest Rate: Allocation to Particular Interest Rate

Range by Different Groups of Banks (%)

Interest

Rate Range

2010 2011



All

Banks

Up to 10% 40.41 32.79 17.55 9.25 100 40.50 36.07 20.28 3.15 100

Above 10%

- 15% 17.73 74.04 4.22 4.01 100 24.17 63.54 4.78 7.51 100

Above 15%

- 20% 0.27 86.46 0.07 13.20 100 5.80 89.15 2.23 2.81 100

Above 20% 0.00 49.54 0.00 50.46 100 0.03 72.05 0.00 27.92 100

Total 21.80 65.39 6.95 5.86 100 21.33 66.55 6.54 5.58 100


5.6.3 Advances by Interest Rate: Growth in 2011 over 2010

An astonishing 579.64 percent growth is observed in case of providing advances in

the interest rate of above 15 percent to 20 percent. Approximately 73.16 percent

growth of advances is found in the interest rate of above 20 percent which is mostly

contributed by the PCBs. However, negative growth of advances is seen in the lower

interest rate categories for all banks except SBs.

Table 20: Advances by Interest Rate: Growth in 2011 over 2010 (%)

Interest Rate

Range

2011


Banks

Up to 10% -12.58 -4.08 0.77 -70.27 -12.79

Above 10% - 15% 20.42 -24.20 0.17 65.62 -11.66

Above 15% - 20% 14667.07 600.82 20453.43 44.81 579.64

Above 20% 0.00 151.85 0.00 -4.19 73.16

Total 15.92 20.57 11.53 12.67 18.47



6. Review and Evaluation of Some Major Aspects of Credit Operations of

Banks in 2011

6.1 Availability of Guidelines, Database, Checklist in Banks as per CRM guidelines

As per the CRM guideline, a bank needs to have its own credit policy, risk rating

model, data base and checklists. Availability of these will not only help a bank in the

process of creating good quality loans but also help to maintain the quality of the

loans through proper monitoring, close supervision and frequent follow up. Table-21

shows that most of requirements are being followed by banks. However, only 20

percent of the sample banks maintain electronic database of CRG grades of borrowers

and have customized sector specific Internal Risk Rating (IRR) models of their own.

Maintaining database of CRG grades is not merely a requirement of CRGM, it is

instrumentally important for determining the validity of the models used for internal

risk rating of borrowers. It is interesting to note that 93 percent of the sample banks

don‟t have any system of taking formal assessment test, though required by CRM, for

selecting executives to be engaged in the credit approval function. This may affect the

process of creating good loans through compromising assessment at the pre-sanction

stage. It is also evident from the Table that sample banks are not having any incentive

scheme for their employees for recovery of NPL.

Table 21: Availability of Guideline, Database and Checklists in Banks as per

CRM Guidelines

# Particulars Maintained Not

Maintained

1. Lending guideline/ credit policy 100% -

2. Internal Risk Rating(IRR) / grading of Borrowers 100% -

3. Customized sector specific IRR model 20% 80%

4. Electronic database of CRG grades 20% 80%

5. Loan documentation checklist reviewed by legal

counsel

100% -

6. Comprehensive loan disbursement checklist 100% -

7. Separate recovery unit/division 100% -

8. Separate incentive scheme for recovery of NPL - 100%

9. System of assessment test for selecting executives

for approval

7% 93%

N = 15

Source: Field Survey


6.2 Frequency of Updating the Lending Guideline

Only availability of credit policy will not serve the purpose of the bank regarding

creation and maintenance of quality of loans unless such policy is updated by giving

due consideration to the changes in the business environment, regulatory requirement

and other areas of importance. Though CRM requires updating of the lending

guidelines at least annually nevertheless it was noticed during the survey that only 40

percent of the sample banks follow it meticulously (Table-22). Variations of the

frequencies of updating credit policy is surprising when one notes that 7 percent of

the banks update credit policy once in every six months while another 7 percent do it

once in every four years though all are operating in the same financial market. It is

also evident from the Table that 53 percent of the banks do not update lending

guideline regularly as per the requirement of CRM.

Table 22: Frequency of Updating the Lending Guideline

# Particulars Findings CRM

Requirement Comment

1. Half Yearly 7%

At least

Annually

Partially

Complied

2. Annually 40%

3. Once in every two years 20%

4. Once in every three years 13%

5. Once in every four years 7%

6. Need-based 13%

Total 100%

N = 15


6.3 Loans Deviating from the Lending Guideline

For better performance it is important on the part of a bank to make sure that the

lending guideline is available at all levels of credit operations, all the employees

dealing with credit matters clearly understand the contents of the policy and work as

per the instructions of the policy. As shown in Table-23, all banks are compliant in

case of restricting approval of exceptional loan proposals to the board. Seven percent

of the sample banks were found not to deviate from the credit guideline in any

respect.


Table 23: Loans Deviating from the Lending Guideline


Requirement Comment

1. Never deviated 7%

Approval should

be restricted to

the MD and

Board

Fully

Complied

2. Rarely deviated and referred

to board

13%

3. Deviated in few cases and

referred to board

80%

Total 100%

N = 15


6.4 Assessment of Credit Risk Grade at the Pre-sanction and Post-sanction Stage

As per Credit Risk Grading Manual (CRGM), banks are supposed to determine CRG

score at pre-sanction stage for selecting customer and at post-sanction stage for

observing the trend of customer performance and undertaking monitoring activities

accordingly. Among the respondents, as depicted in Table-24, 46 percent of the banks

calculate CRG score only at the pre-sanction stage. But only 27 percent do this both

at pre and post-sanction stages. Another 27 percent of the banks reported that the

score is determined at the post sanction stage in case the quality of loans deteriorates.

Table 24: Assessment of Credit Risk Grade at the Pre-sanction and

Post-sanction Stage

# Particulars Findings CRGM

Requirement Comment

1. Only at pre-sanction stage 46%

Both at pre-

sanction and

post-sanction

stage

Partially

Complied

2. Both at pre-sanction and post-

sanction stage

27%

3. Mainly at pre-sanction stage

and sometimes at post-sanction

stage if quality deteriorates

27%

Total 100%

N = 15



6.5 Segregation of Relationship Management Function, Approval Function, and Credit

Administration Function

For successful operation of credit functions and effective management of credit risk,

it is indispensable to segregate relationship management function, approval function

and credit administration function. From Table-25, it is clear that 93 percent of the

banks maintain this basic condition of effective credit risk management either at the

head office or at the branch level while 80 percent maintains this segregation both at

the head office and branch level. In rest of the banks comprising of 7 percent of the

sample banks, no such segregation among these activities was found.

Table 25: Segregation of Relationship Management Function, Approval

Function, and Credit Administration Function

# Particulars Maintaining

Rate

CRM

Requirement Comment

1. Only at the head office

level

13%

Banks should

aim at

segregating

these functions

Mostly complied 2. Both at the head office

and branch level

80%

3. No segregation 7%

Total 100%

N = 15


6.6 Knowledge and Experience of the Executives engaged in the Credit Approval

Executives engaged in the credit approval play a vital role in the process of

originating good quality assets by applying their knowledge and experience.

Knowledgeable executives can successfully identify good quality proposals and

decline poor quality ones, on the one hand, and can determine the appropriate exit

policy, on the other hand, once a poor quality asset is created mistakenly. So, it is

important and required by CRM to entrust the responsibility of loan approval function

only to knowledgeable, well-trained and experienced executives. The interesting

findings of the survey, as presented in Table-26, is that a system of undertaking

formal assessment test, required by CRM, to determine the knowledge level is absent


in 93 percent of the sample banks. The implication of this is that poor quality assets

may be created in banks.

Table 26: Knowledge and Experience of the Executives Engaged in

Credit Approval

# Particulars Rate of

Consideration

Rate of Not

Consideration

CRM

Requirement Comment

1. At least 5 year

experiences as

relationship manager

100% - - At least 5 years

experience as

relationship

manager

- Thorough

knowledge of

Accounting

- Training on Risk

Analysis

- A good

understanding

of the local

industry

- Successful

completion of

an assessment

test

Partially

complied and

there is no

system of

taking formal

assessment

test except in

one bank.

2. Thorough knowledge

on Accounting

60% 40%

3. Training on risk

analysis

40% 60%

4. A good

understanding of the

local industry

90% 10%

5. Successful

completion of an

assessment test

7% 93%

N = 15


6.7 Centralization of Approval Function in CRM

Credit Risk Management (CRM) team in the bank is empowered to decline any

proposal forwarded by the relationship managers on the quality ground which is not

always possible by RM as he/she runs for the achievement of target of loan

disbursement. So, it is important that all loan proposals must pass through the CRM

department to ensure selection of good quality customers. Table-27 shows that only

27 percent of the sample banks have fully centralized approval function within CRM,

meaning that each and every loan is required to be passed through the CRM. Rest 73

percent of the banks are yet to get a full shape in this regard although they have done

it partially.


Table 27: Centralization of Approval Function in CRM

# Particulars Findings CRM Requirement Comment

1. Fully Centralized 27% Credit approval should be

centralized within the

CRM function

Poorly

Complied 2. Not Fully Centralized 73%

Total 100%

N = 15


6.8 Delegation of Approval Authority Regarding Large Loans

As per CRM guideline approval of large loans may be delegated to head of CRM if

loan amount is up to 15 percent of the capital of banks, Managing Director up to 25

percent of capital, and Board of Directors above 25 percent of capital. From the

respondents opinion, (Table-28) it is seen that the management of the sample banks

are following more conservative approach and they forward relatively smaller-sized

loans to the Board of Directors for approval. Negative side of excessive dependence

on the board is that the frequency and cost of holding board meeting will increase,

nonprofessional consideration will get priority in loan approval system and directed

lending may increase too.

Table 28: Delegation of Power to Approval Authority Regarding Large Loans


1. Conservative compared

to CRM or at par with

CRM

100% - Upto 15% of

capital by Credit

Risk Management

- Upto 25% of

capital by

Managing Director

(MD)

- Above 25% of

capital by the Board

of Directors

Fully Complied.

Approval is

referred to the

Board if the

loan size is

more than 10%

of capital

2. Liberal compared to CRM -

Total 100%

N = 15



6.9 Accountability of Approval Authority

A bank that can ensure accountability of its executives engaged in credit approvals

will be able to create good quality assets and maintain the quality of the same in a

better way than that of others. Table 29 shows that 67 percent of the banks directly

make their approval executives accountable for their approval and recommendations.

This is something good for the banks for establishing discipline in the credit

operation. But there is still opportunity for improvement in the banks.

Table 29: Accountability of Approval Authority


1. Directly accountable 67% Recommending or approving

executives should take

responsibility for and be held

accountable for their

recommendations or approval

Mainly

complied 2. Indirectly accountable 33%

3. Not accountable at all -

Total 100%

N = 15


6.10 Functions of Credit Administration

Role of credit administration department in a bank is vital for successful operation of

credit. This department is entrusted to perform documentation, limit creation,

custody, monitoring, and compliance. Table-30 shows that Credit Administration

Department (CAD) of 80 percent of the sample banks performs almost all the

functions as specified in the CRM. Although disbursement has been mentioned in

CRM as a function of CAD, yet actual disbursement is made by the branch as per the

limit set by CAD.

Table 30: Functions of Credit Administration


1. All functions mentioned in

CRM

80% - Documentation and

disbursement

- Custodian

- Monitoring

- Compliance

- Mostly complied.

- Disbursement is

made through

branches but the

limit is set by

CAD

2. Other than what is mentioned

in CRM

20%

Total 100%

N = 15



6.11 Monitoring Activities of Credit Operations

In case of credit monitoring, interesting finding is that the good term loans i.e. loans

with regular payments are mostly (up to 87% of banks) kept out of the purview of the

annual credit review. On the other hand, cent-percent of the continuous loans are

reviewed annually at the time of renewal of the limit. Certain deviations are also

observed in case of receiving financial statements on a regular basis and reporting of

covenant breaches of the borrower.

Table 31: Monitoring Activities of Credit Operations

# Particulars Yes No CRM

Requirement

Comment

1. Loan terms and conditions are

monitored

100% - - Loan terms

- Obtaining

Financial

statements

- Reporting

breaches

- Immediate

reporting of

past due

- Addressing

audit findings

- Loan review

- Mostly

complied

- Loan

review is

not done

in many

cases

2. Financial statements are received on

a regular basis

80% 20%

3. Any covenant breaches or

exceptions are reported

immediately

67% 33%

4. Past due principal or interest

payments, past due trade bills,

account excesses, and breach of

loan covenants are immediately

reported

100% -

5. Timely corrective action is taken to

address any audit findings

100% -

6. Annual review of loan facilities:

(i) Continuous 100% -

(ii) Good Term Loans 13% 87%

(iii) Poor Quality Term Loans 73% 27%

N = 15


6.12 Identification of Early Alert Accounts

Early identification of the NPL accounts helps a bank intensify monitoring activities

and undertake initiatives to minimize loan loss. From Table-32, it is found that 47

percent of the sample banks obtain report on the early alert accounts generated


automatically from the system. Rest of the banks follow symptom based physical

identification method for identifying early alert accounts.

Table 32: Identification Early Alert Accounts


Requirement

Comment

1. Auto-generated report from

system

47% Expected to be

created

Mostly not

automatically

generated 2. Other than auto-generated

report

53%

Total 100%

N = 15


6.13 Functions of Recovery Unit/Division

A separate recovery unit as required by the CRM is found to be available in all the

sample banks. But their mode of operations is not exactly the same. It is seen from

Table-33 that around 87 percent of the sample banks transfer files from relationship

management to recovery unit once the loans are classified as substandard. Other

banks do not transfer files physically to recovery unit. Regarding other functions,

banks are almost at par with CRM specified functions.

Table 33: Functions of Recovery Unit/Division

# Particulars Yes No CRM Requirement Comment

1. Transfer of files to

recovery unit

when classified as

substandard

87% 13% - Determine Account Action

Plan/Recovery Strategy

- Pursue all options to

maximize recovery

- Ensure adequate and timely

loan loss provisions based

on actual and expected

losses.

- Regular review of loan

categorized as no standard,

doubtful and bad loss.

Mostly

complied

2. Action

plan/recovery

strategy

93% 7%

3. Provision for NPL 93% 7%

4. NPL review 93% 7%

N = 15



6.14 Loan Classification, Provisioning, Rescheduling and write-off

Most of the sample banks (93 percent) are following the methodology prescribed by

the Bangladesh Bank regarding loan classification, provisioning, rescheduling and

write off. It is interesting to note that 7 percent of the sample banks are pro-actively

following more comprehensive approaches in this regard (Table-34).

Table 34: Loan Classification, Provisioning, Rescheduling and Write-off

# Particulars Findings

1. Loan Classification, Provisioning, Rescheduling and Write-off done

as per Bangladesh Bank guidelines

93%

2. Loan Classification, Provisioning, Rescheduling and Write-off done

as per bank‟s own more stringent guideline

7%

Total 100%

N = 15


7.1 Problems Faced by the Banks in the Credit Operation in 2011

The acute problem faced by the bankers in 2011 was shortage of funds. Hundred

percent of sample banks expressed this opinion (Table-35). Besides deposit crisis,

volatile money market and high cost of funds augmented this problem. They add that

Government borrowing might be a reason for crowding out private sector needs

which created deep fund crisis in 2011. Financial inclusion, appropriate deposit

products for all segments of surplus units including NRB could be a solution in this

regard.

Table 35: Problems Faced by the Banks in Credit Operations in 2011

# Problems Frequency

1. Deposit crisis, volatile money market, high cost of funds and interest

rate cap on lending

100%

2. Volatile foreign exchange market 87%

3. Audited financial statements do not reflect the true financial picture 80%

4. Difficulty in getting borrowers‟ rating rated by ECAI 80%

5. Slow recovery and cash flow problem of borrowers 73%

6. Financing against local LC and accommodation bill 53%

7. Indiscriminate extension of LTR facility resulting in fund diversion 53%

8. Delay in loan documentation due to delinquency of some Government

offices

20%

9. Primary dealership driven liquidity problem 20%

N = 15



Eighty seven percent respondents opine that volatile foreign exchange market has

created barriers to the smooth credit operation. Depreciation of BD Taka made import

costlier which consequently created more demand for money.

Eighty per cent respondents claimed that audited financial statements submitted by

the borrowers do not reflect the true financial picture of the borrower. In addition,

information submitted by the borrower is not also sufficient. They opined that as

professional accountants are not responsible for falsification of information, they are

ambivalent in this regard.

Difficulty in getting borrowers‟ rating rated by External Credit Assessment

Institutions (ECAIs) is also a major concern to bankers. Eighty percent of the sample

expressed their concern in this regard (Table-35). They opined that borrowers are not

interested to have rating from ECAI as it incurs extra cost. It is noted that

Bangladesh Bank issued circular in this regard in 2008 and stated that credit rating is

to be determined on the basis of risk profile assessed by the ECAIs.

The slow recovery from the borrowers is also indicated as a serious problem faced by

the bankers in 2011. Slow recovery has been observed particularly in the real estate,

RMG and commodity sector. Electricity, gas, world economic recession and high

commodity price in the world market increase the cash conversion cycle of the

borrower. It compelled entrepreneurs of these sectors to reschedule their repayment.

Ultimately, it led to slow recovery of loan.

Financing against local LC and accommodation bill and indiscriminate extension of

LTR facility resulted in fund diversion. Fifty three percent of the sample banks raised

these problems in their credit operation in 2011. Here, they stated that in some cases

they were compelled to extend these types of facilities because of pressure from the

influential sections of the society.

Twenty percent of the sample bankers highlighted that delay in loan documentation

due to delinquency of some Government offices is also an obstacle for banks in their

credit operation.

Finally, primary dealership driven liquidity problem was an issue which was also

raised by twenty percent respondents. They mentioned that PD banks have

experienced a tough time in their operational performance due to liquidity constraint

on account of their holding of a large chunk of government securities. In addition,

they added that the average yield on the government approved securities was around


10% whereas average interest rates in the inter-bank call-money market were ranging

from 15% to 17%. It resulted in incurring loss for the primary dealers.

7.2 Cases on a Successful Project and a Failure Project

7.2.A Case of a Successful Project/ Borrower

JMI Syringes and Medical Devices Ltd. as a joint venture with South Korea was

established as a Private Limited Company in April, 1999. But at present it is a Public

Limited Company. The project is situated at Noapara, Choddogram in the district of

Comilla.

The project is a pioneer manufacturer of Auto Disable (AD) Syringe, Blood

Transfusion Set, Intravenous Canula (IV Canula), Intrauterive Contraceptive Device

(Copper T380A) in the country. Almost all main hospitals and major pharma of the

country are the purchaser of the syringe and other products of the company. It is the

only company accredited by WHO and GVI (Global Alliance for Vaccination and

Immunization) to supply syringe for the EPI (Expanded Program for Immunization).

It is also a member of International Association of Safe Injection Technology

(IASIT), Geneva, Switzerland. It exports its products to Singapore, Thailand,

Myanmar, Spain, Portugal and other different countries of Asia and Latin America.

The total cost of the project now stands at BDT 500 million including BDT 125

million term loan from a state-owned commercial bank and BDT 50 million from the

public issue. The project has a yearly capacity of producing Auto-disposable Syringe

(228,171 pieces), Insuline Syringe (31,428 pieces), Infusion Set (39,286 pieces), Bud

Set (39286 pieces), Urine Bag (31,249 pieces), IV Cannula (23,571 pieces), Needle

(Blister Pack (39,286 pieces) and Auto Disable (AD) Syringe (480,571 Pieces)]. As

regards loan repayments, there is no default. Payment is made without any delay. Till

date BDTK. 135 million has been repaid.

The project became a successful one due to the following:

(i) Mr. Abdur Razzaque , M.A. in Economics from the University of

Chittagong, is the main sponsor of this project.

(ii) Technical know-how, practical experience in machine installation, process

flow, etc. of Mr. Abdur Razzaque.

(iii) Twelve (12) years working experience at Japan in a Disposable Syringe

Factory.


(iv) Fluency in Japanese, Korean and English languages of Mr. Abdur Razzaque.

(v) Maintaining good relationship with public and different government and

other agencies.

(vi) Giving due importance to perseverance and value of time.

(vii) Extensive demand for the products of the project at home and abroad.

(viii) Simple life style and no extravagancy.

(ix) Personal commitment.

(x) Timely sanction of required working capital by the bank.

7.2.B Case of a Unsuccessful Project/ Borrower

In 1992 an amount of TK. 41.795 million was sanctioned in favour of Rahman

Knitting and Yarn Processing Ltd. by a state owned commercial bank. The first

installment of the loan was due for payment on 27.08.1994. The loan was scheduled

to be repaid in eleven half yearly installments. Each installment amounted to

Tk. 6.288 million. The entire amount of loan was scheduled to be repaid within

27.08.1999. Afterwards an amount of TK. 45.118 million BMRE loan was disbursed

on 09.02.2004 for proper balancing the project. But the borrower failed to repay the

loan installments in due time and because of this, the loan account was rescheduled

around thirteen times starting from December, 2001. Under these circumstances, the

BB has already directed the bank to classify the loan, and take appropriate actions

against the officers who are involved with re-scheduling the loan again and again. BB

has also asked the bank to take immediate action to recover the overdue loans and

report to them the progress thereof.

The project comprises of dyeing, knitting and sweater unit. At present the sweater

unit is not running. But the rest are in operation. The borrower has informed the bank

that they are running the project on sub-contract basis and as such they are not in a

position to repay the loan installment due to insufficient cash generation. They are not

also receiving direct export L/C bacause they are not getting the opportunity to open

Back-to Back L/C from the bank as the banks are not allowing them to open the same

(Back-to-Back L/C) due to failure of payment of overdue loans.

The project failed due to the following bad personal traits of the borrower and other

factors:

(i) Ill motive.

(ii) No expenditure control and lavish life style.


(iii) Always looking for excuse whatever be the merits.

(iv) Tendency for over borrowing by exaggerating project cost.

(v) Fund diversion.

(vi) Lack of professionalism.

(vii) Lack of practical knowledge of the concerned business man including basic

technical know-how.

(viii) Ill behavior.

(ix) Connectivity with political/ influential persons.

(x) Never seeing root of problems.

(xi) Always trying to cover up/ manage things for short period and in temporary

basis.

(xii) The project is being run on sub-contract basis.

(xiii) Insufficient cash generation.

8. Challenges and Recommendations

8.1 Increased Cost of Funds and High Interest Rate of Loans

From the review of the credit portfolio and the opinion of the bankers it has been

found that the cost of raising funds for loans has increased substantially in the year

2011 and it forced banks to increase the interest rate on loans within the ceiling. Such

increase in the cost of funds and loan interest rate may make some good projects

economically unviable. On the other hand, it reduces the size of the spread as there is

a ceiling for lending interest rate. As a short term measure, rebate for good borrowers

may be considered. For long-term solution to this problem, banks may be encouraged

to follow the asset-liability management norms strictly and may be discouraged to set

ambitious profit target.

8.2 Credit Concentration

Different types of concentration are evident from the review of the credit portfolio of

banks as presented in section five of this paper. Particularly, geographical

concentration is critical. About 86.69 percent of advances of all banks are

concentrated in Dhaka and Chittagong Division in 2011 which means only 13.31

percent of the advances of all banks are made in five other Divisions. Banks gave

least priority on distribution advances in Barisal Division and Sylhet Division. Other

concentration includes concentration in urban areas, concentration in trade finance,


concentration in large loans, concentration in high interest rate loans and

concentration in collateral etc. Such inequitable distribution of advances by the banks

may create regional economic disparity. Moreover, such concentration of advances

will add concentration risk to the risk profile of the banks and will require them to

maintain additional capital under Basel-II. Poor infrastructure, investment safety and

absence of good officers in rural areas are assumed to be the reasons for low credit

disbursement in the rural areas that needs to be addressed. Investment for rural

infrastructure may be increased. For making good officers available in the rural

branches, minimum mandatory rural service with appropriate incentives for all bank

officials may be introduced in the banks.

8.3 Slow Recovery

The slow recovery from the borrowers is indicated as a serious problem faced by the

bankers in 2011. Slow recovery has been observed particularly in the real estate,

RMG and commodity sector. Now unavailability of utilities (electricity and gas),

world economic recession and high commodity price in the world market increased

the cash conversion cycle of the borrower in the above mentioned sectors.

It compelled entrepreneurs of these sectors to reschedule their repayment. Ultimately,

it led to slow recovery of loan. Banks should emphasize on cash flow rather than

collateral, succession plan, economic viability etc. at the time of choosing projects for

financing. In one hand, legal framework may be strengthened to disallow writ by the

borrowers, on the other hand, borrowers may be made aware of the laws. Media can

also play a vital role in this regard. Borrowers training may help as well. Ambitious

profit target, mentioned earlier, which force bank employees to compromise loan

quality may be discouraged.

8.4 Primary Dealership and Fund Crisis

Primary Dealer banks are suffering the most because of the requirements of buying

more Govt. securities and absence of the secondary market. They have more than

sufficient high quality liquid assets62

in their portfolio but there is no fund for creating

new loans. The other side of the problem is the gap between high cost of borrowing

money and the low return from these high quality liquid assets. It should be made

62 High quality liquid assets, among others, include Treasury bills.


mandatory for all banks, instead of only Primary Dealer banks, to purchase certain

percentage of the government securities offered based on their balance sheet size. It is

noted that BB has already taken initiative to reduce the burden of the primary dealers

by keeping provision to distribute unsold Government securities among non-PD

banks.

8.5 Electronic Database of CRG Score

It has been found from the review that the banks are not maintaining any electronic

database of the CRG score of the borrowers although it is required by the CRM to

maintain database of the CRG score. Besides, maintaining data base is also important

for the validation of the internal model used for determining the risk grade of the

borrowers. Maintaining data base will also help banks in developing more rigorous

internal risk rating model that will ultimately help banks to switch over to advance

approaches of determining minimum capital under Basel-II. Banks may start

maintaining electronic database in case of internal rating of borrowers.

8.6 Less Credit Disbursement in Agricultural Sector

The contribution of Agricultural Sector to GDP is almost 20 percent but the flow of

credit to this sector is only around 5.59 percent of total advances in 2011.

Particularly, the participation of PCBs and FCBs in this sector is very negligible

compared to their total loan portfolio. This sector needs to be prioritized for

distribution of advances which will boost GDP growth and ultimately help the

country to attain self-sufficiency in production of food. Interest should be created

among young bankers regarding agriculture, its process and agricultural credit.

Efforts to minimize the knowledge gap of the young bankers regarding agriculture

and agricultural credit may help in this case. In this regard, specialized training

programs may be arranged and incentives may be given with a view to bridging the

knowledge gap and creating interest among the bankers respectively. In this regard, it

is mentionable that Bangladesh Bank has now made it mandatory for banks to

disburse a certain percentage of credit to agricultural sector.

8.7 Loan against Trust Receipt (LTR) and Accommodation Bill Financing

Financing against local LC, accommodation bill and indiscriminate extension of LTR

facility result in fund diversion. Fifty three percent of the sample banks raised these


problems in their credit operation in 2011. Here, they stated that in some cases they

were compelled to extend these types of facilities because of pressure from the

influential sections of the society. Besides, lack of effective monitoring aggravated

the fund diversion problem in these areas. LIM in lieu of LTR may be offered with

centralized warehouse. Accommodation bill financing should be stopped. To achieve

this banker should be given the responsibility to ensure actual trade transaction in case

of local LC although bankers are not supposed to deal with goods as per UCPDC 600.

8.8 Absence of System of Assessment Test for Selecting Approval Executive in Banks

It is required by CRM to entrust the responsibility of loan approval only to

knowledgeable, well-trained and experienced executives. The most interesting

findings of the survey, as presented in Table-26, is that a system of undertaking

formal assessment test, as required by CRM, to determine the knowledge level is

absent in 93 percent of the sample banks. This may create poor quality assets for the

banks. Banks should introduce a system of taking assessment test before appointing

any credit approval executive to ensure right people in the right place.

8.9 Low Credit Rating Coverage

Other than internal risk rating of the borrowers, external rating is also necessary for

risk management and capital adequacy assessment purpose. But during the survey

bankers termed it as a difficult task as the borrowers do not want to bear the cost of

being rated. The other side of the problem is the reluctance of the borrowers to share

information with the rating agency particularly where there is a possibility of getting

low rating from ECAI. External credit rating may be made mandatory for getting

loans. Fees for credit rating may be regulated. Besides, loan interest rate may be tied

up with credit rating score. Borrowers with good rating may be offered lower interest

rate and vice versa.

8.10 Updating Frequency of Lending Guideline

Though CRM requires updating of the lending guidelines at least annually

nevertheless it was noticed during the survey that only 40 percent of the sample banks

follow it meticulously. Variations of the frequencies of updating credit policy will

surprise one to note that 7 percent of the banks update credit policy once in every six

months while another 7 percent do it once in every four years though all are operating


in the same financial market. It is also evident that 53 percent of the banks do not

update lending guideline regularly as per the requirement of CRM. Banks should

update their lending guideline at least once in a year and it should be made available,

understandable to all branch level executives dealing with credit matters.

8.11 Centralization of Approval Function within CRM

Credit Risk Management (CRM) team in the bank is empowered to decline any

proposal forwarded by the relationship managers on the quality ground which is not

always possible by RM. So it is important that all loan proposals must pass through

the CRM department to ensure selection of good quality customers. Table-27 shows

that only 27 percent of the sample banks have fully centralized their approval

function within CRM meaning each and every loan is required to be passed through

the CRM. Rest 73 percent of the banks are yet to get a full shape in this regard

although they have done it partially. For ensuring creation of good loans, there is no

alternative of centralizing approval function within CRM. All loans must pass

through CRM department. Location of CRM department may in the branches or in

the regional offices or in the head office.

8.12 Segregation of RM Function from Approval and Administration Function

For successful operation of credit functions and effective management of credit risk,

it is indispensable to segregate relationship management function, credit

administration function, and approval function. From Table-25, it is clear that 93

percent of the banks maintains this basic condition of effective credit risk

management either at head office or at branch level while 80 percent maintains this

segregation both at the head office and branch level. In rest of the banks comprising

of 7 percent of the sample banks, no such effective segregation among these activities

was found. Supervisory initiatives to encourage banks to segregate these activities

may help solve this problem.


REFERENCES

Bagehot, Walter (1873), Lombard Street, Homewood, IL: Irwin.

Bangladesh Bank (2010), Scheduled Banks Statistics, BB, Dhaka.

Bangladesh Bank (2011), Annual Report: 2010-2011, BB, Dhaka.

Bangladesh Bank (2011), Prudential Regulations for Banks: Selected Issues, BB, Dhaka.

Bangladesh Bank (2011), Scheduled Banks Statistics, BB, Dhaka.

Beck, Thorsten, Kunt, A Demirgric and Levine, Ross (2000), „A New Data Base on

Financial Development and Structure‟, World Bank Economic Review, 14.

Goldsmith, Raymond W. (1969), Financial Structure and Development, New Haven, CT: Yale

University Press.

http://www.bangladesh-bank.org/aboutus/regulationguideline/guidelist.php

http://www.bangladesh-bank.org/pub/publictn.php?cat_id=0&pub_id=2



Islam,A.B.Mirza Md. Azizul (2012), „ Ethics in Banking,‟ Bank Parikrama, Nos.

1&2, Vol. XXXVII.

Jayaratne, Jith and Strahan, Phillip E. (1996), „The Finance-Growth Nexus: Evidence

from Bank Branch Deregulation‟, The Quarterly Journal of Economics.

King, Robert G and Levine, Ross (1993a), „Finance and Growth: Schumpeter Might

be Right‟, Quarterly Journal of Economics.

King, Robert G and Levine, Ross (1993b), „Finance, Entrepreneurship and Growth:

Schumpeter Might be Right‟, Quarterly Journal of Economics.

Levine, Ross, Loayza, N. and Beck, T. (2000), „Financial Intermediation and Growth:

Causality and Causes‟, Journal of Monetary Economics 46.

Robinson, Joan, (1952), The Rate of Interest and Other Essays, London: Macmillan.

Schumpeter, Joseph A. (1912), Theori Der Wirtschaftlichen Entwicklung, Leipzig,

Germany: Dunker & Humbllot.

http://www.bangladesh-bank.org/aboutus/regulationguideline/guidelist.php


Paper Three

Trade Services Operations of Banks

Dr. Shah Md. Ahsan Habib1

Mahmood-ur-Rahman2

Antara Zareen3

A. T. M. Nessarul Haque4

Md. Nazir Hossain5

1 Professor and Director (Training) of Bangladesh Institute of Bank Management (BIBM) 2 Assistant Professor of Bangladesh Institute of Bank Management (BIBM) 3 Lecturer of Bangladesh Institute of Bank Management (BIBM) 4 Assistant Vice President of Mutual Trust Bank Limited 5 Senior Assistant Vice President of Eastern Bank Limited


List of Abbreviations

AD Authorized Dealer

AWB Air Waybill

BB Bangladesh Bank

BTMA Bangladesh Textile Mills Association

BGMEA Bangladesh Garment Manufacturers & Exporters Association

BIBM Bangladesh Institute of Bank Management

BEFTN Bangladesh Electronic Fund Transfer Network

BKMEA Bangladesh Knitwear Manufacturers & Exporters Association

BDT Bangladesh Taka

BOE Bill of Entry

CD Current Deposit

CDCS Certified Documentary Credit Specialist

C&F Clearing and Forwarding

CFR Cost and Freight

CPT Carriage Paid To

CIB Credit Information Bureau

CITF Certificate in International Trade and Finance

CIP Carriage and Insurance Paid To

CIF Cost, Insurance and Freight

CCI&E Chief Controller of Import and Export

COTIF Convention concerning International Carriage by Rail

CY Calendar Year

DP Documents Against Payment

DA Documents Against Acceptance

DAP Delivered at Place

DAT Delivered at Terminal

DDP Delivered Duty Paid

DOCDEX Documentary Instruments Dispute Resolution Expertise

EDF Export Development Fund

ERC Export Registration Certificate

ERQ Exporters Retention Quota


EXW EX Works

FC Foreign Currency

FCB Foreign Commercial Bank

FCA Free Carrier

FDBP Foreign Documentary Bill Purchase

FE Foreign Exchange

FIT Finance of International Trade

FMJ Form of Money and Jewelry

FAS Free Alongside Ship

FERA Foreign Exchange Regulation Act

FEPD Foreign Exchange Policy Department

FOB Free on Board

GFET Guidelines for Foreign Exchange Transactions

ICC International Chamber of Commerce

ICC Institute of Cargo Clauses

IDA International Development Association

IRC Import Registration Certificate

ISBP International Standard Banking Practice

ISP International Standby Practices

LC Letter of Credit

LCAF Letter of Credit Authorization Form

LDBP Local Documentary Bill Purchase

LIM Loan Against Imported Merchandise

LTR Loan Against Trust Receipt

MFI Micro Finance Institute

MT Message Type

NBR National Board of Revenue

NFCD Non-Resident Foreign Currency Deposit

OBU Offshore Banking Unit

PI Proforma Invoice

PAD Payment Against Documents

PCB Private Commercial Bank

PRC Proceed Realization Certificate

PSI Pre Shipment Inspection


RFCD Resident Foreign Currency Deposit

RRI Road Rail and Inland Waterway

SCB State Owned Commercial Bank

SOD Secured Overdraft

SWIFT Society for Worldwide Interbank Financial Telecommunication

TM Travel and Miscellaneous

TIN Tax Identification Number

UCPDC Uniform Customs and Practice for Documentary Credit

UN United Nations

URR Uniform Rules for Bank to Bank Reimbursements under

Documentary Credits

URC Uniform Rules for Collection

UPAS LC Usance Pay at Sight Letter of Credit

URDG Uniform Rules for Demand Guarantee

VAT Value Added Tax

WTO World Trade Organization


Trade Services of Banks

1. Introduction

The ongoing global liberalization and integration process have brought considerable

changes in international trade transactions and practices that have been affecting trade

services by banks covering mainly facilitation of trade payment and trade financing.

Most developing countries along with Bangladesh are now closely linked to the

global economy by trade flows that have grown over the years. By virtue of global

integration of world economies, the economic crisis of 2009-10 was transmitted

among many developing countries in the form of contraction in trade finance and

a slowdown in demand affecting bilateral trade flows. Owing to the crisis, the

significant reduction in trade flows affected the economic activities of developing

countries in the context of falling commodity prices, drops in exports exacerbated by

the deficit of credit and trade finance. Traders were facing more counter-party risk

and asking for greater securities in their trade activities. Following the financial crisis,

the global economy experienced a fall in the trade volume in 2009 that recovered in

2010, then the global trade volume consolidated in 20111. Bangladesh is connected

with global economies mainly through trade. As one of the less financially integrated

economies, the impact of the global crisis was not that apparent in the country.

Though in between CY 2009 and CY 2010, the growth rate of trade was around

20 percent, the country experienced tremendous growth in trade in between CY 2010

and CY 20112.

The efficiency level of trade services affects the trade flows and bargaining power of

the traders. The general perception about our export-import market is that when we

export it is buyers‟ market and when we import it is sellers‟ market. That is, our

counter parties are always stronger. This has reflection on the use of methods of

payments and other trade services of the country. Credibility of the traders, banks and

regulatory requirements are also important factors that determine the methods of

1 Export volume of the world economy experienced growth rates of -12.2 percent in 2009, 15.2 percent in 2010 and 7.1 percent in 2011; and import volume of the world economy experienced growth rates of -13.3 percent in 2009, 15.5 percent in 2010 and 7.3 percent in 2011 (AIECE 2011).

2 Bangladesh‟s total export volumes were BDT 99218 crore, BDT 114396 crore and BDT 171291 crore during CY 2009, 2010, and 2011, respectively; and Bangladesh‟s total import volumes were BDT 150860 crore, BDT 193910 crore and BDT 268337 crore during CY 2009, 2010, and 2010, respectively; in between CY 2010 and CY 2011 export volume and import volume registered around 50 percent and 39 percent growth, respectively (BB 2012).


payments and financing of any country. In the context of Bangladesh, the information

on the practices of international trade services is not readily available due to

inadequate research activities in the area. For the improvement of the trade services, it

is important to understand the operations, progress and trends in different trade

services activities by the bankers, academicians and researchers of the relevant fields.

Capturing the detailed information on the trends, changes, dimensions and challenges

would also facilitate practitioners to undertake future course of action. Moreover, the

activity review is expected to contribute to creating the backdrop for further research

activities. Ultimately, this collective endeavor of bankers, academicians and

researchers is necessary for improving the efficiency of the trade services operations

by banks.

Specific Objectives

With this backdrop in mind, the broad objective of the study is to review the overall

activities of trade services operations of banks for the year 2011. The specific

objectives of the review are: one, to discuss about different functional areas and

activities performed by the trade services departments of the banks; two, to capture

the status and changes regarding the use of trade payment methods and financing

techniques with their different dimensions over 2011; three, to illustrate operational

process and documentation related issues in regard to trade payment and financing;

four, to examine the issues relating to costs, risks, technology and human resources in

regard to trade payment and financing; five, to understand the regulatory environment

and role played by the different stakeholders in trade payment and finance practices

by banks in Bangladesh; and six, to identify the challenges of trade services activities

of banks to suggest future course of action in Bangladesh.

Methodology

For the study, both primary and secondary data have been collected to fulfill the

objectives of the study. Secondary data are collected from different publications

related to international trade payment and financing practices. ICC documents have

been the major secondary data source. To gather primary data, a questionnaire survey

has been conducted. Both open-ended and close-ended questions have been

incorporated in the questionnaire for the survey. The survey samples (AD branches of

commercial banks) are determined purposively based on three considerations: one,


trade payment and financing practices of banks of the country should be brought

under the survey; two, AD branches that are involved in all types of and large

volumes of trade payment and trade financing transactions should be covered by the

study; and three, the study should also reflect the practices of different administrative

divisions of the country. For collecting primary data, senior executives of selected

commercial banks were consulted.

The survey has been administered in sixteen major branches/head offices of thirteen

commercial banks located in Dhaka, Chittagong and Khulna. Thirteen banks3 include

two SCBs, nine PCBs of different generations, and two FCBs. Operations of bank

within EPZs (both Dhaka and Chittagong) have come under survey. Interviews have

been conducted with the dealing officers and incharge of foreign trade divisions of

the selected bank branches.

Table 1: Sampling Distribution (Branches/Head Offices of Banks)

Dhaka Chittagong Khulna Total

SCBs 2 0 1 3

PCB 4 5 1 10

FCB 2 1 - 3

Total 8 6 2 16

The draft review study report was presented in the review workshop participated by

the expert practitioners from different banks. The report has been finalized after

accommodating comments of the participants and experts of the banking sector.

Coverage and Limitation of the Report

Broad areas of the study are trade payment and trade finance activities of banks.

The study also identifies other products of the trade services department under the

head of „other services‟. The survey covers limited number of branches/head offices

and banks (centralized banks cover the data of all branches). Data of the banks are

simple averages. Though the practices of different branches of even within a bank

3 Sonali Bank Ltd; Agrani Bank Ltd; Bank Asia Ltd; CitiBank N. A.; Dhaka Bank Ltd; Eastern Bank Ltd; HSBC.;

Mutual Trust Bank Ltd; Prime Bank Ltd; Al-Arafah Bank Ltd; IFIC Bank Ltd; United Commercial Bank Ltd and

Islamic Bank Bangladesh Ltd.


may be different, the study considers the principal or big branches as the

representatives of banking sector.

Organization of the Review Report

The report has been organized under six sections: after an introductory section with

the objectives and methodological issues, section 2 deals with the trade services

products and their operational procedures. Legal frameworks of international trade

services are discussed in section 3 Section 4 deals with the trends of trade services

products and their dimensions. Cost, risk, technology, exchange rate and human

resource related issues of trade services are captured in section 5 Finally section

6 identifies a few challenges and puts forward a few recommendations. A glossary of

the technical terms is added at the end of the report.

2. Trade Services Products and Their Operational Procedures

Trade services products are those services that are commonly offered from the „Trade

Services Department‟ of a bank. The term „Trade Services‟ is confused with „Foreign

Exchange‟ at the operational level in many instances in Bangladesh. Broadly, trade

services include the products or services related to trade payment and trade finance.

In this section, the trade services practices of banks have been grouped under trade

payment, trade finance, and other services.

Operations of Trade Payment Services and the Relevant Issues

Broadly four categories of trade payment methods are in use to facilitate and receive

payments: cash in advance, open account, documentary collection and documentary

credit. It is well-known that open account, most popular to the importer, is the most

widely used form of trade payment method in global cross border payment

transactions. Cost factor and greater bargaining power of importer are the responsible

factors for the frequent use of open account. Open account is followed by

documentary collection and then documentary credit. Though documentary credit is

recognized as the most reliable form of trade payment method, involvement of high

cost limits the use of the method. Moreover, it is not on the preference list of

importer. Cash in advance, most preferable to the exporter, is in the last position in

terms of use. Because of some regulatory compulsion, documentary credit is the most


commonly used method in making import payment from Bangladesh. In export

receipt, mainly documentary collection is in use alongside documentary credit.

However, whatever may be the method of payment the very first step is the contract

between exporter and importer.

Purchase/Sale Agreement and Some Relevant Formalities

In the cases of cash in advance, open account and documentary collection,

sales/purchase contract is the guiding document. Practically, for these three methods,

banking system needs a standard format for purchase/sale agreement, considering the

risks to protect the interests of the clients in a better manner. In case of LC, the

contract may be considered as relatively less important as the terms and conditions of

the contract are expected to be in the LC itself. In Bangladesh, the use of standard

sales/purchase contract is not so prominent which may be due to the widespread use

of documentary credit. There is no doubt that terms and conditions of purchase/sale

contract would vary for different products, modes of payment or even sources of

imports. However, generally, a standard contract should have at least the following

components (box-1):

Box-1: Components of a Standard Purchase/Sale Contract

Name and address of applicant, the applicant‟s bank/ collecting/ presenting/ buyer‟s bank

Name and address of the beneficiary‟s bank /nominated/ remitting/ seller‟s bank

Total value and full description of goods (specification, quantity, unit price, etc.)

Last date of shipment, date of expiry and documents required

Payment terms: method, tenor, trade terms etc.; and warranty/ guarantee/ undertaking

Dispute settlement process (arbitration or litigation and the governing laws)

Retention of title

Liquidated damage clause; and force majeure.

Before getting into a purchase or sale agreement with a foreign counterpart, licensing

or registration is a very common requirement for the traders. In the context of

Bangladesh, importers are to obtain IRC to import from any sources and exporters are

to get ERC. In practice, importers and exporters are to submit a diverse set of


documents4 to the CCI&E of the Ministry of Commerce. It is to be mentioned that

government ministries do not require IRC for importation.

Commonly used Documents in International Trade Transactions

Commonly used documents in international trade transactions include commercial

invoice, transport documents, insurance documents, bill of exchange, etc.

The requirements and nature of documents depends upon purchase/sale agreement. In

case of LC, these documentary requirements are noted in the LC itself and

compliance is a precondition to obtain payment by the exporter. For selecting right

documents, the trading parties should consider both domestic and international

regulations carefully.

Invoice: By invoice, we mainly mean commercial invoice. Commercial invoice is

practically the seller‟s bill for the merchandise. It is issued by the exporter, dated and

bears the names and addresses of parties (exporter and importer). It commonly bears

shipping marks, total weight or quantity of the goods, per unit and total price, etc.

The importer may require several copies of the invoice to satisfy his own needs and

also those of customs and other authorities in his country. There is no standard format

for commercial invoice and exporters designs their own format of commercial

invoice. Usually, a commercial invoice is signed by the exporter/seller and submitted

in multiple sets, as desired by the importer/buyer. Other types of invoices are consular

invoice, customs invoice, certified invoice, and pro-forma invoice. In practice

sometimes commercial invoice may not be signed. But as per the domestic

requirement of Bangladesh, commercial invoice has to be signed.

Transport Documents: Transport documents offer evidence of transportation. These

give proof of shipment/carriage of goods from port of loading/place of receipt to port

of discharge/place of destination. Usually, transport documents are the documents of

„title of goods‟ and act as the evidence of „contract of the carriage‟. A transport

document assumes the form of either single-modal or multi-modal. The various forms

of single-modal transport documents include marine/ocean bill of lading, air waybill,

4 Receipt of the deposited fees, TIN, VAT, Nationality Certificate, Bank Solvency Certificate, Trade License;

Certificate from Chamber/ Registered Trade Association, Certificate from Board of Investment, Rent Receipt;

Partnership Deed/ Memorandum of Association/ Article of Association, etc.


truck receipt, railway receipt, courier or postal receipt, charter party bill of lading, etc.

Some documents commonly used in relation to the transportation of goods, namely,

delivery order, forwarder‟s certificate, mate‟s receipt, etc. do not contain a contract of

carriage and are not transport documents. As in most of the other countries, bill of

lading is the most commonly used transport document both in exports and imports in

Bangladesh. Transshipment and Partial Shipment are some common phenomena in

global transportation arrangement of international trade transactions. As per

international rules, AWB, Truck Receipt etc. are not title documents and should not

be issued „to the order‟ of a bank (negotiable). However, domestic rules of

Bangladesh requires exportable to be released to the order of a bank. Blank-back or

short form transport documents are not accepted in the country.

Insurance Document: Insurance document is the evidence of insurance coverage.

International trade is very much risk-ridden and thus it is necessary to insure the

goods against the risks of loss or damage to be indemnified. A Policy becomes

a complete set of documents only when appropriate clauses are attached. Three

alternative sets of clauses, covering different types of perils are available for

attachment: ICC(A), ICC(B) and ICC(C). Both the coverage and premium are

minimum in ICC(C) and maximum in ICC(A). As per the domestic requirement of

Bangladesh, insurance coverage is to be given by domestic insurance companies for

imports.

Bill of Exchange: Based on the available literature on documents, in international

trade bill of exchange may be defined as an unconditional order issued by the

exporter on a person or bank requiring to pay on demand or at a fixed or determinable

future time a certain sum of money. Traders are very familiar with the document and

its format. Though conceptually bill of exchange is a redundant document to a group

of experts in case of LC, it is commonly asked and issued. In Bangladesh,

traditionally customs authority asks for bill of exchange at the time of releasing of

goods. Under the Stamp Act5 the amount accepted in the bill of exchange for usance

payment is dutiable.

5 ….every bill of exchange payable otherwise than on demand or promissory note drawn or made out of

Bangladesh on or after that day and accepted or paid, or presented for acceptance or payment, or endorsed,

transferred, or otherwise negotiated, in Bangladesh….. [Chap II, section 3 (b) Stamp Act 1899].


Other Documents: Considering the practice of Bangladesh, other documents may

include certificate of origin, PSI certificate, weight list, phyto-sanitary certificate,

health certificate, fumigation certificate, radiation certificate, quarantine certificate

etc. In case of import to Bangladesh, barring a few exceptions6 obtaining certificate of

origin is a regulatory requirement. Generally, PSI certificate is not required for the

importable with the import duty of less than 5 percent, importation of perishable

goods, capital machinery, import under bonded warehouse, etc. Phyto-sanitary or

health certificates are commonly required in connection with importation of foods.

Trade Payment Methods in Use and Procedures

Payment mode is agreed upon in the purchase/sale agreement. At the operational

level, two types of payment processing mechanisms are followed: Branch Based and

Centralized. Under branch-based arrangement, AD branches of a particular bank

conduct their trade service operation not only for their own customers but also for the

customer of Non-AD branches. Under centralized arrangement, trade services are

offered through a centrally managed department or unit. Sometimes a hybrid

arrangement is followed under which customers of non-AD branches are served from

a centralized unit and AD branches serve their own customers. Both systems have

their own advantages and disadvantages7.

Cash in Advance: In cash in advance method of payment, the buyer places the funds

at the disposal of seller (exporter) prior to shipment of goods in accordance with the

sales/purchase contract (figure-1). If the exporter is not sure about the buyer's

creditworthiness or there are other circumstances which cast doubt on the certainty of

getting paid, a last resort is to ask for cash in advance. In case of cash in advance,

purchase/sale contract is the guiding document. In Bangladesh, there are a few areas

where cash in advance is used. In imports, the method can be used only for importing

books, journals and under retention quota upto certain limit; however, import against

cash in advance upto any limit is allowed in case of repayment guarantee by an

overseas bank. In export there is no such restriction.

6 Import of lime stone, coal and 100 percent export oriented industries.

7 Under centralized system, bank management can have control over the trade services activities and may ensure quality and better monitoring; however, banks with huge scattered branch network and inadequate modern technology may not adopt the system.


Figure-1: Operational Procedure of Cash in Advance

Figure-2 Operational Procedure of Import using Cash in Advance in

Bangladesh

Steps Activities Involved

Step-1: Purchase/

Sale Agreement

obtaining PI/ quotations

negotiating the terms & conditions of the agreement, where

the payment term is cash in advance

signing the sales/purchase agreement

verification of quoted prices by the banks

Step-2: Advance

Fund Transfer

application from the importer and verification of signature

obtaining undertaking from the importer according to

GFET

Importer

Exporter

Payment

Flow

Flow of

Goods &

Services

Importer’s Bank

Exporter’s Bank

1 2

Purchase/ Sales

Agreement


obtaining Bangladesh Bank‟s permission other than a few

exceptions8

outward remittance (using SWIFT -MT 103)

Step-3: Shipment

by the Foreign

Exporter and

Sending

Documents

arranging shipment by the exporter and sending

documents to the importer

Step-4:

Clearance of the

Consignment

receiving documents, approaching bank by the importer for

obtaining LCAF and accomplishing other formalities

releasing goods by the importer from the port and submit

bill of entry to the bank

Step-5: Reporting

to BB

dispatching the required documents including IMP/TM

form, LCAF, commercial and proforma invoice etc. to BB

along with monthly returns

Figure-3 Operational Procedure of Export using Cash in Advance in

Bangladesh


Step-1:

Purchase/Sale

Agreement

obtaining export order

sending PI

negotiating the terms & conditions of the agreement, where the

payment term is cash in advance

signing the sales purchase agreement

8 Books, journal, import under repayment guarantee and import using ERQ (GFET 2009).


Step-2: Receipt of

Export Proceeds in

Advance

transfer of fund by the foreign importer through the banking

channel

Step-3: EXP

Issuance and Bank

Endorsement of

Shipping

Documents

issuing EXP the exporter‟s bank

submitting the EXP along with other documents to the Customs

for clearance of goods for export by the exporter or its C & F

agent

issuing shipping bill/bill of export by the customs after

assessment and verification authenticates the EXP

Step-4: Shipment

by the Local

Exporter and

Sending Shipping

Documents

arranging shipment and sends the shipping documents to the

foreign importer by the local exporter either through banking

channel or directly.

Step-5: Reporting

to BB

reporting in advance the remittance voucher at the time of

realization of export proceeds

dispatching the duplicate and triplicate EXP copies to BB

submitting the monthly returns [in case of invisible exports, C

Form is used for reporting]

Open Account: Open account is the reverse of cash in advance. This is an

arrangement between the buyer and seller whereby the goods are manufactured and

delivered before payment is required. The seller must have absolute trust that he will

be paid on the agreed date. Through using the method, the seller can avoid a lot of

banking charges and other costs, but he has no security that he will be receiving

payment in due course. For this reason, the exporter may not be willing to accept this

sort of mode of payment. Though it is the most popular method of payment in the


world, there are relatively less instances of open account (mainly in EPZs) due to

regulatory compulsion in the country. In export, there is no explicit restriction,

however, EXP signing requirement9 by the bank restrict banks to agree with open

account. There are some cases of direct handling of documents by clients (exporter

and importer). In such a case though bank is involved at the stage of issuing EXP, the

operational procedure is in line with open account method.

Figure-4: Operational Procedure of Open Account

9 Banker and exporter will be considered equally liable if export proceeds are not received within 4 months

following the date of shipment (GFET 2009).

Importer

Exporter

Payment

Flow

Flow of

Goods &

Services

Importer’s Bank

Exporter’s Bank

2 1

Purchase/ Sales

Agreement


Figure-5 Operational Procedure of Import using Open Account in

Bangladesh


Step-1: Purchase/

Sale Agreement


negotiating the terms & conditions of the agreement,

where the payment term is open account


verifying quoted prices by the banks

Step-2: Shipment

by the Foreign

Exporter and

Sending Shipping

Documents

arranging the shipment and sending the shipping

documents to the local importer by the exporter

Step-3: Bank

Endorsement and

Clearance of the

Consignment

receiving the shipping documents, approaching bank by

the importer for customs purpose copy of LCAF & other

formalities

releasing goods from the port by the importer and

submitting bill of entry to the bank

Step-4: Fund

Transfer/Import

Payment by the

Local Importer

approaching bank by the importer with an application to

remit fund according to sales/purchase agreement

processing of outward remittance[using SWIFT

(MT 103)]

Step-5: Reporting

to BB

reporting to Bangladesh Bank as per the directives of

GFET


Figure-6 Operational Procedure of Export using Open Account in

Bangladesh


Step-1:

Purchase/Sale

Agreement


sending PI

negotiating the terms & conditions of the agreement, where the

payment term is open account


Step-2: EXP

Issuance and Bank

Endorsement of

Shipping

Documents

issuing EXP by the bank

submiting the EXP along with other documents by the exporter

or its C & F agent to the customs for clearance of goods for

export



submiting documents by the exporter along with EXPs to the

bank

Step-3: Shipment

by the Local

Exporter and

Sending Shipping

Documents

arranging shipment by the local exporter and sending the

shipping documents to the foreign importer through the

banking channel

Step-4: Receipt of

Export Proceeds

after Shipment

transferring fund by the foreign importer through the banking

channel after receiving the consignment as per the tenor

mentioned in the sales purchase agreement

processing of inward remittance.

Step-5: Reporting

to BB

sending duplicate and triplicate EXP copies to Bangladesh

Bank as per GFET


Documentary Collection: Collection method provides a means of payment whereby

the exporter can ensure that the buyer should not be able to take possession of the

goods until it has paid or given a payment undertaking. In return for this payment or

payment undertaking, the importer receives documents allowing possession of the

goods. The system is appropriate to cases in which the seller is unwilling to provide

the merchandise on open account terms but does not need a bank undertaking such as

a documentary credit. Under the arrangement, the exporter hands over the documents

(such as transport documents, insurance documents, commercial invoice, bill of

exchange etc.) to a bank (remitting bank) and asks it to collect payment or acceptance

on its behalf using the service of one or more than one bank/banks (collecting and

presenting bank). The method is regulated by one ICC publication known as Uniform

Rules for Collection (URC 522). Purchase/sale contract is particularly important for

the method. In case of export, the method is used in Bangladesh. Other than a few

exceptions, documentary collection can not be used in importation.

Figure-7: Operational Procedure of Documentary Collection

Importer Presenting

Bank Collecting

Bank

Exporter Remitting

Bank

Purchase/

Sales

Agreement

Payment

Flow 1 Dispatch of

Documents

2


Figure-8 Operational Procedure of Import using Documentary Collection in

Bangladesh


Step-1: Purchase/

Sale Agreement


negotiating the terms & conditions of the agreement,



Step-2: Shipment

by the Foreign

Exporter and

Sending Shipping

Documents on

Documentary

Collection Basis

arranging the shipment and sending the shipping

documents either to the bank of the local importer or to its

correspondent agent, as mentioned in the agreement

Step-3: Fund

Transfer

receiving the documents by the bank which is operating as

either collecting or presenting bank as per the collection

instruction

presenting the documents the bank to the local importer

and collecting the payment or acceptance as mentioned in

the collection order

collecting the documents by the importer and making

payment (DP) or accepting the documents (DA)

transferring fund by the importer through the banking

channel

Step-4: Reporting

to BB

reporting to Bangladesh Bank as per directives of GFET


Figure-9: Operational Procedure of Export using Documentary Collection in

Bangladesh


Step-1: Purchase/

Sale Agreement


sending PI

negotiating the terms & conditions of the agreement


Step-2: EXP

Issuance,

Shipment by the

Local Exporter

and Procurement

of Shipping

Document

issuance of EXP by the bank when the shipment takes

place

submitting the EXP along with other documents to the

customs by the exporter or its C & F agent for clearance of

goods for export

issuing shipping bill/bill of export by the Customs after


submitting documents along with EXPs to the bank by the

exporter

Step-3:

Submission of

Shipping

Documents to a

Bank with

Collection

Order/Instruction

approaching bank [remitting bank] for sending the

documents by the exporter to the foreign importer through

banking channel

forwarding documents to its correspondent bank

[collecting bank]

collecting the documents either on DA or DP basis by the

importer

Step-4: Receipt

of Export

Proceeds

transferring fund by the foreign importer through the

banking channel as per collection instructions

collecting the export proceeds by the remitting bank

through the collecting bank

Step-5: Reporting

to BB

reporting the duplicate and triplicate EXP copies to BB


Documentary Credit: Documentary Credit is a classic form of international trade

payment method that substantially reduces risks for both exporter and importer.

This is an arrangement whereby the importer‟s or buyer‟s bank is committed to pay

an agreed sum of money to the exporter/ seller under some agreed conditions.

Documentary credit or LC is an undertaking or commitment issued generally by a

bank to pay the exporter a certain amount provided that the terms and conditions of

the documentary credit are complied with. The conditions are about submission of

certain documents in certain form. Documents must be in order to receive payment.

Documentary Credit is guided by a classic form of set of rules known as Uniform

Customs and Practice for Documentary Credits [UCPDC] published by ICC. In the

payment mechanism of LC, banks have a very active role to play.

Figure-10: Operational Procedure of Documentary Credit

Importer

[Applicant]

Issuing

Bank

Exporter

[Beneficiary]

Advising

Bank

Nominated

Bank

Financing

Arrangement

2 Dispatch of

Documents

2

Payment

Flow 3

3 Purchase/

Sales

Agreement

1

Letter of

Credit

1


Figure-11 Operational Procedure of Import using Documentary Credit in

Bangladesh


Step-1:

Purchase/Sale

Agreement





Step-2: Financing

Arrangement

between the

Importer and the

Bank

opening of CD account and an FC account, if and when

necessary

obtaining CIB report from Bangladesh Bank.

obtaining bank‟s internal approval regarding opening of

LC, margin requirement, financing option for retirement

etc.

Step-3: Importer

approaches to Issue

LC

approaching bank by the importer to open LC along with

the following documents:

duly filled up LCAF, LC application form, Imp form,

proforma invoice or indent, insurance cover note, valid

IRC, valid trade license, up to date TIN certificate,

membership of relevant trade association/ certificate

from chamber of commerce, declaration from the

importer regarding income tax submission and any other

permission like import permit etc.

obtaining of credit report of the supplier

Step-4: Issuance of

letter of credit issuance of LC according to PI or indent

Step-5: Lodgment

and Retirement

intimation about the receipt of document to the customer

effect payment through creation of PAD

retirement of documents through adjustment of PAD as

per arrangement

Step-6: Reporting

to Bangladesh Bank submitting LCAF, IMP form, proforma invoice and

commercial invoice to the Bangladesh Bank along with

monthly return


Figure-12 Operational Procedure of Export using Documentary Credit in

Bangladesh


Step-1: Purchase

Sale Agreement

sending PI/ quotations



Step-2: Advising

and Lien of export

LC

receiving the export LC by a bank, sending a notification

letter to the exporter and advising the same accordingly

bank lien marks the respective export LC being

requested by the exporter

Step-3: Shipment

and EXP Issuance issuing EXP by bank when the shipment takes place

submitting the EXP by the exporter or its C & F agent

along with other documents to the Customs for clearance

of goods for export


assessment and verification of EXP

Step-4: The

Exporter submits

export documents

after shipment

submits documents by the exporter along with EXPs to

the bank

negotiation or forwarding of submitted documents for

collection of export proceeds

Step-5:

Reimbursement

from the issuing

Bank

arranging provisioning of the back to back liabilities as

well as adjusts other pre-shipment liabilities by the

bank after receiving export proceeds

remaining amount encashed and credited to customer

CD account

Step-6: Reporting

requirement to

Bangladesh bank

submitting the copies of EXP to Bangladesh Bank along

with invoice and short shipment certificate if any


Under the current version of UCPDC, LC means Irrevocable LC that can not be

amended or cancelled by the issuing bank without the consent of the beneficiary.

Thus it offers huge protection to the exporters. Although it is the costliest form of

trade payment method, it is often considered as secure for both parties. Different

types of LC are there in practice that includes transferable, confirmed, back-to-back,

revolving, red clause and standby letter of credit. Of the different types, transferable

and back-to-back are commonly observed in Bangladesh. Back-to-back is basically

a financing technique. In connection with the operation of transferable LC, banks of

Bangladesh and exporters have been facing some difficulties (Box-2). In a few cases,

confirmed LC is issued from Bangladesh. There are also some instances of receiving

LC issued by reputed corporates (corporate LC). These are very much within the

framework of UCP. A bank is commonly involved in the process of transmitting LCs,

documents and payments on behalf of an issuing corporate. J C Penny is one of such

issuers of corporate LC to Bangladesh.

Box-2: Use and Operation of Transferable LC in Bangladesh

In Bangladesh, the transferable and transferred LCs are very frequent in exports. In

most cases, transferable LCs, received by the first beneficiaries are transferred 100

percent to the second beneficiaries in Bangladesh. This is an indigenous practice

generally not common in other economies. Regarding presentation of documents, in

the existing version of UCPDC 600 in article 38 (k) it is mentioned that the

documents, presented by the second beneficiaries must be submitted at the counter of

transferring bank for substitution. This had been creating problems to our banking

and trading communities. As in case of 100 percent transfer, there is no need to

substitute commercial invoice and bill of exchange by the first beneficiary, and thus

no need to channel documents through transferring bank. It simply lengthens the

settlement process. Later on, the commentary of UCP 600 released by ICC came up

with some solution according to which First Beneficiary/Transferring Bank should

inform second beneficiary and Issuing Bank that the documents can directly be sent

to the counter of Issuing Bank in case of 100 percent transfer. Practically, in

Bangladesh, bankers are generally following the process to handle 100 percent

transfer. ICC already published an opinion on the issue [official opinion R-653].


Trade Finance Services by Banks

Exporters and importers need financing facilities to accomplish their cross-border

purchase and sale. At different stages of production and payment, traders obtain

financing facilities from banks. Financing pattern also vary in different methods of

payments. Financing to the exporters can be grouped under pre-shipment and post-

shipment financing; and financing to the importers can be categorized into pre-import

and post-import financing. The trade financing products used in Bangladesh are

discussed below.

Pre-shipment Credit to the Exporter

Pre-shipment credit is obtained to meet expenses on purchasing raw materials,

processing, transportation, insurance etc. These cash credit facilities are commonly

provided against hypothecation, against pledge, and against trust receipt. Packing

Credit, the most popular form of pre-shipment credit, is extended against transport

documents evidencing transportation of goods. This type of credit is sanctioned for a

transitional period starting from the dispatch of the goods up to the negotiation of the

export documents. The drawings under export cash credit limit are generally adjusted

by drawings in packing credit limit which is, in turn, liquidated by negotiation of

export documents. Practically, all these forms of pre-shipment credits are popularly

known as „Packing Credit‟.

Back-to-Back Letter of Credit is a financing arrangement between bank and exporter

commonly to import raw materials for preparing exportable. Under this arrangement,

the bank finances export by opening a letter of credit on behalf of the exporter who

has received a letter of credit from the overseas buyer. The bank's credit related to

back-to-back L/C is realized subsequently from export proceeds. The technique is

very common in Bangladesh (box-3). „Assignment of proceeds‟ is another method of

repaying the lending bank from export proceeds under documentary credit

arrangement. However, it is not that much practiced in Bangladesh. Under a red

clause letter of credit, the opening bank authorizes the advising bank/nominated bank

to make an advance to the beneficiary prior to shipment to enable him/her to procure

and store the exportable goods in anticipation of his/her effecting the shipment and

submitting a bill under the LC. Though it is not prohibited, it is very rare in

Bangladesh. There is restriction on opening revolving LC.


Box-3: Back-to-Back LC in Bangladesh

Back-to-back LC is a type of LC issued in case of intermediary trade where the

middleman, the beneficiary of the master export LC, wishes to hide the eventual

supply source from the ultimate buyer or to finance the procurement of raw materials

for manufacturing. In Bangladesh, back-to- back LCs are used chiefly in the RMG

Sector and in most cases our exporters are receiving Transferred LCs (master export

LCs). Like most LCs, back-to-back LCs is used primarily in international

transactions, with the first LC serving as the collateral for the second one. In

Bangladesh, the ADs may open back-to-back import LCs against export LCs received

by export oriented industrial units operating under the bonded warehouse system,

subject to observance of domestic value addition requirement, prescribed by the

Ministry of Commerce. As supported by the domestic regulatory framework, there

are also provisions of opening back-to-back LCs even against confirmed

sales/purchase contracts (export). In these cases, the export proceeds are realized on

documentary collection basis which makes the transactions more risky. So, usually

the banks examine the performance record of the foreign supplier (beneficiary of the

back-to-back LC) as well as the credit worthiness of the foreign buyer (party of the

export contract).

Exporter obtains Export Development Fund (EDF)10

facilities to meet foreign

currency requirements mainly to import raw materials under back-to-back

arrangement. This has been helping Bangladeshi exporters to comply with the

requirements of sight back-to-back LC. Mainly, the garments exporters have been

using the financing facilities.

10 To promote non-traditional manufactured items export business of Bangladesh, International Development Association (IDA) in 1989 arranged an Export Development Fund (EDF) initially with US$ 31.2 million and the present balance of EDF is US$100.00 million. The main objectives of creating an Export Development Fund (EDF) at the Bangladesh Bank is assure a continuous availability of foreign exchange to meet the import requirements of non-traditional manufactured items.


Post-Shipment Credit to the Exporter

Post-shipment credit refers to the credit facilities extended to the exporters by the

banks after shipment of the goods against export documents. Necessity for such credit

arises as the exporter cannot afford to wait for a long time without paying

manufacturers/suppliers or remain out of fund for long. Before extending such credit,

it is necessary for banks to look carefully into the financial soundness of exporters

and importers/buyers as well as other relevant documents connected with the export

in accordance with the rules and regulations in force. Banks in our country extend

post-shipment credit to the exports through Negotiation of documents under LC,

Purchase of DP & DA bills, and Advance against Export Bills surrendered for

collection. Negotiation means purchase of the documents submitted under LC by a

nominated bank. Under UCP 600, to call the purchase as negotiation, documents must

be in order and purchase must be made before reimbursement or before the consent of

reimbursement. Under collection, documents submitted under DA or DP is also

purchased by banks (remitting bank). Banks generally accept export bills for

collection of proceeds even though documents drawn against an LC contain some

discrepancies. In such a circumstance the exporter may obtain an advance from the

bank against the security of export bills. In addition to the export bills, banks may ask

for collateral security like a guarantee by a third party or an equitable/registered

mortgage of property.

Import Financing to the Importer

For importation, banks have been offering credit facilities to the importers both at the

pre-import and post import stage. LC is a financing technique for importers under

which banks offer undertaking to make payment on behalf of importers.

In Bangladesh the popular post-shipment import financing techniques are termed as

PAD, LIM and LTR. Under PAD or Payment against Documents, an Issuing Bank

makes payment against documents on behalf of importer. Bank extends credit

facility to the importer for retirement and clearance of the consignment known as

Loan against Imported Merchandise (LIM). A definite repayment schedule is given

to the importer to take delivery of goods. Here the possession of the merchandise

remains with bank. In LIM, the bank should keep watch on the arrival of the ship.

Advances against a Trust Receipt or LTR obtained from the Customer are allowed to

only first class tested parties when documents covering an import shipment of other


goods pledged to the Bank as scrutiny are given without payment. The customer

holds the goods or their sale proceeds in trust for the Bank, till such time, as the loan

allowed against the Trust Receipts is fully paid off. The Advance allowed against

Trust Receipt must be adjusted within the stipulated period.

A Recent Innovative Financing Technique

Offering finance against documentary credit has been popular in the form of red

clause and back-to-back LC. Another recent innovative financing technique to offer

post-shipment credit to the exporter or financing to the importer is popularly known

as Usance Pay at Sight Credit LC (UPAS LC). This is a new feature in the LC process

in response to the demands for immediate payment by the exporter and applicant‟s

request for deferred payment. Under the arrangement, Issuing Bank through

specifying a third bank (either its OBU or a correspondent bank) to make payment at

sight or at the stipulated date to the beneficiary provided that the documentary credit

issuing bank reimburses the third bank along with interest and charges as per pre-

agreed manner. UPAS credit is a good trade service solution for the beneficiary as

he/she does not need to wait for payment. In the context of Bangladesh, the applicant

is also benefited as he/she can enjoy credit facility at relatively lower interest rate and

also can hedge price of goods which show an increasing trend internationally. It has

been providing importers a better negotiating position with suppliers. Importers of

Bangladesh are getting benefits of the technique. There are also a few instances of

financing to the exporters using the technique.

Other Trade Related Services by Banks

Stand-by LC and Demand Guarantee

There are a few instances of offering or using Standby and Demand Guarantee

services by banks. Standby may get coverage under UCP 600 but it is encouraged to

use ISP 98 which is specifically designed for standby arrangement. In connection

with Demand Guarantee, the recent ICC regulation known as Uniform Rules for

Demand Guarantees (publication no 758) applies. Though these products have

potential there is no specific guideline for these products and ICC publications from

Bangladesh Bank.


Remittance Services

Official remittances flow into Bangladesh mainly through banks. The government-

controlled commercial banks of Bangladesh have branches and representatives offices

abroad which are mostly used by the migrants for sending remittances official

channels. In recent years, some private banks have also been very active in the

remittance market. Most banks use branch networks in the process of channeling

funds to the rural areas. In this process, the foreign counterparts are mainly the

exchange houses with which the banks have arrangements. Alongside using ICT tools

and mobile technologies, banks have started using the services of each other

networks/branches more extensively. Bangladesh Bank has allowed banks to use the

services of MFIs in distributing the remitted fund in the remote areas of Bangladesh

and, accordingly, some banks have usefully engaged the branch networks of micro-

finance institutions.

Maintenance of Foreign Currency Accounts

As per GFET of Bangladesh Bank, ADs may open different types of foreign currency

accounts, without prior approval of Bangladesh Bank. These are: Private Foreign

Currency Accounts; Non-Resident Foreign Currency Deposit (NFCD) Accounts;

Resident Foreign Currency Deposit (RFCD) Accounts.

Services on Cash Incentive

Exporters of Bangladesh are entitled to receive cash incentives from the government.

Banks offer processing related services to the exporters for obtaining incentives.

Banks used to offer similar services for the duty drawback facilities for the exporter

that are now being processed through NBR (from October 2011).


3. Regulatory Environment of Trade Services

In performing international trade services operations, banks are required to follow

both a set of domestic regulations and international rules/guidelines. In this

connection, our exchange control regulation i.e., Foreign Exchange Regulations Act

1947 [FERA 1947] is the key domestic regulation in regulating cross-border banking

transactions. Banks are also required to follow the trade polices issued by the

Ministry of Commerce of Bangladesh. Among the international rules and guidelines,

International Chamber of Commerce (ICC) publications are the most relevant. The

major relevant regulations followed in performing trade services activities in the

country are shown in Table 2 below.

Table-2: Regulatory Framework of International Trade Services

in Bangladesh

(Key Relevant Rules/Guidelines)

Domestic Regulations/Rules:

Foreign Exchange Regulations

Act 1947; Export Policy 2009-

2012; Import Policy Order

2009-12.

International Guidelines/Rules: Uniform

Customs and Practice for Documentary Credits

(UCP 600); Uniform Rules for Collections

(URC 522); Uniform Rules for Bank-to-Bank

Reimbursements under Documentary Credits

(URR 725); International Standard Banking

Practice (ISBP 681); International Commercial

Terms 2010.

Other than the above mentioned key rules/guidelines, some other domestic

regulations/acts like Customs Act 1969, Pres-shipment Inspection Act, 2002 are

indirectly related. A few other ICC publications like International Standby Practices

[ISP-98], Uniform Rules for Demand Guarantees [URDG 758], and Documentary

Instruments Dispute Resolution Expertise Rules (DOCDEX) etc. are also relevant.

Some of these relevant rules and guidelines have been summarized below:

Foreign Exchange Regulation Act 1947

In Bangladesh, Foreign Exchange Regulations Act, 1947 [FERA, 1947] is the most

important domestic regulation in the area of international banking. FERA, 1947 has

empowered Bangladesh Bank to regulate all kinds of foreign exchange dealings in


Bangladesh. Empowered by the Act, Bangladesh Bank issues Authorized Dealers

licenses to the selected bank branches for conducting trade payments, financing and

other international banking operations. Following the provisions of the Act,

Bangladesh Bank issues circulars/guidelines from time to time to regulate trade

payment, financing, remittance services etc. activities to be followed by the banks.

These guidelines should complement the ICC guidelines for smooth operations of

international trade payment and financing activities. The Act has 27 sections and a

number of sub-sections which cover an array of issues connected with trade services

and foreign exchange. It focuses on the maintenance of the proper accounting of

foreign currency receipts and payments. Bangladesh Bank is responsible for

administration, supervision, monitoring as well as framing of different guidelines

governing all the transactions denominated in foreign currencies under the Act. The

authorized dealers must maintain adequate and proper records for all foreign

exchange transactions and furnish the particulars in the prescribed formats in form of

regular monthly submission of returns to the Bangladesh Bank. The Act has given

Bangladesh Bank the authority to call for information, power to inspect and finally to

draft rules based upon which Bangladesh Bank issues circulars/guidelines from time

to time to regulate trade payment and international banking activities to be followed

by the banks. Section 5, 8, and 12 of the FERA 1947 are specifically important and

relevant for trade services by banks. A total number of 23 FE circulars have been

issued by the Foreign Exchange Policy Department of Bangladesh Bank in CY

2011[summarized in Appendix table -3].

Guidelines for Foreign Exchange Transactions, 2009

Authorized Dealers are required to follow Foreign Exchange (FE) circulars issued by

the Bangladesh Bank being empowered by FERA 1947. In this process, one cannot

by-pass the policy decisions and directives of the government in the form of Export

Policy and Import Policy Order issued by the Chief Controller of Export and Import

of the Ministry of Commerce of the country as empowered by the Imports and

Exports (Control) Act, 1950. Bangladesh Bank compiled all the FE circulars in the

guideline titled GFET. The current [second Edition] issue of GFET 2009 covers

regulations upto May 31, 2009. The first volume offers the directives regarding the

procedural modalities and the second one contains the details of monthly reporting of

FE transactions. From operational banking point of view, the importance of the GFET


is imperative and the officials working at different desks of trade services

departments in AD branches must know these rules well.

Import Policy Order 2012

The existing Import Policy Order, 2009-2012, has been formulated, keeping in mind

the market economy ideology for making the easy availability of the commodities to

consumers at fair prices through removing the barriers to movement of goods

internationally. As noted in the policy document, the major objectives are

liberalization of imports in line with WTO and globalization; simplification of

imports for export oriented industries; and improving quality of services to the

importers. The present version of the import policy order has got nine chapters which

cover relevant definitions, general rules for imports, fees related to imports,

miscellaneous rules, general rules for industrial imports, provisions related to the

importers of government sector, import trade control committee, and recognized list

of chamber of commerce and industry. In the Import Policy Order, twenty

commodities have been kept under the restricted list. The import policy has allowed

opening of LC for importing capital machinery even without IRC and other flexible

measures to keep up with the momentum of rapid industrialization through ensuring

required imports. The limit of import without LC has also been raised. For enhancing

easy availability of industrial raw materials and consumer goods at fair prices, some

commodities have been declared importable as raw materials.

Export Policy 2009-2012

Export Policy 2009-12 primarily aims at encouraging production of exportable

commodities and promoting new exporters and helping the existing exporters. In the

policy document, strategies are mentioned to facilitate expansion of trade and taking

necessary steps to modernize and simplify the country‟s trade policy in accordance

with WTO obligations and upholding the country‟s interest. Recently, pressure from

the buyers is mounting for improvement of quality of products, export of products

free from any hazardous and toxic substances, along with fulfillment of other

standards and compliance-related conditions. The Export Policy of 2009-2012 has

considered software and ICT products, agro-products and agro-processing products,

light engineering products (including auto-parts & bicycles), shoes and leather

products, pharmaceuticals products, textile, shipbuilding, toiletries products as the


thrust sectors for our export development. In addition, electronic products,

handicrafts, herbal medicine and medicinal plants, production of finished leather,

frozen fish production and processing, natural flowers, jute products, plastic products,

ceramic products, service export, furniture, uncut diamond, etc. have been considered

as special development sectors. The document is divided into seven chapters covering

broad strategies, general rules for exports, steps for development and decentralization

of exports. It includes lists of the restricted and conditional exportable items. The

current export policy has accommodated fiscal, financial and other incentives in line

with the requirements of globalization.

Customs Act 1969 and Pre-shipment Inspection Rules 2002

Customs Act 1969 has consolidated the law relating to customs (the levy and

collection of customs duties) and to provide for other allied matters. The Act has

covered some issues connected with bill of entry and pre-shipment inspection that are

related to trade services by banks. Government of Bangladesh circulated a set of rules

of pre-shipment inspection known as Pre-shipment Inspection Rules 2002 under the

Customs Act 1969. These rules assigned specific responsibilities11

to the importers

and the banks related to pre-shipment inspection.

11 Importer must get information about the requirement of PSI for a product and name of the PSI agencies appointed for the purpose for different regions. According to the rules, Issuing Bank must add condition related to (where applicable) pre-shipment inspection in the LC; and must send an attested copy of the LC, insurance cover note, TIN certificate and VAT certificate to the concerned inspection office at Dhaka. In case of import through LCAF (without LC) the copy of the LCAF along with other documents must be sent (PSI Rules 2002).


Box-4: Some Domestic Regulations/Rules for Importation in Bangladesh

- Generally import license is not required to import in Bangladesh, no person can

import in BD unless registered with the CCI&E, before LCAF is issued or LC

is opened or remittance is made for imports into Bangladesh the AD should

verify that the importer is registered with the CCI&E or otherwise exempted

from such requirement.

- The ADs must deal only with known customers. In case the importer is a new

customer, the AD should obtain certificate from the AD through which the

applicant imported earlier to the effect that no bill of entry is due/overdue for

submission by the importer.

- The ADs are authorized to issue LCAFs in conformity with the IPO allowing

imports into Bangladesh; the ADs should be very careful about compliance

with the instructions of the IPO and relevant Public Notices in the matters of

issuance and disposal of LCAFs; the ADs will not issue blank LCAFs to their

clients. LCAFs remain valid for remittances for one year subsequent to the

month of issuance; Remittance in excess of the value of the LCAF is not

permissible without prior approval of the Bangladesh Bank;

- Other than some exceptions, imports are to be made using only LC; LC must be

opened within the framework of UCP 600; some items with limited quantity

may be imported only using LCAF; for some imports, Import Permit or

Clearance Permit is required.

- All LCs for imports in Bangladesh must be documentary LCs; It is not

permissible to open clean or revolving LC or LC with realization clause.

However, this is not applicable for companies operating in the EPZs; ADs may

open transferable LC; All LCs must specify submission of signed invoice and

certificate of origin.

- Import using incoterms C&F, CFR, CPT, FOB, CIF, CIP, DAF, DES, DEQ and

DDU. Imports using CIF and CIP are conditional; unless exempted by PSI Act,

all goods imported shall be inspected by a PSI company. Requirements of the

submission of Certificate of Origin to the customs.

- NRBs may send importable by directly making payment abroad; Importable

must be shipped within 17 months from the issuance of LCAF for equipments

and 9 months for other item.

- ADs should obtain confidential report on exporters; the credit report of the

same suppliers collected from one importer may be used for other importers

within the validity period.

- ADs must allow remittance against documents received directly by the

importers after the goods have been cleared from the customs on the basis of


LCAF, and authenticated copy of the customs bill of entry.

- ADs may open back to back LCs for export-oriented industries operating under

bonded warehouse system; the back to back LC value shall not exceed the

admissible percentage of net FOB value; the usance period of the back to back

LC shall not exceed 180 days

Source: Based on GEET 2009; Relevant FE Circulars; Import Policy Order 2009-12

Box-5: Some Domestic Regulations/Rules for Exportation from Bangladesh

- All items are exportable except for those noted in the prohibited or restricted list

of the Export Policy; all exports, to which the requirement of declaration

applies, must be declared on the EXP Form. These forms are supplied by the

ADs to their exporter clients; The ADs should, before certifying any EXP form,

ensure that the exporter is registered with the CCI&E under the Registration

(Importers and Exporters) Order 1952; for delay in repatriation or non

realization of export proceeds, exporters and ADs render themselves liable to

punitive action under FERA.

- Exports are allowed under contract or advance payment subject to the

submission of EXP Form and Shipping bill; For Export, obtaining PSI

Certificate is not compulsory.

- Transport documents should be drawn to the order of a bank; All shipping

documents must be passed through AD within 14 days of shipment;

Commission, brokerage or other trade charges to be paid to foreign importers

may be deducted from sale proceeds up to a maximum of 5 percent of value.

- Exports are allowed using EXW, FCA, FOB, FAS, CFR, CIF, CPT, CIP and

DAF provided those are stipulated in the relevant LC or sales contract; Export

proceeds must be received by the exporters within four months; ADs may issue

PRC only after being confirmed about the realization of such proceeds.

- ADs are allowed to remit up to USD 10000 from Exporters Retention Quota

Account subject to some conditions; Advance payment by ADs are allowed

from Exporters Retention Quota not exceeding USD 10000; Exporter may get

up to 90 percent credit of the amount against LC or confirmed contract.

- Exports from EPZs are subject to the usual requirement of declaration of

exports in EXP Form and repatriation of export proceeds; For identification,

EXP forms for these exports should be rubber stamped or printed with words Continued


“EXPORT FROM EPZ" in bold letters.

- EPZs enjoy freedom from national import policy restrictions; import of raw

materials are also allowed on Documentary Acceptance (DA) basis; no

restriction on using letter of credit as trade payment method; advantage of

opening back to back LC for certain types of industries for import of raw

materials; import of goods from the domestic tariff area permissible; proceed

realization clause facility in case of opening back to back LC is permissible.

Source: Based on GEET 2009; Relevant FE Circulars; Export Policy 2009-12

Uniform Customs and Practice for Documentary Credits (UCP 600)

UCP 600, the current version of UCPDC, is the collection of rules governing the

issuance and execution of letters of credit in the cross border exportation and

importation in the global economy. The rules of the UCP have been formulated in a

manner that has almost equally protected the interests of both the exporters and

importers. UCP, the popular title of UCPDC, compiles the best documentary credit

practices that came into effect from July 01, 2007 and is the sixth revision of the rules

since they were first promulgated in 1933. The 39 articles of UCP 600 mainly cover

the liabilities and responsibilities of different parties engaged in the process of LC

which is meant for traders and bankers. Article 112 of UCP permits the user to modify

or exclude any of the provisions of the rules by stating on the face of the credit.

It offers flexibility of accommodating local regulations and necessary changes in the

rules. Considering the contents, the articles in UCP 600 may be divided into seven

broad heads: General Provisions and Definitions (articles 1-6); Undertakings and

Liabilities (articles 7-13); Examination (article 14-16), Documents (articles 17-28),

Miscellaneous Provisions (articles 29-33); Disclaimers (article 34-37), Transferable

and Assignment (articles 38-39). UCP 600 assigned specific articles for commercial

invoice (article 18), transport documents (articles 19-25), and insurance documents

(article 28). It asserts generic provisions for other documents. UCP focuses

particularly on uniformity in the examination of documents by banks. Here matters of

particular interest to the cross-border trade include the basic responsibilities of banks

when examining documents tendered for payment under documentary credit

governed under UCP 600, and the requirements pertaining to different types of

12…….. They are binding on all parties thereto unless expressly modified or excluded by the credit (UCP 600, ICC, 2007).

Continued Box-5


documents. UCP 600 defined the term „Complying Presentation‟13

in article 2 that

obligates bankers to consider LC terms, rules noted in UCP 600 and „International

Standard Banking Practice‟ while examining documents. Article 14 also identifies

some specific issues connected with standard for examination of documents. The

universal acceptance of the UCP by practitioners in countries with widely divergent

economic and judicial systems is a testament to the rules' success. In Bangladesh, LC

can only be opened and received within the framework of UCP 600 since July 2007.

International Standard Banking Practice (ISBP 681)

International Standard Banking Practice is the practices that are not specifically

mentioned as among the best practices of documentary credit under 39 articles of

UCP 600. However, such practices do not conflict with the provisions of UCP 600.

For the information of the bankers, the ISBP 681 contains these standard practices.

The ISBP mainly explains how documents examination practices referred to in the

UCP 600 are applied by LC practitioners; and ISBP and UCP 600 should be read in

their entirety and not in isolation. According to ISBP 681, to avoid un-necessary

costs, delays, and disputes in examination of documents, the applicant and the

beneficiary should carefully consider which documents are required, data content of

documents, issuers of documents, and time frame for presentation. Starting with some

general principles, the publication covers practices on draft, invoice, different

transport documents, insurance document and certificate of origin.

Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits

(URR 725)

In most cases under LC, reimbursement by the issuing bank is made using the service

of a third bank known as „Reimbursing Bank‟. And the process of making

reimbursement using the service of the Reimbursing Bank is known as Bank-to-Bank

Reimbursement Arrangement. It has been referred to in article 13 of UCP 600;

however, the process is guided by a separate ICC set of rules titled, The Uniform

Rules for Bank-to-Bank Reimbursements under Documentary Credits, (ICC

publication No 725) which came into effect from October 1, 2008 containing 17

13 …….Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice (UCP 600, ICC, 2007).


articles. To get coverage of the rules, it must be stated on the face of reimbursement

authorization issued by the Issuing Bank. As in the case of UCP 600, the URR 725

permits modification and exclusion of any provision of the rules. URR suggests two

ways of making reimbursements: one, simply by authorizing Reimbursing Bank to

make reimbursement to the Claiming Bank; and two, by authorizing Reimbursing

Bank to issue a reimbursement undertaking to the Nominated Bank. The first one is

revocable whereas the second one is irrevocable. Reimbursement undertaking offers

greater security to reimbursement to the Nominated Bank and thus to the exporter.

The rules of URR assign liabilities and responsibilities of different parties involved in

the process of reimbursement.

Uniform Rules for Collections (URC 522)

Uniform Rules or Collection of ICC contains the set of rules to guide collection

process through banks, which is known as „Documentary Collection‟. The ICC

Uniform Rules for Collections are a practical set of Rules to aid bankers, buyers, and

sellers in the collections process. The Rules have been prepared to resolve problems

that practitioners have experienced in their everyday operations since 1979. To get

coverage under ICC URC 522, in the operation of documentary collection, it is to be

stated on the collection instruction that the collection is as per Uniform Rules for

Collection 522. The URC has 26 articles that are divided under seven broad heads.

URC 522 underlines the need for the principal and/or the remitting bank to attach a

separate document and the collection instruction to every collection subject to the

rules that came into effect in 1995. It makes it very clear that banks will not examine

documents, and addresses problems banks experience in respect of documents against

acceptance (D/A) and documents against payment (D/P). The document clearly

indicates that banks have no obligation to store and insure goods when instructed.


International Standby Practices (ISP98)

International Standby Practices fills an important gap in the market place. Though

standby letters of credit have similarities with commercial letters of credit and other

financial instrument, there are significant differences in scope and practice. A new set

of Rules was therefore required for this workhorse of commerce and finance. ISP98

reflects a distillation of practices from a wide range of standby users: bankers,

merchants, rating agencies, corporate treasurers, credit managers, government

officials and banking regulators. Like the UCP for commercial credits, ISP98 is

designed to become the industry standard for the use of standbys in international

transactions. Another set of invaluable ICC rules, ISP98 offers a precise and detailed

framework for practitioners dealing with standby letters of credit.

Uniform Rules for Demand Guarantees (URDG 758)

Uniform Rules for Demand Guarantees (URDG 758) is the guiding framework

applicable to the demand guarantee and counter –guarantee practices. This is new

regulatory framework that succeeds URDG 458 and came into effect from July 1,

2010. The URDG help leveling the playing field among demand guarantee issuers

and users regardless of the legal, economic and social system in which they operate.

Incoterms 2010

From the 1st January 2011, the ICC‟s Incoterms 2010 came into force. This is the

eighth revision of the Incoterms Rules, with the last revision dating back to 2000. The

introduction to the new 2010 rules stresses the need to use the terms appropriate to

the goods, to the chosen means of transport and to whether or not the parties intend to

impose additional obligations on the seller or buyer. In addition, there are Guidance

Notes (and a diagram) at the front of each Incoterms Rule containing information to

assist in making a choice on which Rule to use. The new Rules have been separated

into two classes: Rules for use in relation to any mode or modes of transport; and

Rules for sea and inland waterway transport, where the point of delivery and the place

to which the goods are carried to the buyer are both ports. Incoterms 2000 had 13

terms whereas Incoterms 2010 has 11 terms. Four D terms (DAF, DES, DEQ, DDU)

of the Incoterms 2000 have been replaced by two D terms (DAT, DAP) in the most

recent version.


DOCDEX Rules and ICC Arbitration

DOCDEX Rules are about a service known as „Documentary Instruments Dispute

Expertise‟ that are provided in connection with any dispute related to ICC

regulations/guidelines and their applications that are made available by the ICC

through its International Centre for expertise. The purpose of the ICC DOCDEX

Rules is to provide parties with a specific dispute resolution procedure that leads to an

independent, impartial and prompt expert decision for settling disputes involving the

UCP, URDG, URR and URC. The ICC Court is the leading international arbitration

institution in the world. The arbitration process starts with a written request for

arbitration to the ICC Court. ICC and Committee Maritime International (CMI) offer

separate arbitration rules to meet the special requirements of maritime users.

Laws of International Carriage of Goods

The world-wide nature of international trade and the necessity for efficient

transportation have led to a series of rules, covering carriage by sea, by road, by rail

and by air. The Hague Rules of 1924, and The Hague-Visby Rules of 1968, together

with the Hamburg Rules 1978, now provide the basis for carriage of goods by sea.

The Warsaw Rules 1929 exist for air transport and there have been variations, most

notably in Montreal Rules adopted in 1975. In Europe and in some countries linked to

European rail network, rail transport is governed by the 1980 Convention concerning

International Carriage by Rail (COTIF), which entered into force in 1985 and applies

in around 40 countries. Similar to the rail transport, a number of countries-mostly

European- have signed CMR 1956 convention on the Contract for the International

Carriage of Goods by Road. Other than these, UN Convention on the International

Multimodal Transport of Goods (1980) covers multimodal transportation.

4. Trends in Trade Services Over 2011

Methods of Payments used in Export and Import Payment

Survey data clearly indicate the extensive use of documentary credit in import

transactions in Bangladesh [table-3]. In 2011, 97 percent [in terms of number of

cases] and 98 percent (in terms of volume of imports) import payments from the

country were made through LC. There is no significant difference in regard to the use

of LC by different categories of banks. In case of EPZs, use of open account is


relatively higher. In connection with the number of cases, about 30 percent were open

account 70 percent were LC.

Table-3: Use of Methods in Import Payment in CY2011

Methods of Payment In % of Number In % of Volume

Cash in Advance 1 0.5

Open Account 1 1

Documentary Collection 1 0.5

Documentary Credit 97 98

Source: Survey Data

Table-4: Use of Methods in Export Receipts in CY2011

Methods of Payment In % of Number In % of Volume

Cash in Advance 2 2

Open Account 2 3

Documentary Collection 30 35

Documentary Credit 66 60

Source: Survey Data

As in the case of import payment, LC was the most widely used method to receive

payment by the exporters of Bangladesh during CY 2011. As the survey data indicate

[table-4], in 66 percent [in terms of number of cases] cases of exports, LC payment

methods were used that amounted to 60 percent of the total export receipts. However,

as compared to the methods of import payments, uses of documentary collection are

much higher in case of export receipts. According to the survey data [table- 4], of the

total cases of export receipts during 2011, 30 percent was documentary collection. In

EPZs, the use of documentary collection is relatively higher as compared to LC.

Trade services departments also offer services related to issuance and settlement of

local LC. These are mainly connected with commodity trade within the national

boundary.

Use of Documentary Credit: Different Types

In Bangladesh, all LCs opened are irrevocable in nature as required by the import

policy order of the country. Under UCP 600 also LC means irrevocable LC. Of the

special type of LC, a significant number is back-to-back. This is because of the


garments sector that imports raw materials from abroad for meeting their export

orders. The survey shows that 35 percent of the total letter of credit are back-to-back

[foreign] that amounted to 40 percent of the total amount in CY 2011 [table-5]. The

number and volume of confirmed letter of credit, the survey reveals, are only round 5

percent. There is not a single case of transferable, red clause, and revolving credit.

Absence of revolving credit was due to the restriction prescribed in Bangladesh Bank

guidelines.

No significant difference has been observed in terms of types of letter of credit

opened by the different types of domestic banks [both government and private]. For

obvious reason, very insignificant volume of LC issued by the FCBs required

confirmation in 2011. Relatively higher number of LCs issued by the SCBs required

confirmation as compared to other broad groups.

Table-5: Use of Different Types of Import LC [Issued] in CY2011

LC Types In % of Number In % of Volume

Confirmed 5 5

Back to Back 35 40

Transferable 0 0

Red clause 0 0

Revolving 0 0

Irrevocable (other than the five mentioned above) 60 55

Note: Number of back-to-back LCs includes only foreign LC, all LCs are irrevocable

Source: Survey Data

Table-6: Use of Different Types of Export LC [Received] in CY2011

LC Types In % of Number In % of Volume

Confirmed 0 0

Transferable/Transferred 40 45

Red clause 0 0

Irrevocable (other than C, B, T& R) 60 55

Confirmed 0 0

Note: Number of back-to-back LCs includes only foreign LC, all LCs are irrevocable

Source: Survey Data


In Bangladesh all LCs received are irrevocable in nature as required by the UCP 600.

Out of the total export letters of credit, a significant number is transferable letter of

credit (table 6). Existence of a large number of buying houses is one of the reasons

for the dominance of transferable LC. Buying houses [of the garments products] are

not the actual manufacturers and therefore, for procuring the goods, they are required

to transfer the LCs to the real manufacturers. Moreover, the practice of subcontracting

by the garments manufacturers is also very common for which an LC is transferred.

In contrast to the import LC, back-to-back letter of credit is completely absent in case

of export LC.

Documents Required in Documentary Credit

As the survey result shows, in case of all the documentary credit opened from the

country in CY 2011, issuing banks asked for transport documents [bill of lading,

airway bill, truck receipt etc.], commercial invoice and certificate of origin.

In selecting documents, generally banks‟ dealing officers play a dominating role [as

revealed by the respondents namely Head of Trade Services/ Dealing Officer] by

offering consultancy services. Only in case of a few big firms, the applicants dictate

terms and select documents. In Bangladesh, insurance documents are rarely asked as

according to the country‟s import policy, insurance is to be covered by domestic

importers [as a measure to restrict foreign currency outflow and promoting domestic

insurance companies]. In case of export LC, the documentary requirements are almost

same. It can be observed from the survey data [table-7] that insurance documents are

less frequently asked in the LCs sent to Bangladesh exporters [not very different from

the LC opened by banks located in Bangladesh for foreign exporters]. Such practice

points to the similar regulatory requirement in the trade partner countries under which

insurance formalities are to be covered by their domestic insurance companies.


Table-7: Documents Required in Import LC [Issued] Export LC [Received] in CY 2011

Name of the Document Import LC Export LC

Transport Document All All

Insurance Document Very rarely Less Frequently

Commercial Invoice All All

Certificate of origin All Very Frequently

Bill of Exchange Very Frequently Very Frequently

Packing List Very Frequently Very Frequently

Weight List Less Frequently Less Frequently

PSI Certificate Less Frequently Less Frequently

Source : Survey data

Table-8: Use of Different Transport Documents in Imports and Exports in CY2011

Transport Document [types] Import Export

Ocean bill of lading 75 85

Airway bill 10 10

RRI 14 4

Multimodal 1 1 Source: Survey Data

The most commonly used transportation mode that is in use for importing in and

exporting from the country is ocean mode. In a considerable number of cases truck

receipts are asked for, which comes under RRI [Road, Rail, and Inland Waterway]. In

a very insignificant number of cases multimodal transport documents were used in

CY 2011.

Margin, Issuance of LC, Amendments, Credit Availability and Examination

At the time of issuing an LC, issuing bank generally has an explicit financing

arrangement with importer. Banks generally do not finance the entire LC amount and

ask for some margin that varies from 0 to 100 percent and from one client to client.

The margin is determined by the head offices or in some cases branch heads based on

banks‟ relationship with the clients. The survey data reveal that the extreme cases of 0

percent or 100 percent are insignificant in number and in most cases the margins fall

between 10-25 percent.


Over CY 2011, banks commonly advised letters of credit through another bank

known as advising bank. In most cases the foreign issuing banks selected their own

advising banks. According to the opinions of survey respondents [of the questionnaire

for head of trade services/dealing officers], banks prefer to select those banks as

advising banks with which they have correspondent relationships. Some banks also

try to accommodate exporters‟ choice. It has been observed that a few banks are a bit

rigid in selecting advising banks because of maintaining their business relationship or

commission sharing with the counter parties. To accommodate exporters choice

banks also avail the services of second advising banks. Almost in all cases,

confirming banks are selected by issuing bank, however, sometimes banks try to

accommodate exporters‟ choice if they have arrangement with the banks.

For amendment of letters of credit, generally importers approach to the issuing bank

on behalf of exporters. Though, some issuing banks ask for letter, mail etc. to ensure

exporters consent in this connection, they hardly find amendment risky for

themselves. According to the observation of survey respondents [head of trade

services/dealing officers], most of these amendments are practically go in favour of

exporters and so risks of accepting or rejecting is minimum.

An LC must points out whether the credit is available at sight, deferred, acceptance,

or negotiation basis. In all cases banks offer scope for negotiation in Bangladesh. In

most cases [as the survey data indicate], the LC issued from the country are freely

available which means any bank is nominated bank at the counter of which

documents are submitted by the foreign exporter/beneficiary. In such a case, exporter

can submit documents at the counter of its own bank in the country of his/her

domicile. Some banks [mainly foreign and a few domestic private sector banks]

however prefer to restrict negotiation at the counter of certain banks having

correspondence relationship. As the survey data indicate, in most cases credits were

made available on negotiation basis in CY 2011.


Table-9: Availability of Credit in Import and Export Payment in Bangladesh

during CY 2011

Credit Available by Import Export

Sight 0 0

Deferred 10 0

Acceptance 20 20

Negotiation 70 80

Source: Survey Data

Table-10: Discrepancies found in the Examination of Import [as Issuing Bank] and

Export [as Nominated Bank] Documents in CY2011

Discrepancies Import Export

Late Shipment 65 75

Late Presentation 50 60

LC Expired 20 20

Missing words/dates 5 15

Others (Wrong HS code, LC value overdrawn, Absence of

documents, Bill of exchange drawn on wrong party,

absence of the name of vessel in B/L, Inconsistent

description of goods) 20 15

Note: In a number of instances, a single LC has more than one discrepancy.

Source: Survey Data

Late shipment and late presentation were the most common discrepancies in both

export and import documents [table-10]. According to the survey observation, in

about 75 percent cases the nominated bank of Bangladesh received discrepancy

notices; where as in 65 percent cases local issuing bank issued discrepancy notices to

the foreign counterparts presented in CY 2011. Cases of disputes are there but case of

non-payment/non-reimbursement by the issuing bank was only around 1 percent in

CY 2011.


5. Risks, Costs, Exchange Rates and Human Resources Associated with

Trade Services

Cost and Risk Aspects in Payment and Financing

As methods of payment, cash in advance and open account are the simplest and

cheapest, but they create the greatest possibility for opportunistic misconduct by the

trading partners. In line with the regulatory requirement of Bangladesh, LC is almost

the single way to import which is the costliest form of trade payment method.

As already seen in the previous chapter, alongside LC, documentary collection was in

use in Bangladesh in CY 2011. It is cheaper than LC, however, sometimes is risky for

the exporter. In case if documents are not accepted by the importer then documentary

collection could prove to be very risky. There are instances when the garment

exporters of Bangladesh had to face difficulties in obtaining payment though goods

were prepared by opening back-to-back LCs against contracts.

„Fraudulent activities‟ in trade services is a major area of risk. Central Bank and trade

services providers may play remarkable roles in this connection. Recently Bangladesh

Bank identified a few cases where LCs were transferred fraudulently to the second

beneficiaries. Such activities affect overall trade services and image of the country.

Timely detection of a fraud is crucial for improving trade transactions and for

efficient trade services. For that matter BB must carry on its regular vigilant efforts.

Commercial banks should also be very careful and should undertake extra measures

in handling suspicious transactions. In local LCs, sometimes banks are facing trouble

in recovering reimbursement under accepted bill by the bank. In many cases there is

no underlying transaction against the payment (popularly known as accommodation bill).


Table-11: Ranges of Charges of Banks

Nature of Transaction Charges [Ranges]

Imports LC

LC Opening Commission [cash] 0.30%-0. 50% for first quarter 0.20%-0. 30% for subsequent quarter

Minimum: Tk.250-Tk.1000

LC Opening Commission [usance] 0.40%-0. 80% for first quarter

0.30%-0. 60% for subsequent quarter Minimum: Tk.300-Tk.1000

LC Opening Commission [Back-to-

Back]

0.50%-0. 90% for first quarter

0.30%-0. 60% for subsequent quarter Minimum: Tk.300-Tk.1000

LC Cancellation Tk.500-Tk.1000 + communication cost

Discrepancy Fee USD 50-USD75

LC Amendment Tk.100-Tk.500

Exports LC

LC Advising Tk.200- Tk.1000 + postage

LC Amendment Advising Tk.100- Tk.500 +postage

LC Transfer/Amendment [value] Tk.1000-Tk.1500

Negotiation 0.20%-0. 25% Minimum: Tk.250-Tk.500

Collection [Imports] 0.20% -0.35%

Minimum: Tk.500-Tk.1000

Collection [Exports]

Collection Charges [processing, mailing etc.]

0.25%-0. 125% Minimum: Tk.250-Tk.500

Bill Purchase [without LC] 0.25%- 0.30%

Minimum: Tk500

Bill Discount [without LC] 0.125%- 0.50% Minimum: Tk.750-Tk.1500

Others

LC Application Tk.300- Tk.500

LCA Tk.100- Tk.200

IMP Tk.50 – Tk.100

Issuance of Certificate Tk.250-Tk.500

Registration of LCA Tk.300- Tk.500

Copy Document Certification Tk.100- Tk.500

Exp form Certification Tk.100- Tk.500 per set

Attestation of Export LC Documents Tk. 0 -Tk.500

Communication Charges

SWIFT, Courier, Airmail, Fax,

Postage

Some banks charge on actual basis and some

charges fixed amount that vary among banks.

Note: some charges vary for customers and non-customers; charges of all categories are

not available in all charges schedule; postage or mailing, telex charges are added separately

where applicable.

Sources: Based on Schedule of Charges of Sample Banks


In connection with the risk areas of financing by banks in Bangladesh, creation of

forced loan/LIM, inability to clear back-to-back obligation, failing to obtain payment

against purchased documents under collection etc. are well recognized. As a

financing technique, back-to-bank is always considered very risky, however, in the

context of garments exports of Bangladesh it has been relatively smooth till date.

In purchasing documents bankers commonly make arrangement for indemnity in case

of non-reimbursement by the issuing/foreign bank/importer.

As already been mentioned, charges in documentary credit is much higher as

compared to other forms of payment as involvement of banks are significant in this

particular form of payment. At different stages of involvement, banks charge different

rates of commissions. In a letter of credit operation, banks charge different rates of

commissions as issuing bank, advising bank, negotiating bank, confirming bank,

reimbursing bank etc [table-11].

Exchange Rate in Trade Services

Banks declare exchange rates on everyday basis to be used for trade services. In the

foreign exchange market, banks have to deal with a wide array of customers including

both the individuals as well as the corporate. The Spot or TC Buying rates are used in

buying cash foreign currencies over the counter by the banks, both from the residents

and the foreigners as well as encashment of Traveler‟s Cheque. Similarly, Spot or TC

Selling rate is applied for selling cash foreign currencies to the people as well as

issuing Traveler‟s Cheque. TT Clean Buying rate is deployed in purchasing any form

of inward remittance along with conversion of export proceeds, brought in under

Advance TT or open account method of payment. For procuring export proceeds

under documentary collection TT Doc Buying rate is utilized. For purchasing export

proceeds under sight LCs and deferred LCs OD Sight, EXP Buying rate and Usance

Buying rates (with different tenors) are used. For arranging any category of outward

remittance or affecting import payment under any mode other than LC, TT and OD

Selling rate are applied. For affecting import payment under LCs the prevailing rate is

BC Selling rate. Moreover, the banks are found to be quoting Cross and Forward

rates.


Interest Rates in Trade Financing

In offering financing transactions, various interest rates are deployed by banks.

In pre-shipment export financing banks are required to follow BB guidelines and thus

interest rates can not exceed 7 percent. But some of the banks have been found to

extend SOD (Export Loan) at commercial rates instead of packing credits for serving

the respective exporters‟ needs at pre-shipment stage. To meet the post-shipment

financing requirements of both the deemed exporters and the conventional exporters,

the banks are offering two products – LDBP, a product usually applied under deferred

inland back-to-back LCs (30-180 days) and FDBP, which is meant for the

conventional exporters. Regarding the LDBP process, initially with proper

documentation the deemed exporters are requesting the banks for bill discounting.

The interest rates for LDBP are accruing from the very first day. Usually the banks

are charging the interests from the very first day as per the sanction advice. Penal

rates are applied after the expiry period of the LDBP. In FDBP, the process is almost

same with some variations. Here, the banks usually have got few differences in terms

of their procedure. A set of banks negotiate the export bills at OD Sight Exp rates.

As they don‟t offer exchange rate gain to the exporters so they offer interest gain to

the clients up to 21 or 30 days, implying that they do not charge interest up to the

mentioned periods. If they purchase the export bills at much higher TT Doc Buying

rates, then the clients do not get the interest gain and the interest accrues from the

very day of negotiation. In import financing, banks generally follow the market

interest rates.

Technology in Trade Services

Information technology is rapidly changing the nature of international trade. Through

the Internet, businesses are now able to find suppliers and buyers, conduct valuable

market research and post information on their products and services. At an even more

sophisticated level, exporters can now use the online services to do everything from

submitting documentation to booking a container on a ship. Although all these have

not been happening in Bangladesh yet, use of world reputed banking software for the

operations of the trade services departments along with core banking activities by

some banks have brought remarkable changes. ICT based activities like internet

banking on trade services, online reporting to BB, new avenues for remittance can be

identified as adaptation of advanced ICT by the banking sector. Through the


incorporation of state of the art software the banks have enhanced their operational

efficiency. Basically, it has enabled them to go for faster decision making, prompt

documentation and processing. Internally, quite a few banks are fully relying on

software based operations. In most cases, the communications with foreign

counterparts are done electronically through SWIFT (LC issuance, advising,

confirmation, amendment and others). In the CY 2011, some banks have taken

initiative to route their local LC and all other LC related communication through

SWIFT rather than mail. This is a great step to forbid misuse of LC by unscrupulous

beneficiary. During 2011 there has been a major initiative by the regulator BB to

launch software for online EXP reporting. Apart from that, BEFTN for clearing has

been doing quite well. Use of modern ICT has also enabled the banks in better

information preservation, efficient MIS and internal control.

Human Resource Development in Trade Services

It is a remarkable achievement that almost all executives working in the trade services

departments of different banks have training exposures. A considerable number of

employees of the concerned departments have received training from BIBM. Some

banks regularly arrange on the job training for improving knowledge in regard to the

international trade payment operation. A remarkable improvement in connection with

the development of professional banker in the trade services area reflects with the

growing number of Certified Documentary Credit Specialist (CDCS) in the banking

sector of the country. The number of CDCS holders in the country was only 1 till

2008, which increased to 52 by the end of 2011. Young bank professionals are also

taking interests on professional courses on trade services like Finance of International

Trade (FIT), Certificate in International Trade and Finance (CITF), etc. Moreover,

ICC has also been offering a number of online courses for the trade practitioners.

Alongside a group of inquisitive bankers, ICC Bangladesh has been playing notable

roles in the human resource development of the trade services in banks.


6. A Few Challenges and Recommendations

In the process of offering trade services, the bank executives have been facing some

challenges. Addressing these issues is important for smoothening the trade service

operations and for improving the efficiency of the trade services departments. These

issues along with recommendations are noted bellow:

One, In the chapter 7 of GFET, 2009, there is a directive regarding the disposal of the

fully utilized, partly utilized and unutilized LCAFs stating that even the partly utilized

or unutilized LCAFs should also be surrendered by the ADs to Bangladesh Bank after

expiry of the validity period of the remittance. According to many practitioners, it is

difficult to justify the reporting of the unutilized copies. Moreover, most of the banks

do not send any copy of unutilized LCAF to BB. Bangladesh Bank may think of

abolishing the requirement of reporting unutilized LCAF or take initiative to enforce

the requirement if needed.

Two, In the domestic guidelines, it has been stated that the concerned ADs, related

with import trade must have the copy of the customs BoEs or certified invoices at

their disposal within 120 days from the remittance date. In some cases, the concerned

ADs do not receive the BoEs. In spite of the penalty imposed by the Bangladesh Bank

on the importers with overdue BoEs, concerned ADs do face difficulties in dealing

with the inspection teams from BB if they do not possess the BoEs in due time.

So, there could be arrangements under which the ADs can straightway have online

access to the BoEs issued by the Customs. A collective effort of Bangladesh Bank

and Customs authority would work in easing the difficulty.

Three, Trade services departments of banks offer local LC related services. Though it

is commonly assumed to be guided by the current version of UCPDC, practically

there is no written instruction in this regard. A broad regulatory guideline for local

LC practices by Bangladesh Bank would help removing the confusion among bank

executives.

Four, Bangladesh Bank accepted UCP 600 as the regulatory framework for LC

operation for cross border trade in June 2007. However, there is no such circular

about URR 725 that came into effect from October 2008. Practically, no guideline has


been issued in connection with some important ICC publications like ISP 98 and

URDG 758. Thus there has been confusion over their uses and implications.

A circular in this connection may help handling the confusion.

Five, The current version of Incoterms 2010 came into effect from January 2011.

Bankers are already using these commercial terms. However, the Import Policy Order

2009-2012 still contains the terms that are not in use or have been removed from the

current version. Sometimes these create confusion among bankers. A directive from

the regulatory authority incorporating the commercial terms of the current version

might help making the things clear.

Six, Late payment has been found a common practice by the trade service providing

banks in a number of instances. It is observed that, in spite of receiving compliant

documents under sight LCs, the payments have been lingered. This practice is more

prevalent amongst the SCBs which do not only harm their institutional reputation but

also the country‟s image. Cases have been found where, in spite of compliant

documents the applicants requested the banks to lodge discrepancy notices to halt the

payments momentarily on the grounds such as goods had not arrived. In few cases, it

has been observed that in spite of the arrival of the consignment, the applicants

approached issuing banks to delay payment through issuing discrepancy notices.

Banks are also cooperating with them in some instances. These practices also inflate

the confirmation charges of the LCs issued from Bangladesh. It is important to take

care of the matter by the banks for greater interest. Appropriate directions from the

higher management of all commercial banks followed by the regular vigilant efforts

of BB can help removing such types of mal-practices.

Seven, For governing the transactions with the units of EPZ, there are directives

incorporated in the domestic regulatory framework. These are scattered and

sometimes not very clear. A comprehensive guideline on the trade services practices

in the EPZs might help removing the confusion among bankers.

Eight, In exports, sometimes documents are handled directly by clients (not through

banks). Though a bank remains involved at the EXP issuance stage, the operational

procedure resembles open account method. Bangladesh Bank has no specific


provision in regard to the operation of open account transaction in its guidelines.

The central bank may come up with detailed guidelines for handling open account

transactions by banks in Bangladesh.

Nine, There is no doubt that EDF has been very effective for financing input

procurements by the exporter. Sometimes banks need to finance the same due to

delay in disbursement of EDF funds by the BB. In such a scenario, banks should be

allowed to charge in line with the market interest rates. Quick and timely

disbursement of EDF funds is the proper solution.

Ten, It appears that in a number of instances there are scopes for „assigning export

proceeds‟ (by using article 39 of UCP 600) by the banks. Banks are not involved in

the process may be because of lack of confidence and absence of procedural

guidelines. Moreover, potentials of the greater use of international guarantees can not

be ignored. These grey areas demand further research activities on the issues.


REFERENCES

AIECE (2011), World Trade Trend 2010 and 2011, European Bank Union.

Bangladesh Bank, (2009, 2010, 2011, 2012), Economic Trends, Statistics

Department, Dhaka.

Bangladesh Bank, (2009, 2010, 2011, 2012), Annual Report, Statistics Department,

Dhaka.

Bangladesh Bank, (2009, 2010, 2011, 2012), Export Receipt, Statistics Department,

Dhaka.

Bangladesh Bank, (2009, 2010, 2011, 2012), Import Payment, Statistics Department,

Dhaka.

Bangladesh Bank, (2009), Guideline for Foreign Exchange Transactions, Volume 1

and 2, Bangladesh bank, Dhaka, Bangladesh.

ICC (2007), Uniform Customs and Practice for Documentary Credits-UCP 600, ICC,

Paris, France.

ICC (2007), International Standard Banking Practice for the Examination of

Documents under Documentary credits, Publication No. 681, ICC, Paris, France.

ICC (1995), Uniform Rules for Collections-URC 522, ICC, Paris, France.

ICC (2008), Uniform Rules for Bank to Bank Reimbursements for Documentary

Credits-URR 725, Paris, France.

Ministry of Commerce, (2010), Export Policy 2009-2012, Bangladesh Government,

Dhaka.

Ministry of Commerce, (2010), Import Policy 2009-2012, Bangladesh Government,

Dhaka.

The Custom Act 1969 (as adapted in Bangladesh).

The Stamp Act 1899 (as adapted in Bangladesh).


Appendix Table-1

Source: Based on Bangladesh Bank, 2012


Appendix Table -2

Source: Monthly Economic Review


Appendix Table-3: Foreign Exchange Circulars Issued during 2011

FE-1: Notification on

foreign exchange

transaction at Border Haats

[February 10, 2011]

The section 5(1) and 5(3) of the foreign exchange

regulation act 1947, in respect of purchase by each

individual not exceeding Bangladesh Taka or Indian

Rupee equivalent of USD 50 for any particular day

in the Border Haats, has been suspended.

FE-2: Foreign Exchange

Policy Department at

Bangladesh Bank, Rangpur

Office [March 23, 2011]

„Foreign Exchange Policy Department (FEPD)‟ has

been established in Bangladesh Bank, Rangpur

Office and following districts, which are presently

under the jurisdiction of Borga Office, will come

under Bangladesh Bank, Rangpur Office for foreign

exchange transaction purposes from May 01, 2011.

FE-3: New Market

Exploration Assistance

[April 10, 2011].

The time limit for submission of new market

exploration assistance has been raised in textile

sector.

FE-4: Five percent Cash

intensive on the export

earnings of BTTLMEA

[April 24, 2011]

Bangladesh Teri Towel and Linen Manufacturer and

Exporters Association [BTTLMEA] is also included

with BGMEA, BKMEA and BTMA to issue the

certificate for the 5 percent cash intensive under

SME segment.

FE-5: Cash incentive in

Leather and Leather goods

for export earnings from

advance TT in addition to

LC [May 04, 2011]

Advance payment through TT needs to be

mentioned in LC/contract. And in this case the

permitted dealer bank branch needs to ensure the

foreign buyer‟s reliability, accurateness of the LC

value and repatriation of the advance TT value. The

advance TT value can be repatriated only from the

export recipient country.

FE-6: Inward remittances

for providing Business

Process Outsourcing

services [May 30, 2011].

ADs may credit the proceeds of inward remittance to

the accounts of service providers subject to

observance of some conditions: ADs shall satisfy on

examination of the relevant documents relating to

the inward remittance that the payment has been

received from the non-resident customers to whom

services have been delivered; ADs shall ensure

deduction of applicable taxes, if any; ADs shall

comply with foreign exchange regulations etc.


FE-7: Regarding cash

incentive for export of

frozen shrimp and other

fishes [June 06, 2011].

The ceiling limit of cash intensive is increased to 25

percent of FOB value for exporting frozen shrimp

and other fishes.

FE-8: Cash incentive for

export of handloom product

[June 08, 2011].

For handloom product the cash incentive will be

given at the rate of 5 percent. The ceiling value for

the 12 products under hand loom sector is also noted

in the circular.

FE-9: New edition of Code

Lists for Reporting of

External Transactions by

ADs [June 23, 2011].

Bangladesh Bank has published new edition of Code

Lists for Reporting of External Sector Transactions

by the Authorized Dealers.

FE-10: Export subsidy/cash

incentive against the export

for the year 2011-12 [July

13, 2011].

The new applicable export subsidy/cash incentive

rate for 19 items against the export for the year

2011-12 is circulated.

FE-11: Online payment of

fees etc abroad using ICCs

on internet [July 14, 2011].

ICCs may be used for online payment through

internet of fees mentioned at paragraph 9, chapter

11, GFET. Individuals not holding ICCs in their

names may also make such online payment through

internet using 'Virtual Card' for the required amount

by an ICC issuing bank, for use through its

designated bank branch.

FE-12: Cash subsidy for the

jute made goods in both

public private jute mills

[July 17 2011].





value and repatriation of the advance TT value. The

advance TT value can be repatriated only from the

export recipient country. The application for cash

subsidy against export bill collection/negotiation

should be submitted in the permitted dealer bank

branch within 180 days after the repatriation of the

nostro account.


FE-13: Replacement of few

references contained in

Vol.-1 of the GFET, 2009

[17 July 2011].

Provide linkage of references quoted in foreign

exchange regulation guideline vol-1 with the

relevant paragraph of vol-2.

FE-14: Clearing

arrangement with BB in

Canadian Dollar [September

28, 2011].

AD may open foreign currency clearing account

with Bangladesh Bank in Canadian Dollar.

FE-15: Repatriation of

Export Proceeds through

Online Payment Gateway

Service Providers [August

07, 2011].

It has been decided to allow the ADs to offer the

facility of repatriation of remittances against small

value service exports in non-physical form such as

data entry/data process, off-shore IT service,

business process outsourcing etc. through the

OPGSPs.

FE-16: Subsidy in export of

ship [August 14, 2011].

The repatriation of export value for export of ship is

started as advance before two years of actual export.

So the decision for payment of the export subsidy on

the export repatriation value against LC and

confirmed contract under documentary collection or

TT have been undertaken by the government.

FE-17: Second incentive

package under new market

exploration assistance and

the financial benefits on the

electricity bill for export

sector

[September 18, 2011]

Those sector selected under FE circular 13, 2010 for

cash incentive will get the assistance under new

market exploration. The small and medium

enterprise under textile sector will get 10 percent

grant on its electricity bill, if the enterprise can

produce electricity from the generator of one mega

watt capacity.

FE-18: Jurisdiction of

Bangladesh Bank Rajshahi

Office

The banks from Kustia, Meherpur and Chuadanga

will submit their return report to the Rajshahi

Bangladesh Bank office instead of Khulna office"


export of frozen shrimp and

other fishes [25 October,

2011]





value and repatriation of the TT value. The TT value

can be repatriated only from the export recipient

country.



the mills of textile industry

[November 02, 2011]

The member of BTMEA will get the 5% cash

incentive. For this, the directives are -the member

mills which imported the cotton at higher price

(time-from august 2010 to march 2011), can claim

the incentive; -the application to get the incentive

needs to be submitted within the 60 days after this

circular has been published.

FE-21: Inclusion of Export

Registration Certification

(ERC) No. of direct/

deemed Exporter for loan

from Export Development

Fund [November 14, 2011]

For operational purpose, ADs are advised for

mandatory inclusion of valid ERC No. and date

thereof of the direct/deemed exporter while applying

for loan from EDF and reporting the transactions to

Bangladesh Bank.

FE-22: New Market

Exploration Assistance for

different mode of payment

including TT [20

November, 2011].

The condition for advance payment under TT needs

to be mentioned in the Letter of credit/ contract. The

export value, quantity and the reliability of the

foreign buyer should be supported by

BGMEA/BKMEA/BTMEA. The repatriation from

advance TT should be done through proper banking

channel. And the importer‟s address and …… needs

to be mentioned in letter of credit/contract.

The advance TT can be repatriated only from the

export recipient country.

FE-23: Amendment of FMJ

Form [December 29, 2011].

In order to be compliant with international standard

in declaration of foreign exchange by incoming

passengers, the FMJ Form has now been amended.

The amended FMJ Form consists of 3 (three) sheets

– the original copy for Bangladesh Bank, the second

copy for Customs Authority and the third copy for

the concerned passenger.


Appendix Table-4 Glossary of Technical Terms used in the Report

Acceptance. A time draft that the drawee (the payer) has accepted and

acknowledged in writing the unconditional obligation to pay it at maturity.

Advising Bank. A bank, which receives a letter of credit, issued by the

applicant‟s bank and forwards it to the beneficiary after verification of

authenticity.

Air Waybill. A transport document/bill of lading, which serves as a receipt for

goods and contract to transport the goods by air.

Applicant. The buyer/importer/account party who applies to its bank to issue a

letter of credit in favor of the beneficiary/seller/exporter.

Assignment of Proceeds - Legal mechanism by which the beneficiary of a

letter of credit may pledge the proceeds of future drawings to a third party.

At Sight. The tenor of a draft or availability term of a credit indicating that

payment is due upon presentation or demand.

Back-to-Back Documentary Credit. A documentary credit issued on the basis

of another documentary credit that will constitute security for the back to back

credit.

Bank guarantee: Undertaking given by a bank on behalf of a customer to pay

the guaranteed party a sum of money if the customer cannot or will not

pay/perform.

Beneficiary. The person or company in whose favor a letter of credit is issued.

Usually the beneficiary is the seller/exporter.

Bill of Exchange. (See Draft.)

Bill of Entry. A declaration by an importer or exporter of the exact nature,

precise quantity and value of goods that have landed or are being shipped out.

Bill of Lading. A transport document, which serves as a receipt for goods and

contract to transport using ocean mode.

Bonded Warehouse. A warehouse authorized for storage of goods on which

payment of duty is deferred until the goods are removed from the warehouse.

Certificate of Analysis. A certificate issued regarding the quality and

composition of food products or pharmaceuticals.

Certificate of Inspection. A document certifying that merchandise was in good

condition immediately prior to its shipment.

Certificate of Origin. A document, often issued by a Chamber of Commerce,

certifying the origin of the goods being shipped. It is used to satisfy import

http://www.businessdictionary.com/definition/declaration.html

http://www.businessdictionary.com/definition/importer.html

http://www.businessdictionary.com/definition/exporter.html

http://www.businessdictionary.com/definition/precise.html

http://www.businessdictionary.com/definition/quantity.html

http://www.businessdictionary.com/definition/value.html

http://www.businessdictionary.com/definition/goods.html


regulations and to determine customs duties.

Certified Invoice. An importer may require a certified invoice, which is an

invoice bearing a signed statement by someone in the importer‟s country who

have inspected the goods and found them in accordance with those specified in

the contract.

Charter-party. An agreement wherein the ship owner hires his vessel to the

charterer subject to certain conditions.

CIGS. It is a Contracts for the International Sale of Goods. (UN convention on

contracts for the international sale of goods).

Clean Bill of Lading. A receipt for goods issued by a carrier with no indication

that the goods or the packaging were in damaged condition when received.

Clean Transport Document. A transport document that bears no clause or

notation that indicates that goods were received in apparent good order and

were not damaged or had other irregularities.

Collecting Bank. Banks involved in the collection of a draft and/or documents.

Commercial Invoice. A document issued by a seller listing goods being sold to

a named buyer including the price and shipping terms.

Confirmation of a documentary Credit. Adding an additional undertaking in

the LC other than that of the issuing bank.

Consignee. The person or firm named in a freight contract to whom

merchandise is to be delivered.

Consular Invoice. A commercial invoice that has been reviewed by the Consulate

of the buyer‟s country to ensure that no indigenous laws or regulations are

being broken.

Contract of Carriage. This is an agreement between the shipper and the

carrier.

Country Risk. The risks inherent in doing business in a foreign country over

and above commercial risks, which are generally beyond the local company‟s

ability to control.

Deferred Payment. Payment a set time after shipment or presentation of shipping

documents, as opposed to immediately or „at sight‟.

Demand Guarantee. A guarantee usually issued by a bank, under which the

beneficiary is only required to make a demand in order to receive payment.


Discrepancy. Error or defect, according to the bank, in the presented document

compared with the documentary credit, UCP 600 and ISBP.

Dock Receipt. A receipt for goods issued by an ocean carrier or their agent at

their dock or warehouse; does not cover the loading on a vessel.

Documents against Acceptance (DA). Instructions given by a shipper to his

or her acceptance bank that the documents attached to a time draft for collection

are deliverable to the drawee/payer against his or her acceptance of the draft.

Documents against Payment (DP). Instructions given by a shipper to his or

her bank that the documents are deliverable to the drawee/payer only against his

or her payment of the draft.

Draft. An unconditional order in writing from drawer (exporter) to drawee

(importer) directing the drawee to pay a specific amount of money to the payee

on demand or at a fixed or determinable future date.

Drawback. A repayment of duty on the exportation of goods previously imported.

Drawee. The person, company or bank upon which a draft is drawn.

Drawer. The person, company or bank that creates the draft and is generally

entitled to receive payment.

Duty. A tax on imported goods imposed by the customs authorities in that country.

Entre-pot Trade. It means export of any imported goods into a third country

with minimum 5% value addition.

Exchange Rate. The value or price of one currency when used in relation to its

value in another currency.

Expiry Date. Last date on which documents may be presented or corrected in

order to comply with a letter of credit.

Export credit insurance. Special insurance coverage of exporters to protect

against commercial and political risks for making an international sale.

Feeder Ship. Vessel used in short sea trade to serve ports at which deep-sea

container ships do not call.

Force Majeure. Conditions such as floods, earthquakes, hurricanes or other

events beyond the control of various parties involved in transporting goods.

Foreign Exchange. The currency of a foreign country and/or the conversion

from one currency to another.

Forwarder’s Cargo Receipt. Document issued by a freight forwarder or

freight consolidator indicating goods have been received from the seller and are


being held on behalf of the buyer.

Forwarding Agent. The agent or firm arranging transport on behalf of the

seller.

Free (Foreign) Trade Zone. An enclosed and secured area usually designated

by a port into which goods may be taken and customs duties may be deferred or

waived until such time as the goods are removed for domestic distribution or re-

exported.

Freight Forwarder. A private company that arranges cargo space on a carrier

as well as the logistics for delivering the goods to the carrier (e.g. ship, airplane,

etc.).

GATT. “General Agreement on Tariffs and Trade.” A multilateral treaty

designed to reduce trade barriers and to provide a forum for resolution of trade

disputes.

Groupage B/L. Forwarding agents are permitted to group together or

consolidate consignments from individual consignors and dispatch them as one

consignment.

Hague Visby Rules. Set of rules amending the Hague rules, published in 1968,

which have not been implemented by as many countries as the predecessor

Hague Rules.

House bill of lading. A bill of lading issued by freight forwarder.

Insurance certificate. Document giving details of insurance cover for a

consignment. The certificate will cross-reference a master insurance policy and

must be countersigned.

Insurance cover note. Insurance document evidencing that insurance cover for

a consignment has been taken out, but not giving full details.

Insurance policy. Document setting out full details of insurance in force.

International Chamber of Commerce (ICC). An organization founded to

promote free trade, private enterprise, and to represent business interests at the

national and international level.

Issuing Bank. The bank that issues a letter of credit; also called the opening

bank

Inspection certificate. A certificate generally issued by a respected

independent agency that generally verifies the quality, quantity or specifications


of the good shipped is in conformity with the sales contract.

Latest shipment date. Date on a letter of credit by which the goods must have been

shipped.

Liner Party BL. Liner B/Ls are issued by shipping companies in respect of

goods carried on regular line vessels with scheduled runs, and reserved berths at

destination.

Maturity date. Date at which payment is due under a term bill of exchange.

Mate's Receipt. When the goods are handed over to the agent of the shipping

company for shipment by a specified vessel and the agent contracts to do so, it issues a

receipt known as Mate's Receipt.

Marine Risk Insurance. Insurance covering loss or damage while goods are at

sea.

Marks of Origin. Physical markings on a product indicating the country where

the merchandise was produced.

Most-Favored-Nation Treatment. A commitment that a country will extend to

another country the lowest tariff rates or the most favorable nontariff policies.

Multimodal Bill of Lading. Bill of lading covering shipment of goods by more

than one means of transportation but including an ocean leg.

Nominated Bank. The bank with which the credit is available or any bank in

the case of a credit available with any bank.

Notify party. The party who is to be notified when goods arrive at their destination.

ON Board B/L. It is issued after the goods have been shipped on board. A

credit requiring B/L must indicate that the goods have been shipped on board.

Open Insurance Policy. A marine insurance policy that applies to all

shipments over a period of time rather than on a single shipment.

Packing List. A document that lists the various packages or cartons being

shipped and their contents.

Partial Shipment. A shipment under a Letter of Credit representing only part

of the goods covered by the Letter of Credit.

Payee. Party to whom payment is due.

Phytosanitary Certificate. A certificate typically issued by a country‟s

agricultural department to satisfy import regulations certifying that specified


perishable food, weed and plant items are free from contamination, pests and

plant diseases.

Pre Shipment Finance. The finance required for the period before goods have

been shipped.

Pre-shipment Inspection. An inspection of contract goods prior to shipment to

ascertain their quality, quantity or price.

Post Shipment Finance. The finance required for the period after goods have

been shipped before payment is received by the exporter.

Presenting Bank. The Collecting Bank making presentation to the Importer

(drawee), usually the Importer's bank.

Principal. Party entrusting a draft and/or documents to a bank for collection of

payment; usually the seller of goods.

Pro-Forma Invoice. A draft or sample of what the final invoice will look like

which is used by sellers in the negotiating process with a potential buyer in

order to ensure that all parties understand what costs are included in the quoted

price.

Promissory Note. Financial document in which the buyer agrees to make

payment to the seller at a specified time.

Red Clause Credit. A red clause credit allows pre-shipment advances to be

made to the exporter at the risk and expense of the applicant.

Remitting Bank. The bank that the Exporter authorizes to carry out the

collection on its behalf.

Revolving Credit. The revolving credit is one, which under the terms and

condition thereof provides for restoring the credit to the original amount after it

has been utilized.

Short Form/Blank Back BL. BL in which the detailed conditions of

transportation are not listed in full (on the back of the BL).

Sight Draft. A draft which is payable by the drawee at the time of presentation.

Straight BL. B/L issued to the name of a certain party and which cannot be

transferred by endorsement.

Stale BL. A BL that has been presented later than 21 calendar days after the

date of shipment.


Standby Letter of Credit. Letter of credit issued to back an obligation of the

applicant, but typically not intended to be the primary method of payment.

SWIFT. Society for Worldwide Interbank Financial Telecommunication; an

organization that operates the major interbank electronic communication system

for financial messages (payments, letters of credit, securities transactions, etc.)

Through BL. BL covering goods being transshipped en route. It covers the

whole voyage from point of shipment to final destination.

Transferable Letter of Credit. A Letter of Credit that allows the Beneficiary

(Exporter) to instruct its bank to transfer the credit in part or in whole to a

Secondary Beneficiary.

Transferring Bank. The bank authorized by the Issuing Bank to transfer at the

Beneficiary's request all or part of the Letter of Credit to another party.

Trust Receipt. Release of merchandise by a bank to a buyer in which the bank retains

title to the goods.

Warehouse Receipt. A receipt issued by a warehouse operator for goods

received for storage.

Weight Certificate. It is a certificate evidencing the weight of the goods to be

carried to the destination of importer by the carrier.


Paper Four

Treasury Operations of Banks

Md. Nehal Ahmed1

Md. Shahid Ullah2

Md. Zakir Hossain3

Labonnya S. Chowdhury4

1 Associate Professor of Bangladesh Institute of Bank Management (BIBM) 2 Assistant Professor of Bangladesh Institute of Bank Management (BIBM) 3 Lecturer of Bangladesh Institute of Bank Management (BIBM) 4 Former Vice President of HSBC and Faculty Member of University of Liberal Arts Bangladesh (ULAB)



ABB Association of Bankers Bangladesh

ALCO Asset Liability Committee

ALM Asset Liability Management

ALS Assured Liquidity Support

ARCH Auto-Regressive Conditional Heteroskedasticity

BB Bangladesh Bank

BDT Bangladeshi Taka

BPC Bangladesh Petroleum Corporation

CFO Chief Financial Officer

CRR Cash Reserve Requirement

CY Calendar Year

DIBOR Dhaka Inter-Bank Offer Rate

DMD Debt Management Department

DOS Department of Off-site Supervision

FC Foreign Currency

FI Financial Institutions

Forex Foreign Exchange

FRTMD Forex Reserve and Treasury Management Department

FX Foreign Exchange

FY Fiscal Year

GARCH Generalized Auto-Regressive Conditional Heteroskedasticity

HFT Held For Trading

HTM Held Till Maturity

IIFM Islami Interbank Fund Market

LC Letter of Credit

MPD Monetary Policy Department

NIM Net Interest Margin

NOP Net Open Position

OD Over Draft

PD Primary Dealer

REER Real Effective Exchange Rate

SLR Statutory Liquidity Ratio

USD US Dollar

WAY Weighted Average Yield


Treasury Operations of Banks

1. Introduction

Globalization and financial innovation have over the last two decades multiplied and

diversified the risks carried out by the banking system. The commercial banks are

now operating in a highly volatile and uncertain business environment. The volatility

and uncertainty of international financial markets has generated increased financial

risk to commercial banks. In the context of global business environment, some of the

factors that drive banks to focus on risk management are introduction of complex

banking products, increased complexity in operation, increased adoption of

information technology, increased awareness of the stakeholders about risk, etc.

As banks are highly-leveraged financial institutions, risk is inherent in the banking

business. Banks are always exposed to a number of risk factors such as credit risk,

foreign exchange risk, liquidity risk, interest rate risk, operational risk, etc. In order to

aggregate all such risk at a single department and bring expertise in such functions,

the concept of treasury has evolved.

Conventionally, treasury function was confined to fund management – maintaining

adequate cash balance to meet day to day requirements and deploying surplus funds.

Thus, treasury function was essentially liquidity management and from an

organizational point of view treasury was considered as a service center. However,

due to economic reforms and deregulation of markets over the last few decades, the

scope of treasury has expanded considerably. Treasury has now, evolved as a profit

center, with its own trading and investment activity (Kumar et al., 2005). Moreover,

treasury connects core activity of the banks with the financial markets and managing

market risk for the entire bank that has become an integral part of treasury.

In addition, treasury plays an active role in asset-liability management and with its

constant exposure to markets, is well placed to advise the management of bank on

internal decisions, for example, product pricing and strategic investment decisions.

Recently, investments in securities and foreign exchange businesses have become part

of the integrated treasury, adding a new dimension to treasury activity (Chastain, 1986).


Today’s treasury operations have become more significant and challenging than ever

before. Treasury management is the management of financial risk and liquidity of the

business; it is often called risk management (Hillier, 2003). A well-defined treasury is

responsible for balanced liquidity management, and profit maximization by actively

participating in money, foreign exchange, and security market; assessing and

mitigating risk in ALM and devising new financial products. A common problem in

managing treasury risk is that most banks only realize that they have been at risk

when losses have already occurred. In an ideal situation however, treasury risk

management practice should begin before the exposure occurs; otherwise

fundamental operating, investing and financing decisions would be taken on the basis

of incomplete information (Hillier, 2003). Thus, efficient management of treasury

risk is of vital importance for both banks and regulatory bodies.

In recent times, treasury risk management has often been in the news especially in

situations where things have gone wrong. Efficiency in risk management has become

a critical element of banks’ sustainability and growth. Therefore, any problems in the

risk management have an immediate effect on banking industry, financial markets,

and financial systems. Thus, efficient management of the risk has an impact on the

sustainable growth of the banking industry and the economy at large. The trend of

changing economic environment and hence, free and open market operation in the

financial market in Bangladesh compels most commercial banks to consider how they

can best adapt to currency trading, position management and currency risk

management within the existing regulatory framework. These efforts of trying to

adjust to economic changes and open market policies are not only inevitable, but also

of interest in the performance of the banking industry in light of the reforms.

In Bangladesh, treasury management function has grown significantly since the

gradual easing of foreign exchange controls by the Bangladesh Bank.

The liberalization of interest and exchange rates, and currency convertibility are the

main reasons for the establishment of treasury management unit in majority of the

commercial banks. Considering the paramount importance of the treasury operations,

Bangladesh Bank has also issued a guideline1 to establish a separate treasury

1 Core Risk Management Guideline on “Foreign Exchange Risk Management”, Bangladesh Bank.


department. Against this background, the study has been undertaken to review the

overall treasury activity, functional areas along with their risk management practices

and success factor as well as the challenges in the treasury operation in the banking

sector of Bangladesh.

Objectives of the Study

The paper aims to review the overall activities of treasury operation in the context of

Bangladesh for the year 2011. Specific objectives of the paper are: one, to discuss

about different functional areas and activities performed by the treasury department

of the banks; two, to illustrate the operational process of different treasury activity;

three, to examine the risk management practices of treasury operations; four, to

identify the challenges in treasury operation of banks and to suggest future course of

action in Bangladesh.

Methodology of the Study

The paper is based on both primary and secondary information. A detailed

questionnaire was designed to collect the information from the different banks for

collecting primary data. The questionnaire was sent to a number of sample banks. The

study used purposive sampling in order to ensure the availability of the data and

quality of the response. A total of seventeen banks 2 was selected in the sample. The

distribution of sample banks is given in table-1. The response from the sample banks

were accumulated, compiled and analyzed to attain the objectives. Analysis of the

data and information found from the questionnaire were mainly presented in boxes,

graphs and tables. It is important to mention that the issues that discussed in the paper

are mainly qualitative in nature. Besides the questionnaire, the paper also reflects the

opinions of a number of experienced bankers. For secondary data, treasury manuals

of different banks, various publications of Bangladesh Bank and research articles

have been consulted for preparing the report. As our reference period is 2011,

numerical data has been collected for that year.

2 AB Bank Ltd., Agrani Bank Ltd., Al-Arafah Bank Ltd., BASIC Bank Ltd., BRAC Bank Ltd., Commercial Bank of Cylon PLC, The City Bank Ltd., Dutch-Bangla Bank Ltd., Eastern Bank Ltd., Islami Bank Bangladesh Ltd.

Jamuna Bank Ltd., Janata Bank Ltd., Mutual Trust Bank Ltd., NCC Bank Ltd., Prime Bank Ltd., Standard Chartered Bank, United Commercial Bank Ltd.


Table 1: Sampling Distributions of Banks

Bank Category No. of Total

Banks

Sample Banks

No of Sample % of

Population

State Owned Commercial

Bank 4 2 50.0

Specialized Bank 4 1 25.0

Private Commercial Bank

Other than Islamic Banks 23 10 43.5

Islamic Banks 7 2 28.6

Foreign Commercial Bank 9 2 22.2

Total 47 17 36.2

The draft review study report was presented in the review workshop participated by

the expert practitioners from different banks. The report has been finalized after

accommodating comments of the participants and experts of the banking sector.

Coverage and Limitation of the Report

The study covers different activities and functional areas of treasury department of

banks. The study also identifies the risk management practices of treasury department

along with the challenges they are facing. The survey covers a limited number of

banks and observations are generalized on the basis of the sample output. The study

could have been more informative and precise if more banks were included in the sample.

Organization of the Report

The paper is organized into six sections. The first section describes the background,

objectives and methodology. The introductory section is followed by the

organizational framework of treasury operation. Third section depicts different

treasury products and their operational procedure. Section four portrays risk

management practices of the treasury operation. Section five presents the trend and

patterns of treasury products during 2011. Finally, a few challenges and

recommendations have been discussed in section six.


2. Treasury Management of Banks

Organizational Framework

Treasury management (or treasury operation) includes management of an enterprise's

exposures, with the ultimate goal of maximizing the organization’s liquidity and

mitigating its operational, financial and reputational risk. Treasury Management, from

the bank’s point of view, includes collections, disbursements, concentration,

investment and funding activities. In larger banks, it may also include trading in

bonds, currencies, financial derivatives and the associated financial risk management

(www.wikipedia.com).

Most of the banks have full-fledged departments devoted to treasury management and

supporting their clients' needs in this area. Larger banks have the stronghold on the

provision of treasury management products and services. However, smaller banks are

increasingly launching and/or expanding their treasury management functions and

offerings, because of the market opportunity afforded by the current economic

environment, availability of skilled treasury management professionals, access to

industry standard, and other best practices.

For non-banking entities, the terms Treasury Management and Cash Management are

sometimes used interchangeably though the scope of treasury management is larger

which includes funding and investment activities mentioned above. In general,

treasury operations come under the control of the CFO, or Treasurer, and are handled

on a day to day basis by the organization's treasury staff, controller, or comptroller.

However, treasury of a bank may have the following departments:

A Fixed Income or Money Market desk that is devoted to buying and selling

interest bearing securities,

A Foreign exchange or "FX" desk that buys and sells currencies,

A Capital Markets or Equities desk that deals in shares listed on the stock market.

In addition, the treasury function may also have an Asset Liability Management or

ALM desk that manages the risk of interest rate mismatch and liquidity; and a transfer

pricing or pooling function that prices liquidity for business lines within the bank.

http://en.wikipedia.org/wiki/ALM

http://en.wikipedia.org/wiki/Risk_pool


Money Market Desk

The primary money market is comprised of banks, FIs and primary dealers as

intermediaries and savings/lending products and treasury bills as instruments. There

are currently 15 primary dealers (12 banks and 3 FIs) in Bangladesh. The only active

secondary market is overnight call money market which is participated by the

scheduled banks and FIs. The money market in Bangladesh is regulated by

Bangladesh Bank, the Central Bank of Bangladesh (www.bangladesh-bank.org).

Money market dealers arrange short and medium term funds at most economical

terms which are required by the bank aside from customer deposit mobilization

efforts. Money market desk ensures that the bank remains sufficiently liquid, meeting

all of its financial commitments and obligations to its customers besides meeting the

SLR and CRR requirement at minimum risk and cost to the bank. In stressed liquidity

condition the desk always strives to manage sufficient fund to provide business needs.

Foreign Exchange Desk

Since the 1990s, a number of measures were adopted towards liberalization of foreign

exchange transactions. Bangladesh adopted floating exchange rate regime since 31

May 2003. The exchange rate is being determined in the market on the basis of

market demand and supply forces of the respective currencies. In the forex market,

banks are free to buy and sell foreign currency in the spot and also in the forward

markets. However, to avoid any unusual volatility in the exchange rate, Bangladesh

Bank remains vigilant over the developments in the foreign exchange market and

intervenes by buying and selling foreign currencies whenever it deems necessary to

maintain stability in the foreign exchange market.

Forex desk is one of the leading market makers in spot, swaps, and forward

transactions in inter-bank market. Banks usually have good sources of foreign

currency through its own export customers, non-residence remittances, and local and

multinational corporate houses remittances/exports. The treasury is connected to the

international market through on-line dealing platforms of different international banks

to quote very competitive prices on world’s major currency. (www.bangladesh-

bank.org).


Capital Market Desk

Capital market desk or investment desk in treasury operates within the policy

framework approved by the Board of Directors of the bank. Fund is invested in

different securities both for maintenance of SLR and income generating activities.

The philosophy is to manage and maximize income within certain parameters and

limits. It also includes use of effective duration, rate shock analysis, as well as total

return to analyze and manage the investment portfolio and to determine the effect of

movements on the yield and value of the bank’s portfolio. Capital market desk

operates within the available investment opportunities in the country and abroad.

The desk keeps an eye on the capital market movement to reap benefit on every

opportunity and to get the best of every taka invested and maximize profit as well as

shareholders value.

The primary segment of capital market is operated through private and public offering

of equity and bond instruments. The secondary segment of capital market on the other

hand, is institutionalized by two stock exchanges-Dhaka Stock Exchange and

Chittagong Stock Exchange. The capital market in Bangladesh is governed by the

Securities and Exchange Commission (SEC). The capital market desk of the treasury

department of a bank has to perform their capital market operation by following the

regulations of BB and directives of SEC. The instruments in these markets are equity

securities (shares), debentures, corporate bonds and treasury bonds which the capital

market desk mostly deals with.

Asset Liability Management (ALM) Desk

Asset Liability Management is one of the major functions of treasury of a bank.

Therefore, ALM Desk performs as an independent unit within the treasury

department. The objective of the desk is to ensure efficient allocation of fund within

an acceptable, measurable and defined risk structure (Kumar et al., 2005). The desk

monitors and analyzes various cash flows, cash positions, balance sheet gaps, daily

profit and loss, economic trends, investment options, arbitrage opportunities, future

business growth and therefore, places the facts and findings before the ALCO.

Regular ALCO meeting is conducted once in a month but in case of urgent situation,

special meeting is arranged. The desk proposes balance sheet strategy to the

management.


Structure of Treasury Department

Head of Treasury controls the treasury department. Under Head of Treasury several

chief dealers work separately for money market and forex market. There may have

one in-charge for each market. In-charge of the respective front office and back office

of treasury are accountable in submission of report relating to dealing activities of

money market and foreign exchange market directly to the head of treasury. The mid

office most of the cases performs risk management activities such as market risk,

credit risk, etc. They are also responsible for regulatory risk reporting. The typical

structure of the treasury department has been presented in the following diagram.

Figure 1: Structure of Treasury Department

Source: Survey Result

Managing Director

Front Office Mid Office Back Office

DMD

Head of Treasury

Head of Back

Office

Chief Dealer

(Forex Mkt)

Chief Dealer

(Money Mkt.)

Chief

Dealer

(Govt Sec.)

Head of

ALM

Dealer

(Forex Mkt)

Dealer

(Money Mkt.)

Dealer

(Govt. Sec.)

Balance

Sheet

Manager

Market Risk

Management

Credit Risk

Management

Regulatory

Risk Reporting

Lcy Position

Reconciliation

Fcy Position

Reconciliation

Lcy Nostro

Reconciliation

Fcy Nostro

Reconciliatio

n

Lcy

Settlement

Fcy

Settlement

Regulatory

Reporting


Functional Activity of Treasury Department

Treasury department of a commercial bank facilitates diverse market operations, from

dealing to settlement, custody and accounting, in both domestic and foreign exchange

markets (IIBF, 2006). Since the complex nature of transactions is handled by

treasury, various functions are segregated as under:

Front Office

Front office of a treasury has a responsibility to manage investment and market risk in

accordance with instructions received from the bank’s management. This is

undertaken through the dealing room which acts as the bank’s interface to

international and domestic financial markets. The dealing room is the center for

market and risk management activities in the bank. The specific functions of the front

office are given in box-1.

Box 1: Activities of Treasury Front Office

Statutory management

Forming market views through fundamental and technical analysis

To manage investment by participating in money market and forex market as per the

limits approved by the higher management as well as the Central Bank.

Preparing daily exchange rate sheet as well as quotation of various foreign exchange

rate to customers

Maintenance of daily dealing blotter

Participate in the inter-bank market to buy and sell foreign currency against foreign

currency and/or BDT on cash, TOM, Spot or Forward

Manage currency composition in accordance with management’s guidelines

After making a deal, deal slip is prepared in duplicate by each dealer, original copy of

deal slip is delivered to the back office instantly

Helping the back office for any unreconciled entry due to any discrepancy

Propose interest rate matrix and various investment options to the ALCO

Center for market and risk management activity


Back Office

Treasury back office is mainly responsible for confirmation, settlement and

reconciliation of front office activities. This involves checking trade data that have


been conducted, ensuring that they are not erroneous, and transacting the required

transfers. Basically, it provides support service to front office. The major functions of

back office are described in box-2.

Box 2: Activities of Treasury Back Office

Preparation of exchange position

Preparation of daily position and reconciliation with front office

Recording deals

Deal slip verification

Processing and sending deal confirmation

Receiving deal confirmation from counterparties and checking with record and follow-

up

Preparation, checking and passing of vouchers

Ensuring accounting entries

Management of NOSTRO funds

Reconciliation of NOSTRO accounts

Revaluation of exchange position

Justification of rate reasonability for all deals done

Managing discrepancies and disputes

Settlements

Statutory report to Bangladesh Bank

Monitoring approved exposure and position limits

Head of Back Office reports to the Managing Director on daily basis showing details

of the deals


Mid Office

Mid office is responsible for risk management, monitoring, internal controls, and

management reporting. Risk management involves analyzing the risk that traders are

taking into the balance sheet in conducting their daily trades, and setting limits on the

amount of capital that they are able to trade in order to prevent "bad" trades having a

detrimental effect on a desk overall. Another key mid office role is to ensure that the

economic risks are captured accurately, correctly and on time. In recent years the risk

of errors has become known as "operational risk" and the assurance mid offices


provide now includes measures to address this risk. When this assurance is not in

place, market and credit risk analysis can be unreliable and open to deliberate

manipulation. Generally, larger banks have separate mid office arrangement.

But some of the banks especially the smaller ones, do not have such facility. They

perform their mid office activity by merging with the back office. The banks that

have mid office separately perform the functions that are presented in box-3.

Box 3: Activities of Treasury Mid Office

Monitoring dealers adherence to various internal and regulatory limits

Monitoring dealers adherence to various counterparty limits

Reporting any limit excesses and follow-up for measures

Various internal and regulatory reporting

Revision of counterparty limits, dealer’s limit, stop loss limit with the approval of the

competent authority

Audit the records of the front-office and back-office to ensure that they are consistent

and accurate

Interacting with the bank’s risk management department on liquidity and market risk


Functions of Integrated Treasury

Earlier, different treasury operations were performed by different departments of

banks, For example, foreign exchange operation was carried out by International

Department, trading of own account was performed by Central Accounts Department

etc. Recently, the traditional practice of treasury management has been changed due

to deregulations of interest rate and partial convertibility of taka by the central bank.

Therefore, the concept of integrated treasury evolved, which refers to integration of

money market, security market and foreign exchange operations under a single

umbrella (Kumar et. al., 2005; IIBF, 2006). Thus, the functions of integrated treasury

can be summarized as follows

(a) Meeting Reserve Requirements and Investment: It involves meeting CRR and

SLR obligations and having an approximate mix of investment portfolio to

optimize yield and duration. Duration analysis is used as a tool to monitor the

price sensitivity of an investment instrument to interest rate changes.


(b) Liquidity and Fund Management: It involves analyzing the major cash flows

arising out of asset-liability transactions, providing a balanced and well

diversified liability base to fund the various assets in the balance sheet of the

banks, and providing policy inputs to the strategic planning committee of the

bank on funding mix (currency, tenor and cost) and yield expected in credit and

investment.

(c) Asset-Liability Management: ALM calls for determining the optimal size and

growth rate of the balance sheet and also set price of the assets and liabilities in

accordance with prescribed guidelines.

(d) Risk Management: Integrated treasury manages all market risks associated with a

bank’s liabilities and assets. The market risk of liabilities refers to floating

interest rate risk and balance sheet mismatches. Market risk for assets can arise

from unfavorable change in interest rates, increasing level of disintermediation,

securitization of assets, and emergence of credit derivatives, etc. While the credit

risk assessment continues to be in the domain of credit department, the treasury

would monitor the cash inflow impact from changes in asset prices due to

interest rate changes by adhering to prudential exposure limits.

(e) Transfer Pricing: The treasury has to ensure that the funds of the bank are

deployed optimally, without sacrificing yield or liquidity. An integrated treasury

department has an idea of the bank’s overall funding needs as well as direct

access to various markets such as money market, capital market, forex market

and credit market. Hence, ideally the treasury should provide benchmark rates,

after assuming market risk to various business segments and product categories

about the correct business strategy to adopt.

(f) Derivative Products: The treasury can develop Interest Rate Swap and other

currency based or cross currency derivative products for hedging bank’s own

exposures and also sell such products to corporate customers or other banks.

(g) Own Account Trading: Banks that have merchant banking license take position

in the equity market through acquiring stocks, bonds etc. from primary offers and

secondary markets. Apart from these, banks also have exposure in the equity


market in the form of investment. Generally, this is termed as own account

trading which is done through treasury department. However, there are some

banks which manage their own account trading through Central Accounts

Department.

(h) Forex Market: Treasury needs to manage the Net Open Position (NOP) created

through inflow or outflow of foreign exchange from export, remittance or import

proceeds. The gap is managed through buying or selling of USD against local

currency in the inter-bank market. Major Forex transactions are spot and forward

transactions.

The treasury thus encompasses funds management, investment and trading activity

within the framework of risk management, in order to service the bank’s cash flow

requirements, to attain the needs of merchant business as well as to generate surplus

from such activities. This can be further added the evolving role of treasury in

managing balance sheet risk, in coordination with other banking departments.

3. Treasury Products and their Operational Procedures

Money Market Products

Money market refers to raising and deploying short-term funds, with maturity of

funds generally not exceeding one-year. The inter-bank market is divided into call

money, term money, repo and reverse repo, and assured liquidity support.

Call money: Call money refers to overnight placements, that is, funds borrowed by

banks that need to be repaid on the next working day. Money market dealers usually

contact the counterparties over telephone. Sometimes it is rolled over on the

subsequent days, if agreed by both the parties. In that case, it is treated as a new

agreement and the rate of interest is determined based on the market rate on that day.

The operational procedure involved in the call money market is shown below:


Figure 2: Operational Procedure of Call Money Market

Steps Involved Activities Involved

Step-1 daily assessment of deficit/surplus of fund

Step-2 market searching in order to collect information regarding

the demand/supply over the phone

Step-3 fulfilling the gap (deficit/surplus) as required

setting the interest rate based on demand and supply

Step-4 crediting the required amount to the account maintained

with Bangladesh Bank

Step-5 settlement on the next day as per the agreement

reconciliation of the transaction

Term money: Term money market is for placement of funds with banks for a period

exceeding overnight but not more than one year. Term money makes sense when the

arrangement is fixed for a certain period of time.

Repo and Reverse Repo: Repo means repurchase agreements. It refers to sale of

securities with a commitment to repurchase the same securities at a later date

(Mishkin and Eakins, 2008). Presently, only government securities are being dealt

with under Repo transactions. The bank in need of funds and/or having surplus

securities can enter into a Repo transaction with another bank or central bank. It is an

instrument for the bank as an indirect monetary tool for day-to-day liquidity to

smoothen temporary and unexpected disturbance in the supply and demand for

money. This facility provides short-term liquidity in the money market against an

eligible security without necessitating liquidation of the security. In addition, banks

use Repo to take advantage of anticipated changes in interest rates. The bank sells the

securities to the counter party with an agreement to repurchase the same securities,

for overnight or seven days of maturity, at a predetermined price. The bank thus, gets


cash in exchange of securities and pays back the cash to repossess the securities.

The difference in sale price and repurchase price is termed as interest on the cash

advance. The amount of liquidity applied for in a Repo bid should not exceed 95

percent of the present value of the security offered. The reverse repo is the mirror

image of the repo, that is, the transaction with the counterparty under a Repo is

referred to Reverse Repo from the counterparty’s point of view.

However, central bank uses Repo in conducting monetary policy. As a monetary

policy stance, central bank enters into a Repo transaction with commercial banks to

control the money supply in the market.

Assured Liquidity Support (ALS): This is a money market product specially

designed for primary dealers. Under this arrangement, Bangladesh Bank provides

short term liquidity support to primary dealers in a situation of liquidity dearth against

the holdings of T-bills and T-bonds for a period of 75 days3. The amount that the

banks receive is 85 percent of the face value in case of T-bill and 95 percent of the

market value in case of T-bond. But such facilities can be availed only once for the

entire maturity period of the instruments.

Fixed Income Securities Products

Treasury Bill: These securities are issued by government through the central bank

for maturities of 28-days, 91-days, 182-days and 364-days, for predetermined

amounts. Banks buy the bills at a discount from the stated maturity value. At the bill’s

maturity, the holder receives from the government a payment equal to the face value

of the bill. The difference between the purchase price and ultimate maturity value

constitutes the bank’s earnings.

Treasury Bond: Treasury bonds are the long term debt financing instruments of the

government issued by central bank. Based on the maturity, four types of treasury

bonds are available: 5-year, 10-year, 15-year and 20-year. They have a coupon

payment in every six months and principals are repaid at the end of the maturity.

3 DMD Circular No-1, dated 22 February, 2012


Foreign Exchange Products

Spot: Currencies are mostly bought and sold in spot trades. The spot refers to

settlement-payment and receipt of funds in respective currencies. Spot settlement

takes place two working days from the trade date i.e. on the third day. Currency may

also be bought and sold with settlement on the same day i.e. today (TOD) or on the

next day, i.e. tomorrow (TOM). All the exchange rates quoted on the screen or in

print are for spot rate unless otherwise mentioned. The TOD and TOM rates are

generally quoted at a discount to the spot rate i.e. the rate is less favorable to the

buyer of the currency (Kumar et al., 2005).

Forward: It refers to purchase or sale of a currency on a future date. The exchange

rates for forward sale or forward purchases are quoted today. Hence, such

transactions are referred to as forward contracts between the buyer and seller.

Treasury may enter into forward contracts with customers or with banks as

counterparties. Treasury in-turn covers its customer exposure by taking reverse

positions in inter-bank market. Treasury may also enter into forward contracts purely

for the purpose of making profit out of price movements. Forward exchange rates are

arrived at on the basis of interest rate differentials of two currencies, added or

deducted from spot exchange rate (Kumar et al., 2005).

Swap: The spot and forward transactions are the primary products in foreign

exchange markets. A combination of spot and forward transaction is called a Swap.

Buying USD with BDT in the spot market and selling the same amount of USD in

forward market or vice versa, constitutes a USD/BDT swap. The swap is generally

used for funding requirements, but there is also a profit opportunity from interest rate

arbitrage.

The swap is used extensively to convert cash flows arising from principal and interest

payments of loans from one currency to another currency with or without involving

actual exchange of funds.

Dealing Room Operation

The dealing room acts as the bank’s interface to international and domestic financial

markets. The operation of dealing room is primarily carried out by the dealers who

may or may not cover customer’s deals immediately, depending upon the market


situation movements and dealers views on markets. The dealers who are active in day

to day trading activities must be familiar with the bank’s dealing guidelines and

procedures. The following figure depicts the steps involved in a dealing operation.

Figure 3: Process Flow Chart of Dealing Operation


Step-1 dealer checks limit with the counterparty

dealer checks dealing limits

dealer strikes a deal

Step-2 enters deal into blotter

raises deal ticket

sends ticket to treasury back office

Step-3 treasury back office exchanges deal confirmation with

counterparty

passes all necessary entries

Step-4 back office settles the deal

Step-5 back office reconciles exchange position

advises treasury of accurate position

Process of Reconciliation

Banks maintain various nostro accounts in order to conduct operations in different

currencies including BDT. The senior operation manager of the bank set limits for

handling nostro account transactions that include time limits for the settlements of

transactions over the various nostro accounts and the time and amount limits for items

that require immediate investigation after receipt of the account statements. Persons

reconciling nostro accounts are to be independent of originating, responding to,

authorizing or booking transactions and must not reconcile the same accounts for

a continuous period of more than twelve months. The process of matching open items


must be performed each time statements are received and must ensure a true match

(e.g. dates, amounts and transaction identity). All matches must be cross-referenced

between “our accounts” and the statement.

The operation manager sets the time and amount limits for liquidation of open items

or differences found unreconcilable. These items must be investigated as far as it is

practicable and if they are found unreconcilable, the operation manager may authorize

liquidation through appropriate entries as established as per their accounting policies.

At least quarterly, a comprehensive review of all “our accounts” must be made by an

officer independent of transaction processing and authorization functions to ensure

that each account continues to be operated with a valid business purpose and that

reconciliations and other controls continue to be in place and are effective. A detailed

flowchart of the reconciliation process has been shown in the figure-4.

Figure 4: Process Flow Chart of Reconciliation


Step-1 receive NOSTRO account statement from corresponding

bank via SWIFT/TELEX

Step-2 take print out of “our account” from internal system or

database

Step-3 match and knock-off identical entries

Step-4 prepare a report (reconciliation balance report) for the

outstanding exceptions

Step-5 units pass the corresponding/ corrective entries as well as

entries for irreconcilable item


Infrastructural Requirement of Treasury Department

Treasury business is highly dependent on technology. Information technology is

rapidly changing the business style of treasury department. In order to perform

treasury operations smoothly, a sophisticated technological support is essential. The

infrastructural facilities that are required to implement the successful treasury

operation are summarized below4:

A separate and secured dealing room having restricted entry facility, Land phone with

NWD, ISD facilities, Mobile phone, Voice recorder, Fax, National and International

instant news update through financial TV channel, Reuters news, Newspapers,

Dealing platform/ system(s), Reuters Exchange Quotation/ Live Exchange Quotation

in international currency market, commodity market, Computer, Internet facility,

Centralized FX and Money market, International time-showing wall-clock, a good

and secured communication highway in between treasury front and back office

through online treasury operational software for smooth treasury operation.

Asset-Liability Management

Banking business involves the identification, measurement, acceptance and

management of risk; the heart of a bank’s financial management is risk management.

One of the most important functions in banking is Asset Liability Management

(ALM). ALM refers to the management of a bank’s portfolio of assets and liabilities

in order to maximize profitability and stockholders earnings’ over long term,

consistent with safety and liquidity considerations. ALM addresses the responsibility

to managing the acquisition and allocation of funds to ensure adequate liquidity,

maximum profitability and minimum risk. It includes reviewing recent or past

performance of exposures as an indicator to take up future courses of action. Hence,

the major responsibilities of ALM desk are:

Planning to meet the liquidity needs: Making funds available at a competitive

price when they are required is the first task of ALM. The task is to achieve a

proper mix of funds, maximize the fund allocation to high profit areas while

simultaneously ensuring availability of funds to meet all circumstances.

4 Summarized from Survey Result


Arranging maturity pattern of asset and liabilities: Matching of asset and liabilities

over different time buckets and limiting their exposure to interest rate risk are

issues to be looked at in the ALM process.

Rate Control: Controlling the rates received and paid to assets and liabilities to

maximize the spreads or net interest income is the final responsibility of ALM.

Basically, asset liability management is concerned with strategic balance sheet

management involving risk caused by changes in interest rate, exchange rate, credit

risk, and liquidity position of bank (Charro & Ortiz, 1996; López, 2003). With profit

becoming a key factor, it has now become imperative for a bank to move away from

partial asset management and partial liability management towards an integrated

balance sheet management where all the components of balance sheet and its different

maturity mix will be looked at from profit angle of the bank. The ultimate objective

of this process is to generate adequate and stable earnings and to steadily build an

organization’s equity over time.

Therefore, ALM is the management of the Net Interest Margin (NIM) to ensure that

its level and riskiness are compatible with risk return objectives of the bank. To attain

the objectives, the following strategies are followed by the ALM desk:

(a) Spread Management: Spread or margin known differently as interest spread or

interest margin or net interest spread/margin or net interest income refers to the

difference between interest earned on deployment and interest paid on the

acquisition of financial resources. Spread maximization strategy involves -

Reducing bank’s exposure to cyclical rates and stabilizing earnings over the

long term,

Predicting rate changes and planning for such eventualities,

Coordinating rate structure,

Balancing default risk on loans and investments against probable benefits,

Ensuring a steady but controlled growth as well as gradual increase in

profitability.

(b) Gap Management: Gap refers to the difference between asset and liabilities that

can be impacted due to the change in the interest rates. Such assets or liabilities

are referred to as Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities


(RSL), respectively. For the Gap management purpose, the assets and liabilities

are distributed over different time buckets:

Identifying and matching asset and liabilities over different time bucket,

Optimizing the earnings over a planning period,

Building a mechanism to expand and contract assets or liabilities in response

to rates.

(c) Interest Sensitivity Analysis: It is concerned with the analysis of the impact of

interest changes on the bank’s spread/margin and resultant overall earnings.

The strategy includes:

Separating fixed and variable interest rate components of balance sheet,

Listing assumptions regarding rate, volume and mix of the projected portfolio,

Making alternative assumptions on rise and fall in interest rates,

Testing the impact of assumed changes on the volume of composition of the

portfolio against both rising and falling interest rate scenarios.

Another important purpose of asset-liability management is to control a bank’s

sensitivity to changes in market interest rates and limit its losses to its net income or

equity. Interest sensitive gap analysis provides the changes on bank’s NIM due to the

change of the market interest rate. But it does not consider the impact of changing

interest rate on equity position.

(d) Duration Analysis: Duration is a measure of the percentage change in the market

value of a position that will occur due to a small change in the level of interest

rates (Rose and Hudgins, 2010). It reflects the timing and size of cash flows that

occur before the instrument’s contractual maturity. Generally, the longer the

maturity of the instruments and the smaller the payments that occur before

maturity e.g., coupon payments, the higher the duration. Higher duration implies

that a given change in the level of interest rates will have a longer impact on the

market value of the equity (Kumar et al., 2005). The strategy includes:

Calculate average duration of asset and liability portfolio under each maturity

bucket,

The average durations are then multiplied by an assumed change in interest

rates to construct a weight for each time band,


In some cases, different weights are used for different positions that fall

within a time band, reflecting broad differences in the coupon rates and

maturities,

In addition, different interest rate changes are some time used for different

time bands, generally to reflect differences in the volatility of interest rates

along the yield curve,

The weighted gaps are then aggregated across time bands to produce an

estimate of the change in economic value of the bank that could result from

the assumed changes in the interest rates.

Primary Dealer (PD)

Bangladesh Bank has given license to 12 banks5 and 3 non-bank financial

institutions6 in order to make the secondary market of Treasury bill/bond and other

government securities, whose activities are termed as “Primary Dealer”. These banks

subscribe to and underwrite primary issues and make the market deals in a two-way

price quotation basis.

Functions of Primary Dealer

Primary dealers actively participate in all primary auctions to enhance the liquidity

and depth in the securities market. Primary dealers are the most significant vehicle

through which open market operations of monetary policy is performed. The major

functions of a primary dealer are mentioned below:

Buying of securities from the primary auction,

Underwriting unsold government securities as a broker,

Development of secondary market for government securities,

Facilitating efficient liquidity management and open market operation.

The operational procedures for buying and selling the securities by the primary

dealers are given in figure-5.

5 AB Bank Ltd., Agrani Bank Ltd., Jamuna Bank Ltd., Janata Bank Ltd. Mercantile Bank Ltd., Mutual Trust Bank Ltd., National Bank Ltd., NCC Bank Ltd., Prime Bank Ltd., Sonali Bank Ltd., Southeast Bank Ltd., Uttara Bank

Ltd. 6 Industrial Promotion and Development Company, International Leasing and Financial Services Ltd.,

LankaBangla Finance Ltd.


Figure 5: Operational Procedure of Primary Dealer Activity


Step-1 participate in the primary auction as per the auction calendar

Step-2 submit the auction bid to the auction committee of

Bangladesh Bank declaring the yield and price

Step-3 Bangladesh Bank sorts all the auction proposal

the auction committee decides a rate based on the

yield/price offered by the bidder, which is termed as cutoff

yield/price

Step-4 the successful bidder will get the government securities on

the offered yield/price on priority basis

if anything left from the auction amount after considering

the successful bidder, the rest is devolved on the other

bidders at the cut of price determined by the auction

committee

Step-5 on the following, day Bangladesh Bank credits the securities

to the purchasing bank accounts and debits the current

account of respective banks maintained with Bangladesh

Bank for equivalent amount

Step-6 primary dealers sell the securities in the secondary market to

other financial institutions and investors

Step-7 get reimbursement from Bangladesh Bank on maturity


Regulations for Operations as Primary Dealer

Primary dealers are required to follow the rules, regulations, and guidelines issued by

the Bangladesh Bank. The regulations for primary dealers as prescribed by the

Bangladesh Bank vide FRTMD Circular No. 06, dated 29 July, 2003 as summarized

in box-4.

Box 4: Regulations for Operations as Primary Dealer

A PD cannot act as inter-bank or inter dealer broker.

A PD is required to maintain separate accounts in respect of its own positions and

customer transactions, with separate Subsidiary General Ledger (SGL) account in the

name of each customer.

A PD, on behalf of its customers, can quote the price for bids in the primary issues

indicated by the customer. However, purchases against bids on behalf of customers

would immediately be credited to the SGL accounts of the customers concerned.

Transfers arising from secondary trading deals can be booked through the SGL

accounts maintained in the PD's own books and also in the PD's SGL account with the

BB, submitting transfer applications as per procedure to be prescribed by the BB.

Prices would be quoted by a PD in terms of face value units of Taka 100. A two-way

price quote of Taka 101.00/101.50 would indicate premium of Taka 1.00 and Taka

1.50 for bid and offer, while a quote of Taka 98.50/99.00 would indicate discount of

Taka 1.50 and Taka 1.00 on bid and offer. The bid and offer prices may differ for deals

of differing sizes, but in no case should the bid-offer spread be more than taka 0.50.

The secondary trading deals of a PD would be on spot value basis, considered as T+2

local working days.

A PD shall not short-sell any particular issue and shall not carry a short position in

secondary dealings.

A PD shall furnish to the BB daily returns on dealing prices, positions and transactions

on own account and on account of customers. A PD shall also furnish to the BB such

other returns and reports in such forms and at such intervals as may be prescribed from

time to time by the BB.

The BB shall reserve the right to inspect the books and records of all transactions and

dealings of a PD;

A PD shall immediately bring to the notice of the BB any major complaint against it by

a customer, and any action initiated or taken against it by any regulatory entity

including the SEC, the Registrar of Joint Stock Companies, the Income Tax

authorities, the Stock Exchanges.

Source: FRTMD. Bangladesh Bank


Treasury Operation of Islamic Banks

Banking operation of sharia-based banks is different from conventional banks.

Islamic banks always avoid interest on all sorts of transactions. As interest is strictly

prohibited, they perform their banking operation on the basis of profit and loss

sharing. Therefore, they offer some unique products which are different from the

conventional banking system. To perform the treasury operation, the following

products are used by the sharia-based banking at this moment.

Cash/Tom/Spot Foreign Exchange,

Overnight FC Deposit,

Interbank Placement under Mudaraba Mode,

Bangladesh Government Islamic Investment Bond (BGIIB),

Restricted Mudaraba/Murabaha,

Overnight Placement in IIFM.

If any products are approved by Islamic Shariah in future, Islamic banks will also be

permitted to introduce and deal with those products.

Islami Interbank Fund Market (IIFM)

Islami Interbank Fund Market (IIFM) has been established in the light of call money

market of the conventional banks to remove the temporary and short term liquidity

problem of the islamic banks. The fund aims at strengthening the liquidity support to

sharia-based banks. Bangladesh Bank issued a circular7 about the IIFM in December

2011 but its launch was delayed due to a dearth of the required fund.

IIFM has been formed in the model of the traditional call money market. The Islamic

Bond Fund of the central bank will act as the custodian of the IIFM and will not

charge any fees for the fund. According to the rules, if a bank has excess funds, it will

invest the amount in the IIFM for a day, allowing another cash-starved islamic bank

to borrow for the same period. The rate of profit in the islamic bank call money

market will be determined on the basis of the profit the bank gives to its depositors on

a three months’ deposit. The characteristics of IIFM are described in box-5. Besides,

the central bank has taken an initiative to amend Islamic Bond Rules 2004 to enable

the islamic banks and financial institutions to participate more in the islamic financial

market.

7 DOS Circular No.23, dated 27 December, 2011


Box 5: Characteristics of IIFM

Though IIFM is a money market like call money market, it is fully based on Islami

Shariah.

The modes of operation of this market have been designed in such a way that it does

not replicate any form of interests at any stages of the transactions which is prohibited

by the Islami Shariah.

It will be conducted on the basis of Mudaraba.

BB will act as a custodian of IIFM and no fees/charges will be imposed for this.

Islami Shariah based banks & financial institutions and islami banking branches of the

conventional banks can transfer their investible surplus fund into Islamic Bond fund on

a daily basis.

According to Profit Sharing Ratio (PSR) determined by the Islami Bond Fund, the fund

will be provided to the recipients (Islami Shariah based banks & financial institutions

and Islami banking branches of the traditional banks) subject to availability of fund.

It will be determined as per the provisional rate of profit on various term deposits

declared by the fund recipient. To determine the rate of profit from time to time, the

decision of Islami Bond Fund will be the final. If the fund recipient has no term

deposits as determined by the Islami Bond Fund, the rate of provisional profit will be

the rate for the next term deposits.

At the maturity, the fund recipient has to be paid capital including profit in accordance

with the PSR. At the end of the year (January-December), profit paid at the repaid

provisional rate will be adjusted with the announced final profit rate by the fund

recipient.

Source: DOS, Bangladesh Bank


4. Risk Management of Treasury Operations

Risk is inherent in any operation especially in treasury operation. A bank is highly

sensitive to treasury risk because treasury activities are highly leveraged.

Management of treasury risk calls for special emphasis as the loss is magnified. For

example, an adverse movement of the exchange rate by Tk.1 may result in a loss of

Tk.1crore to the bank, which is a straight loss of capital. Moreover, the reason that

management is concerned about the treasury risk is large size of transactions done at

the sole discretion of the treasurer. If the treasurer commits an error of judgment, the

consequent losses to the bank would be enormous. Another reason that the risk

management is crucial in treasury is that the losses in treasury business materialize in

very short term, and the transactions, once confirmed, are irrevocable, hence no

corrective action is possible.

For the above reasons not only bank management of the commercial banks but also

the Bangladesh Bank is concerned with treasury risk management. The conventional

control and supervisory measures, mostly in the nature of preventive steps, can be

divided8 into three parts as follows:

Organizational controls: This refers to the checks and balances within the system.

Treasury is divided into two parts – the front and back office. The front office

generates deals and the back office settles trades only after verifying compliance

with the internal controls. In some banks treasury also has a middle office, which

acts as a bridge between the front office (dealing room) and the back office. While

back office checks and validates deal-wise information, middle office is responsible

for overall risk management and management information system.

Exposure limits: Exposure limits are kept in place to protect the bank from credit

risk which is split between default risk and counterparty risk. Default risk arises

when the bank lends in the money market, but the borrowing bank may fail to

repay the amount on due date. The counterparty risk refers to the possible failure

of the counterparty to the transaction to deliver or settle their part of the

transaction. Therefore, assuming that there is no credit risk in short term lending,

it is not prudent that treasury lend its entire surpluses to a single bank.

8 Kumar, et al., 2005


Internal controls: The most important of the internal controls are position and

stop-loss limits. Trading is a high risky area, vulnerable to sudden market

fluctuations and the limits imposed by management are preventive measures to

avoid losses in adverse market conditions. The trading limits are of three kinds:

limits on deal size,

limits on open positions, and

stop-loss limit.

Treasury also faces Market Risk (which broadly covers that of liquidity, interest rate,

exchange rate and equity price), Credit Risk and Operational Risk.

Market Risk: Market risk arises when the price of a security, interest rate or

exchange rate move in such a way that the value of an asset diminishes. The market

risk is also known as the price risk. The two main components of market risk are

liquidity risk and interest rate risk.

Liquidity Risk: It implies cash flow gaps which could not be bridged. For example,

if the treasurer would like to satisfy the claim subject to immediate payment, he

would borrow money from the call market to satisfy the claim. Although treasurer can

sell T-bill that he holds but he would not dispose the security with an assumption that

the T-bill prices would go up in the next day and he can sell the security with profit.

If the market eventually collapsed next day and the treasurer could not dispose of the

security, the treasury will face liquidity risk resulting in delay in repayment of the call

borrowings.

Treasury is generally prepared to meet known events, such as due date for a money

market loan or for a deposit. However, some unforeseen events may arise, for

example, premature payments of a large deposit which would penalize the bank’s

liquidity. The treasury needs to have a contingency plan to meet any liquidity crisis.

Interest Rate Risk: Interest rate risk refers to rise in interest cost or resulting in fall

in asset prices that erodes the business profits. The interest rate risk is present when

there is a mismatch between assets and liabilities. For example, the incremental

deposit fund of a bank, say with an average maturity of 1-year to the extent that they

are not lent, are invested by treasury, say, in 3-month T-bills. If the yield on bills

changes every 3-months, does not match with the cost of the deposits, the net


earnings of the bank will be negative. Moreover, treasury can borrow at a high rate of

interest, higher than the profit it expects to earn from securities trade.

Exchange Rate Risk: Foreign exchange risk also known as exchange rate risk or

currency risk is a financial risk posed by an exposure to unanticipated changes in the

exchange rate between two currencies. Foreign exchange risk refers to likely loss due

to variations in earnings on account of changes in assets and liabilities labeled in

foreign currency. The implementation of open positions, monitoring forward maturity

positions, studying exchange rate movements, forecasting relevant currency rates etc.

are some of the strategies employed for managing foreign exchange risk.

Each bank has their FX inflows and outflows resulting from the export, import or

remittance proceeds which lead to a Net Open Position (NOP) for the bank. The

efficient NOP management is necessary for prudent risk and profitability

management. Market volatility may expose the banks to exchange gain or loss. The

following limits help the banks to monitor and control the risk exposure effectively.

Exchange Risk and Profitability

Intra-Day Limit: Banks fix an intra-day limit for the dealing room operations

which determines how much position a dealer may take within the day’s

operational period. However, if the dealer needs to exceed the intra-day limit,

they may seek for the management’s approval beforehand.

Overnight Limit: Banks have overnight limit for open position in each currency.

This limit is strictly maintained by the dealers as well monitored by the mid

office. This limit is always set in a conservative manner and is lower than the

intra-day limit. Mid office check the overnight position before the dealers start a

trading day.

Stop-Loss Limit: With a net open position, a bank is exposed to the rate

movement and it tends to suffer loss from the open position when the rates move

adversely. Though the dealers are free to deal within their approved dealing limit

as well as the NOP limits according to their view or trading strategy, they have

Stop-Loss limit. This limit asks the dealer to get out of a certain position when

they hit a certain amount of loss on a given day. It helps the dealer as well as the

management to manage the risk as well as profitability of a certain position in an

effective and efficient manner.

http://en.wikipedia.org/wiki/Financial_risk

http://en.wikipedia.org/wiki/Exchange_rate

http://en.wikipedia.org/wiki/Currency


VAR Limit: This limit needs to be checked by the dealers as well as mid office

each day to see the profit or loss impact of the open position due to currency

movement. It is calculated through mark-to-market calculation of the position.

Before taking any new position, the dealer needs to be sure that with the new

position they will remain within approved VAR limit.

Counterparty Risk:

Before dealing with any inter-bank counterparty, the dealer must check the

counterparty limit approved by the management. Mid office also checks if there

was any breach of limit while doing a transaction with any particular

counterparty. This helps the bank to manage any undue exposure on the

counterparties effectively.

In Bangladesh, risk management practices are limited to some familiar measures and

in some cases; they are limited to comply with the Bangladesh bank’s regulation,

which is not the risk management practices in true sense. However, the risk

management practices and the measures of risk which is followed by the banks in

Bangladesh are summarized below:

To manage foreign exchange risk in a volatile market scenarios, banks set

individual dealers limit along with foreign currency daily turn-over limit, daily

placement limit, squaring off net position, limit intraday exposure, stop loss limit.

To manage market risks, banks calculate standard deviation and Value at Risk.

Banks perform Gap analysis and follow the prudential limit of individual and

cumulative gap in different time buckets in order to manage liquidity risk.

In some cases, they maintain surplus liquidity.

Rate Sensitive Gap and Duration analysis are used to manage the risk that arises

from the fluctuation of interest rate.

Establishment of counter party limit and monitoring performance of the counter

parties.

Hedging through currency swap, interest rate swap and option.

To understand the market, banks monitor, analyze and forecast the market trend.

In order to reconcile the transactions and minimize the risk arises thereto, banks

set up independent mid-office, front-office and back-office.

Conducting regular ALCO meeting for strategic decision making to manage

overall riskiness of banks.

Integration among foreign exchange, money market and fixed income securities

dealers i.e., application of the concept of Integrated Treasury management.


5. Trend and Pattern of Treasury Products During 2011

Overnight Money Market

The weighted average call money rate was volatile through the year 2011 due to high

liquidity crisis in the banking sector. The rate reached to highest ever in December

2010 (to 33.54 percent against 3.33 percent in July 2010) due to increase in demand

for fresh fund in the inter-bank market following the increase in CRR in mid-

December 2010. Bangladesh Bank raised both CRR and SLR by 50 basis points to

5.5 and 18.5 percent respectively in mid-May 2010 and further increased the rates to

6.0 percent and 19.0 percent respectively in mid-December 2010 to contain

inflationary pressure. Following the new CRR rule, the overnight call money rate

picked up to 62.5 percent on 14 December, 175.0 percent on 15 December, and

further to 190.0 percent on 19 December 2010- an all-time high. However, the

weighted average call money rate declined after December, 2010 to 11.64 percent in

January 2011 and in December, 2011 it stood at 17.15 percent. Although the rate was

stable in the first half of 2011, higher volatility in the overnight money market was

observed in the second half. This may be the outcome of the government’s excessive

borrowing from the banking system to meet the budget deficit, which creates liquidity

crunch and causes the market to become relatively volatile. As a result, the interest

rate in the call money market rose to double digit (11.16%) in 2011 as compared to

that in 2010 (8.16%). The market remained stable at a tolerable level because of the

timely intervention by the Bangladesh Bank in the market. Moreover, primary dealers

availed of assured liquidity support and special Repo from Bangladesh Bank that

helped to ease the liquidity situation.

Figure 6: Weighted Average Overnight Money Market Rates

Source: Debt Management Department, Bangladesh Bank


Repo and Reverse Repo Operation

Bangladesh Bank arranged Repo auction on a regular basis by which liquidity was

injected in the money market. Repo operations were held by BB to the eligible parties

considering conditional sale of their holdings of treasury bills and treasury bonds with

tenor of 1-day to 7-day. The range of interest rate of accepted bid was 4.5 to 8.8

percent during CY2011. Reverse Repo, by which Bangladesh Bank mopped up

liquidity from the money market, was conducted to maintain desired level of market

liquidity in the system. Reverse repo auctions were insignificant in CY2011.

BB boosted its policy rates repo and reserve repo by 100 basis points to 5.50 and 3.50

percent respectively to maintain monetary and price stability on 15 August, 2010.

After that, BB raised repo and reserve repo rates by 50 basis points to 6.0 and 4.0

percent respectively on 13 March, 2011 and further increased by 25 basis points to

6.25 and 4.25 percent on 27 April 2011. On 15 June 2011, both repo and reserve repo

rates were enhanced one more time to 6.75 percent and 4.75 percent respectively and

again increased to 7.25 percent and 5.25 percent in 5 September 2011.

Government Securities Market

With a view to creating a secondary market of government securities especially,

“Government Bond Market”, Bangladesh government introduced two tradable

government bonds of 5-year and 10-year tenor from 2003. From July, 2007

government started to issue another two bonds of tenor 15-year and 20-year through

primary auctions. At present, those four types of tradable treasury bonds and three

types of treasury bills (91-day, 182-day and 364-day) are being issued through

weekly auctions regularly held in Bangladesh Bank.

To meet the government fiscal (budgetary) deficit, government borrows major portion

of deficit amount through domestic market from primary dealer bank/financial

institutions by regular auctions. Primary Dealer (PD) along with other banks and

financial institutions who maintain current account with Bangladesh Bank are eligible

to participate in the auction of primary issue of T-Bills and T-Bonds till March, 2011.

But from April, 2011 only primary dealers were allowed to participate in primary

auctions as instructed by Bangladesh Bank9. Although other banks/financial

9 DMD Circular No.1, dated 16 March, 2011, DMD Circular No.2, dated 21 June, 2011 and DMD Circular No.3, dated 29 September, 2011


institutions, individuals, institutions, corporate bodies, insurance companies,

authorities maintaining the pension funds and providend funds are also eligible to

participate in the auctions of primary issue through any primary dealers.

Regular auction of T-bills were conducted by Bangladesh Bank as per auction

calendar. In CY2011, the amount of acceptd T-Bills were Tk 25,140 crore including

devolved amount of Tk 670 crore. The amount has significantly increased as

compared to that of 2010 due to high government borrowing. The weighted average

yield of T-Bills of different maturities as on end of December 2011 ranged from 4.97

– 10.00 percent as compared to 2.32 – 5.59 percent as of December 2010.

Table 2: Treasury Bill

(Tk. in Crore)

Tenor

2010 2011

Accepted

Amount

Devolve

ment on

PD's/BB

Outstanding

As on end

December

WAY

Range

(%)

Accepted

Amount

Devolve

ment on

PD's/BB

Outstanding

As on end

December

WAY

Range

(%)

91-Day 1398.30 3201.70 2100.00 2.32-4.65

10375.50 174.50 2700.00 4.97-10.00

182-Day 3614.30 1630.70 2520.00 3.36-4.98

7648.50 301.50 3600.00 5.17-9.25

364-Day 2366.26 2383.74 4750.00 4.08-5.59

7116.42 194.58 7311.00 5.88-10.50

Total 7378.86 7216.14 9370.00

25140.42 670.58 13611.00

Source: MPD, Bangladesh Bank

The T-Bonds were issued at par through yield based multiple price auction to eligible

parties regularly. In CY2011, the amount of accepted T-Bonds was Tk.14,485 crore

including devolved amount of Tk.335 crore. This amount has also significantly

increased due to high government demand in order to finance the budget deficit.

The weighted average yield of different maturities T-Bond has also increased in

CY2011 as compared to that of CY2010 and it ranged from 8.25 – 10.99 percent.


Table 3: Treasury Bond

(Tk. in Crore)

Tenor

2010 2011

Accepted

Amount

Devolvem

ent on

PD's/BB

Outstanding

As on end

December

WAY

Range

(%)

Accepted

Amount

Devolveme

nt on

PD's/BB

Outstanding

As on end

December

WAY

Range

(%)

5-Year 1132.69 1957.31 16862.74 7.8014-

8.0990 5325.00 75.00 20357.54

8.2500-

8.4994

10-Year 1246.45 1763.55 19390.18 8.7500-

9.4500 5337.00 63.00 24790.18

9.3590-

9.5492

15-Year 509.20 890.80 5061.25 8.7400-

9.1056 1858.00 192.00 7111.25

9.1200-

10.9993

20-Year 547.65 632.35 3696.20 9.1100-

9.5598 1965.00 5.00 5666.20

9.6000-

11.4991

Total 3435.99 5244.01 45010.37

14485.00 335.00 57925.17


Major Highlights of the Money Market

The money market was relatively volatile in 2011. The market witnessed a number of

challenges. The major highlights of the money market that happened during 2011 are

summarized in box-6.

Box 6: Major Highlights of the Money Market

The demand of and the rate for call money were very high at the beginning of the year

due to aggressive lending policy by different banks against insufficient deposit fund.

Money market observed continuous liquidity pressure round the year.

Islamic banks suffered severe liquidity crisis throughout the year due to the absence of

Islamic money market. Although a circular was issued by BB in December 2011 to

introduce IIFM, it started its journey from June 2012.

Excessive government borrowing from the banking system (around Tk.29,000 crore)

for financing deficit budget.

Bangladesh Bank introduced Assured Liquidity Support (ALS) and special Repo for

the Primary Dealers (PD) in order to ease the liquidity pressure of the PD banks.

Unhealthy competition among the banks in order to mobilize deposits. This caused the

deposit rate to increase more than 15 percent. Later on, Association of Bankers

Continue


Bangladesh (ABB) reached a conscientious decision to set a ceiling of deposit rate to

12.5 percent.

Bearish capital market penalized the liquidity condition of the money market by stuck

up of the funds of the banks as well as the investors’.

Before 2011, Banks were allowed to maintain their HTM and HFT security in the ratio

of 75 percent (maximum) and 25 percent (minimum), respectively. Bangladesh Bank

changed the holdings of HTM security from 75 percent to 85 percent to minimize the

revaluation loss.

To ease the market liquidity and inflationary spiral, Bangladesh Bank advised the

commercial banks to reduce the Loan-Deposit (LD) ratio to 85 percent.


The Foreign Exchange Market

Effective management of foreign exchange market is very important to achieve target

level of inflation and a desired level of economic growth for a country. Bangladesh

Bank, being the regulator of the banking and financial systems in the country, has

been taking various steps to strengthen its close monitoring of the daily activities of

the financial institutions and adopt necessary measures for creating and sustaining the

momentum in the country's foreign exchange market. An apparent stability of BDT

against USD in the foreign exchange market had been experienced over the last

couple of fiscal years. In CY11, the depreciation pressure on exchange rate of Taka

against USD entailed improvement in competitiveness of Bangladeshi export in term

of large difference between REER based exchange rate and nominal exchange rate.

However, the depreciation pressure on exchange rate of BDT against US dollar was

eased partly by BB’s USD sales from reserve to limit inflationary consequences of

excessive BDT depreciation.

The nominal exchange rate of BDT/USD (mid-value of buying and selling rate) stood

at Tk.80.99 in December 2011 which was Tk. 70.12 in December 2010 reflecting

depreciation of Taka by 15.5 percent. The difference between REER based exchange

rate and nominal exchange rate went up to 6.48 in December 2011 as compared to

2.54 in December 2010 indicating improvement in the competitiveness in nominal

exchange rate.


Figure 7: Movement of Nominal Exchange Rate and REER Based Exchange Rate


The trend in weighted average exchange rate of Taka/US dollar has been depicted in

Figure-8, which reflects that the foreign exchange rate is exhibiting an increasing

trend during the year 2011. In January 2011, it was Tk.71.04, whereas, it rose to

Tk.79.68 in December in the same year. Therefore, the figure shows a gradual

upward increasing trend in the foreign exchange market.

Figure 8: Movement of Weighted Average Exchange Rate

Source: Economic Trends, Bangladesh Bank


However, volatility is a major challenge in any financial market including in the

foreign exchange market. Bankers need to forecast the volatility in the exchange rate

to hedge against the foreign exchange risk. Figure-9 below shows the volatility that

was present in the foreign exchange market during the year 2011.

Figure 9: Monthly Volatility of the Exchange Rate

Source: Authors’ Own Calculation

From the figure above two highly volatile periods can easily be identified, which is

April 2011 and November 2011. The volatility at the end of December is still

persistent.

DIBOR as a Reference Curve

DIBOR is an interest rate at which banks can borrow and lend funds in marketable

size among them. DIBOR is fixed every day for reference purpose. It indicates a key

interest rate level used for setting rates on loans and floating rates on securities and

for calculating cash settlement of derivative instruments of certain interest rates.

DIBOR is essential for creating a short-term money market, which is required for a

liquid and active foreign exchange forward market. This initiative opened new

avenues for further foreign investments in Bangladesh.

The study reveals that DIBOR curve is the preferred curve (70 percent of the banks)

for two-way pricing of a swap transaction in Bangladesh. However, this rate is not

always representative of actual interbank rates.


Major Highlights of the Forex Market

The forex market was also comparatively volatile in 2011. The market faced a

number of challenges. The major highlights of the forex market are summarized in

box-7.

Box 7: Major Highlights of the Forex Market

The volatility of exchange rate was very high during the period. The rate of USD/BDT

depreciated around 15.5 percent and reached to record high of Tk.80.99 in December

2011.

Foreign exchange reserve declined to USD 9,634.90 million in December 2011 from

USD 11,174.40 million in the previous year.

A derivative product particularly USD/BDT Option had been introduced for the first

time by a foreign bank.

USD/BDT Swap transaction volume increased significantly from the previous year.

LC opening volume increased by about USD 2.6 billion in 2011, which caused to

increase the demand for USD.

Aggressive foreign trade, i.e. import business by banks not sufficiently backed by in-

house inflow of foreign exchange fund.

The Fx interbank transaction in Bangladesh in accordance with the product category is

Spot 90 percent, Swap 9 percent and Forward 1 percent.

Although there is no regulatory restriction, USD/BDT trading is not encouraged by the

regulator. As a result market liquidity is not ensured.

Islamic banks are planning to introduce a new derivative product in the name of

Islamic forward, which is yet to be approved by the Shariah Board of Islamic Banks.


Central Bank’s Initiatives during the Year

Bangladesh Bank was very active throughout the year in order to manage both money

market and forex market. The market was in severe liquidity pressure and central

bank undertook a number of steps to ease the crisis in 2011. They announced

contractionary monetary policy, advised the commercial banks to reduce the Loan-

Deposit ratio, introduced the selling of T-bill and T-bond only through the primary


dealers, provided Assured Liquidity Support (ALS) and special REPO to the primary

dealers are few of them. Again central bank sold the USD from time to time in the

market in order to ease the demand pressure of foreign currency, provided OD facility

to the state-owned commercial banks for their LC payments against oil import for

BPC, keeping stability on the price and liquidity of foreign currency in the interbank

market on spot, forward, and swap through moral suasion. All these initiatives were

proved to be effective to manage the market.

6. Challenges and Recommendations

Overall Market Liquidity

Figure-6 shows that the money market was relatively volatile in the second

half of 2011. This volatility is partly attributed to heavy government

borrowing from the banking system to finance budget deficit, LC payment of

BPC by the State Owned Commercial Banks (SOCB) against oil import, and

recent stock market crash. These events adversely affected the market

liquidity. For example, the SOCB, who was the lender (supplier) in the

market, became borrower (demander) of the fund causing high uncertainty in

the market. Moreover, when the market is in supply shock, every bank

becomes borrower and vice-versa. These add further uncertainty to the overall

market liquidity.

Liquidity Dearth of PDs

From April 2011 only Primary Dealers (PD) were allowed to participate in the

primary auctions of government securities as instructed by Bangladesh Bank.

After accepting the bid placed by the PDs, BB devolved the remaining amount

(targeted amount minus accepted amount) among the PDs. Being a primary

dealer, these banks are forced to finance the government securities, which puts

them in a serious liquidity dearth. The maturity of these securities ranges from

91-day to 20-years. Once they are exposed to longer-term securities (for

example 15-years or 20-years), their fund remain illiquid for that period as

there is no secondary bond market for diluting these securities.

This devolvement process is a regular event and therefore the holdings of the

government securities of the PDs are increasing after every auction date,

resulting in a severe liquidity crisis faced by the primary dealers.


Low Yield Vs. High Cost of Borrowing

Primary Dealer banks are investing a significant portion of their fund in

government securities. In some cases, Bangladesh Bank devolved huge

amount of treasury securities to the PDs. To manage/arrange such funds, PD

banks are bound to borrow from the market at the rate which is higher than the

yield of the security. As a result, the PD banks are incurring significant loss,

which hampers the sustainability of the bank.

Deterring Core Banking Activity of PDs

The core activity of a bank is to mobilize deposit and lending it to different

sectors of the economy. In addition, PD banks invest a portion of their fund in

the government securities. Therefore they hold more than sufficient liquid

asset, which provides low yield and the fund remain invested for a longer

period of time. Thus their lending capacity in the productive sector

diminishes, which ultimately hampers not only the growth of the bank but also

the growth of the economy.

Restructuring Assured Liquidity Support

According to the recent circular issued by the Bangladesh Bank, primary

dealers are allowed to enjoy ALS facility for a period of 75 days against their

holdings of T-Bills and T-Bonds. This 75 days liquidity support is the same

for both bills and bonds. Considering the maturity period of bills and bonds,

the facility is very much lucrative for the bills but not for the bonds. Under the

above circumstances, ALS facility especially for the T-bonds should be

extended by restructuring the existing arrangement.

Limited Products

There are few money market instruments available in Bangladesh though a

number of diversified products are found in the neighboring countries.

Because of the absence of a good number of products, the market become

unattractive to the market participants and hence became illiquid. Therefore,

introduction of new and diversified products are a prerequisite for ensuring a

vibrant and liquid money market.


Limited Market Participants

In Bangladesh, money market participants are limited to banks and financial

institutions. They basically participate in the market to execute need based

transactions. Therefore, in the absence of heterogeneous participants, the market

becomes thin, exhibits low level of liquidity and lacks in depth. So authority

may take necessary initiatives for giving permission to blue chip companies to

participate in the money market to ensure market liquidity and depth.

Lack of Product Knowledge

Usually, treasury products are complex and difficult to understand particularly

derivative products. To manage the risk of these products, sophisticated risk

management knowledge is required, which is almost absent in our country.

Therefore, banks are required to train up skilled risk management personnel,

who understand the complex features of the product and can handle the

technical aspects of the products. Recent global financial crisis suggests that

regulator should understand the complexity and operational procedures of

derivative products as well to monitor the market.

Lack of Skilled Treasury Personnel

The review finds that there is acute dearth of bankers who are well-conversant

with the treasury operations. This is one of the biggest hindrances for the

development of the market. The commercial banks in Bangladesh are running

after a few expert treasury people but no significant initiatives for developing

well-educated personnel for the treasury is evident. That leads to taking

challenging steps required for the growth of this market. This problem calls

for due attention from all the stakeholders including Bangladesh Bank.

Weak Forecasting

The successful treasury operation depends on the accurate forecasting of

market variables (for example, interest rate, exchange rate, inflation, etc.) as

these are very crucial for managing market risk. The adverse forecasting of

these market parameters will have a serious impact on the risk management

particularly in gap and duration analysis, which eventually jeopardize the

bank’s position by reducing the equity values, so the balance sheet. Moreover,

wrong forecasting can lead the bank management to take wrong decision

regarding the investment exposure in the market. Although accurate

forecasting is essential from risk management point of view, bank


management still is not seriously considering the issue. Therefore, skilled

personnel who understand the sophisticated model of forecasting especially

ARCH, GARCH etc. are required to perform treasury operation efficiently.

Unavailability of Two-way Quotation

In Bangladesh, two-way quotation is not available. Although there is no

restriction from the regulator in this regard, traders are least interested to make

two way quotations. The big players also do not take the lead of market

making. The reason behind it is risk averse attitude of the management and

traders as well as lack of skill set for managing a position in a highly volatile

market. This results in the foreign exchange market to become illiquid,

shallow, and significantly lower volume of trade. Central bank should

encourage the market participants to come forward for making two-way

quotation in order to ensure a vibrant and efficient foreign exchange market.

No Reference Rate/ Benchmark Curve

There is no unique reference rate or benchmark curve for quoting a forward

price. A benchmark reference rate is essential for proper functioning of the

market. Dealers are quoting the rate based on either DIBOR curve or T-bill

curve in Bangladesh. Survey results of the study observed that 70 percent

dealers prefer DIBOR curve and 30 percent prefer T-bill curve for quoting

two-way pricing of a swap transaction. But the problem is that those who

prefer DIBOR are not actually using this as a reference rate. As a result, the

forward market is not developing due to lack of volume traded in DIBOR

curve. The price available is quite wide and lacks depth in volume. Initiatives

should be taken to activate a single reference rate curve.

Absence of Derivative Instruments

Figure-9 shows that high volatility is prevailing in the forex market. In order

to hedge this volatility, derivative is a crucial instrument which is used

globally by the bank managers. In Bangladesh, such type of hedging

instrument is almost absent and no initiatives have been taken by the

Bangladesh Bank yet. However, to handle these instruments, skilled and

knowledgeable professionals, good understanding of the complex risk

management procedure of such instruments, well developed infrastructures

etc. are required. Survey result of this study indicates that, the banking system

of Bangladesh is lagging behind in this context, which is considered as a


major challenge of introducing such type of products. Moreover, the

preparedness of the regulator is also very crucial for performing the watchdog

role in this regard. Therefore, this may not be the right time for introducing

derivative instruments in Bangladesh.

Absence of Secondary Bond Market

Bond market plays an important role in the financial market to stimulate

economic development of a country as it facilitates long term financing

requirement to real sector. There is no secondary bond market in Bangladesh

in the sense it implies. That is why the bond market of Bangladesh still in a

nascent stage. Thus, it affects the liquidity of the overall financial market.

Therefore, the banks, especially PD banks, are suffering from severe liquidity

crisis, which they could have minimized in the presence of an active and

vibrant secondary bond market. Survey result of this study indicates that in

order to develop the active secondary bond market some measures need to be

considered such as construction of the benchmark yield curve for determining

the market rate of interest, a pool of fund like provident fund, pension fund,

superannuation fund, gratuity can be created to invest in the government

securities, the existing cap (30 percent of the fund) of investment in

government securities of life insurance companies need to be restructured.

Issuance of Sovereign Bond

Bonds issued by national governments in foreign currencies are normally

referred to as sovereign bonds. These bonds are very useful instruments for

financing government’s budget deficit. At present, government is heavily

relying on the banking sector to finance their budget deficit. In FY 2011-12,

government borrowed around Tk 29,000 crore against their budget of

Tk.19,000 crore from the banking system and in the current FY government is

planning to borrow Tk 23,000 crore from the banking system. This excessive

borrowing by the government is not only putting huge liquidity pressure on

the banking system but also creates crowding out effect in the economy.

Therefore, the issuance of sovereign bond can resolve the problems.


REFERENCES

Bangladesh Bank (2002), Core Risk Management Guideline on Asset Liability

Management, Dhaka.

Bangladesh Bank (2002), Core Risk Management Guideline on Foreign Exchange

Risk Management, Dhaka.

Bangladesh Bank, Economic Trends, various issues.

Bangladesh Bank (2011), Monetary Policy Review, Vol IV, No. 1, October, 2011.

Charro, A.M. & Ortiz, J.F. (1996), “La función de tesorería en la empresa: banca

electrónicay cash management”, Boletín de Estudios Económicos, 51(157), April, pp.

129-164.

Chastain, C.E. (1986), “Integration of Cash Management”, Business Horizons, 29(6),

pp. 79-84.

Hillier, D (2003), “Treasury and Risk Management in the Emerging Markets”,

Unpublished Book.

IIBF-Indian Institute of Banking and Finance. (2006), “Theory and Practice of

Treasury and Risk Management in Banks”, Mumbai.

Kumar, A., D.P. Chatterjee, C. Chandrasekhar, D.G. Patwardhan. (2005), “Risk

Management”, Indian Institute of Banking and Finance, McMillan, Mumbai.

López, F.J. (2003), “Manual de cash management”, Cómo Obtener Beneficios

Manejando Major Su Dinero, 4th edition, Deusto, Bilbao.

Mishkin, F.S. and S. Eakins. (2008), “Financial Markets and Institutions”, Prentice

Hall of India.

Rose, P.S. and S.C. Hudgins. (2010), “Bank Management and Financial Services”,

McGraw-Hill International Edition.

“Treasury Operation Manual” of different banks.

www.bangladesh-bank.org, accessed on June 22, 2012.

www.wikipedia.com, accessed on June 20, 2012.


Paper Five

Internal Control and Compliance

of Banks

Md. Mohiuddin Siddique1

Sk. Nazibul Islam2

Md. Alamgir3

Md. Shahid Ullah4

Md. Mahabbat Hossain5

Amzad Hossain6

1 Associate Professor and Director (DSBM) of Bangladesh Institute of Bank Management (BIBM) 2 Faculty Member (on Deputation) of Bangladesh Institute of Bank Management (BIBM) 3 Assistant Professor of Bangladesh Institute of Bank Management (BIBM) 4 Assistant Professor of Bangladesh Institute of Bank Management (BIBM) 5 Lecturer of Bangladesh Institute of Bank Management (BIBM) 6 Senior Vice President of AB Bank Limited


Internal Control and Compliance of Banks

1. Introduction

The safety and soundness of all individual banks is necessary condition for achieving

financial stability in a country. As bank failures have contagion effect, it is imperative

to ensure a high quality of banking operations of all banks with regard to core risk

management, compliance culture and information disclosure system. There are a

number of independent but mutually reinforcing approaches for ensuring a well

functioning financial sector. These include supervision by the central bank (in some

cases by independent agency), external audit and self-control through Internal Control

and Compliance (ICC). Among these Internal Control (IC) is thought to be the most

crucial and effective way of maintaining a very strong financial condition in terms of

asset quality, profitability, and capital adequacy. That is to say, maintaining a strong

and robust internal control culture and compliance requires much less degree of

supervision by the other agencies or the central bank.

Effective internal control gives reasonable assurance, though not a guarantee, that all

business objectives will be achieved. It extends much beyond the aim of ensuring that

financial reports are reliable. It leads to compliance with laws, regulations, policies,

and the attainment of overall objectives of an organization. Better internal controls

may enable a business to engage safely in more profitable activities that would be too

risky for a competitor without those controls. Effective control does not necessarily

mean more cost rather it may result in cost efficiency. However, internal control does

not evolve naturally; it requires concerted effort on an ongoing basis.

The single greatest factor contributing to operational failures in banks is the lack of

adequate internal controls. When someone speaks of management, someone is

basically speaking of internal controls. Internal controls exist in all banks, at least in

some form of a policy document, even if the implementation of the practice is

ineffectual or nonexistent. Inadequacy in internal controls can contribute to

erroneous decisions which, in turn, can put the organization at an unnecessary level of

risk for an insider to commit fraud or an outsider to be allowed unacceptable client

behavior. Satisfactory internal controls contribute to effective management by both

the bank's board and the bank's management. Assets can be protected and fraud and

financial mismanagement can be prevented by a strong internal control culture within

a bank. Internal controls are the means to ensure compliance with external laws and


regulations as well as with a bank's own internal policies. It is important that risk

management and control are not seen as a burden on business, rather the means by

which business opportunities are maximized and potential losses associated with

unwanted events are reduced. The rapid growth of the risk management function in

banks is based entirely on a solid foundation of satisfactory internal control.

Studies show that having an effective ICC system lead to better attainment of an

organizational objective. To justify the relationship between internal control and bank

performance several studies were conducted and a positive correlation was found.

The Return on Equity (ROE) and Return on Asset (ROA) for commercial banks

doubled between 1991 and 1996 as indicated by a report of US Treasury Department

(Carnell 1997). Studies investigated the characteristics of firms reporting deficiencies

in their internal control environments and found that firms reporting Internal Control

Deficiencies (ICD) are more likely to be weaker financially (Doyle et al. 2005).

Ashbaugh-Skaife et al. (2005) examine the relationship between ICD reporting and

accrual quality and find that firms that reported an ICD during the sample period have

noisier accruals that do not map as well into cash flows as control firms. Ashbaugh-

Skaife, Collins, Lafond, and Kinney (2006) examine whether earnings’ properties

improve subsequent to the disclosure of remediation of ineffective internal controls

and find evidence consistent with this prediction. These results are consistent with

Neimeier’s (2006) as the internal control reports are serving as an important tool to

expose material misstatement in past and current financial statements. Weili &

McVay (2005) found that poor internal control is usually related to insufficient

commitment of resources and inadequacy in the IC of a firm is negatively associated

with profitability.

In some jurisdictions law or regulation may require effective systems of internal

control, with serious penalties for irresponsible failure. The Sarbanes–Oxley Act

(2002) requires Chief Executive Officers and Chief Financial Officers of companies

with listings in the US to certify their assessment of the effectiveness of internal

control over reported disclosures and financial reporting, with penalties of up to $1

million and ten years imprisonment for unjustified certification, or up to $5 million

and 20 years imprisonment for willful breach of the requirements. Japan and Canada

have laws broadly similar to the Sarbanes–Oxley Act. The United Kingdom’s

Combined Code on Corporate Governance (2008) requires that the board of a

company listed on the main market of the London Stock Exchange should, at least


annually, conduct a review of the effectiveness of the group’s system of internal

controls and should report to shareholders that they have done so.

The banking sector of Bangladesh has witnessed a considerable growth in the last two

decades. Starting with a nationalized banking system just after independence our

banking sector is now matured enough due to a series of financial sector reforms

programs. The nature and magnitude of business as well as the degree of competition

in the banking industry has increased manifold in recent years, so is the level of

various risks such as market risk, operational risk, strategic risk, etc. Managing

banking risk, thus, has come to the forefront to the policy makers and top

management of the banks. All these changes lead to making internal control and

compliance as an indispensable management tool to safeguard the overall discipline

of a bank. Considering the paramount importance of IC Bangladesh Bank issued a

guideline on Internal Control and Compliance along with five other core risk

management guidelines in 2003. Observations suggest that the activities of internal

control division is now more scientific and well organized than what it was in recent

past. On this backdrop it might be useful to review various activities of ICC division

of banks in Bangladesh. Keeping this in mind the objectives of the paper are to

review the activities of internal control and compliance department of the banks, to

identify the problem areas as well as success factors ,and finally to suggest some

possible measures for better functioning of internal control and compliance

department of banks.

Methodology

The study reviews the activities of ICC department for the year 2011. It uses both the

primary and secondary data. Primary data have mainly been collected from the ICC

department of banks on the basis of a questionnaire with a combination of open-

ended and close-ended questions. A number of seventeen banks have been selected as

sample banks. The selection of banks was purposive ensuring representations of all

broad categories of banks. The distribution of 17 sample banks is given in Table 1.

Besides the questionnaire, the paper also reflects the opinions of a number of

experienced bankers. Analysis of the data and information found from the

questionnaire has been mainly presented in tabular form. As to the secondary data,

various publications of Bangladesh Bank, Basel guidelines, research articles have

been consulted for preparing this report. As our reference period is 2011, numerical


data has been collected for the year 2011. It needs to be mentioned here that the

issues that we have dealt with are mainly qualitative in nature. As internal control

mechanism refers to a process, the paper is prepared based on the assumption that

there was no significant difference between 2011 and the first part of 2012. The paper

has been finalized after incorporating the discussions and suggestions received in a

review workshop participated by the heads of internal control divisions of different

banks.

Table 1: Sample Distribution of Banks

Bank Category No. of Total

Banks

Sample Banks

No. % of Population

State Owned Bank 4 1 25

Specialized Bank 4 1 25

Foreign Bank 9 1 11.11

Private Banks including Islamic Bank 30 14 46.67

Total 47 17 36.17

The paper is organized in to six sections. After introduction in section I, Section II

discusses conceptual aspects of ICC. Section III presents the regulatory framework of

ICC in the local and global context. The major activities performed by the department

are summarized in Section IV. Section V produces the major part of the study i.e.

review and analysis of the activities of ICC department of banks in 2011. Finally

Section VI identifies a few challenges and puts forward a few recommendations.

Limitations of the Study

We need to be careful in generalizing the observations of the study as the review and

analysis of ICC department’s activity has been done on the basis of 17 banks.

The study could have been more informative and useful if we were to go for more

micro analysis on individual component of ICC such as monitoring, compliance and

internal audit and inspection.

2. Internal Control and Compliance of Banks : Conceptual Framework

Internal control denotes a set of tools directed towards the achievement of

organizational overall objectives. It helps an organization in maintaining its


operational soundness, achieving performance and profitability targets, and

preventing loss of resources. It can also help in ensuring reliable financial reporting

and compliance with relevant laws and regulations. Many organizations try to define

internal control in different ways. One of the widely accepted definitions is given by

the COSO1 which defines IC as “a process effected by the entity’s board of directors,

management and other personnel, designed to provide reasonable assurance regarding

the achievement of objective, the effectiveness and efficiency of operations,

reliability of financial reporting and compliance with applicable laws and

regulations”. It is worth-mentioning here that the Guideline on Internal Control and

Compliance by Bangladesh Bank (BB) defines IC in almost the same way as that by

the COSO.

The King Report2 defines internal control as the tools that provide a reasonable

assurance regarding the achievement of organizational objectives with respect to

(i) effectiveness and efficiency of operations (ii) safeguarding the company’s assets

(iii) compliance with applicable laws, regulations and supervisory requirements,

supporting business sustainability under normal as well as adverse operating

conditions, reliability of reporting and behaving responsibly towards all stakeholders.

The Institute of Internal Auditors (IIA) defines “control” as any action taken by

management, board and the other parties to manage risk and increase the likelihood

that established objectives and goals will be achieved. Banking Advisory Group

defines banking internal control as a process designed to provide a reasonable

assurance regarding the achievement of the objectives with regard to effective,

efficient and secure business operations, safe custody of assets, both own and those

entrusted, integrity, exclusivity and completeness of business and financial data and

reporting, compliance to applicable laws and regulations including internal plans,

procedures and general policies. According to an IMF publication internal control

refers to the mechanism in place on a permanent basis to control the activities in an

1 The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a voluntary private-sector organization, established in the United States, dedicated to providing thought leadership to executive management and governance entities on critical aspects of organizational governance, business ethics, internal control, enterprise risk management, fraud, and financial reporting. COSO has established a common internal control model against which companies and organizations may assess their control systems. COSO is supported by five supporting organizations, including the Institute of Management Accountants (IMA), the American Accounting Association (AAA), the American Institute of Certified Public Accountants (AICPA), the Institute of Internal Auditors (IIA) and Financial Executives International (FEI). 2 King Report on Corporate Governance for South Africa (March 2002), “King II,” Institute of Directors in Southern Africa. “King III” is to be published in 2009.

http://en.wikipedia.org/wiki/United_States

http://en.wikipedia.org/wiki/Business_ethics

http://en.wikipedia.org/wiki/Risk_management

http://en.wikipedia.org/wiki/Fraud

http://en.wikipedia.org/wiki/Financial_reporting

http://en.wikipedia.org/wiki/Financial_Executives_International_%28FEI%29


organization, both at a central and at a departmental level. Internal control consists of

five interrelated components that are presented below:

The control environment sets the quality of an organization, influencing the control

consciousness of its people. It is the foundation for all other components of IC,

providing discipline and structure. Control environment factors include integrity,

ethical values and competence; management philosophy and operating style; the way

management assigns authority and responsibility, and organizes and develops its

people; and the attention and direction provided by the board of directors.

Diagram: ICC and its Components

Every bank faces a variety of risks from external and internal sources that must be

assessed. A precondition to risk assessment is establishment of objectives, linked at

different levels and internally consistent. Risk assessment is the identification and

analysis of relevant risks to achieve the objectives, forming a basis for determining

how the risks should be managed. Because economic, industry, regulatory and

operating conditions will continue to change, mechanisms are needed to identify and

deal with the diverse risks associated with change.

Control activities are the policies and procedures that help ensure management

directives are carried out. They help ensure that necessary actions are taken to address

risks to achievement of the entity’s objectives. Control activities occur throughout the

organization, at all levels and in all functions. They include a range of activities as


diverse as approvals, authorizations, verifications, reconciliations, reviews of

operating performance, security of assets and segregation of duties.

Pertinent information must be identified, captured and communicated in a form and

timeframe that enable people to carry out their responsibilities. Information systems

produce reports, containing operational, financial and compliance related information,

that make it possible to run and control the business. They deal not only with

internally generated data, but also with information about external events, activities

and conditions necessary to informed business decision-making and external

reporting. Effective communication also must occur in a broader sense, flowing

down, across and up the organization. All personnel must receive a clear message

from top management that control responsibilities must be taken seriously. They must

understand their own role in the internal control system, as well as how individual

activities relate to the work of others.

Internal control system needs to be monitored – a process that assesses the quality of

the system performance over time. This is accomplished through ongoing monitoring

activities, separate evaluations or a combination of both. Ongoing monitoring occurs

in the course of operations. It includes regular management and supervisory activities,

and other actions personnel take in performing their duties. The scope and frequency

of separate evaluations will depend primarily on an assessment of risks and the

effectiveness of ongoing monitoring procedures. Internal control deficiencies should

be reported upstream, with serious matters reported to top management and the board.

All the above components altogether can create an effective IC system. The Internal

Control System (ICS) is intertwined with the bank’s operating activities and exists for

fundamental business reasons. IC becomes most effective only when controls are

built into the entity’s infrastructure and are a part of the essence of the enterprise. It is

an integrated process where everyone in an organization has responsibility in

different capacities. The role of management, board of directors, internal auditors and

others are presented in Box 1:


Box-1: Role and Responsibilities of Different Parties

Management: The chief executive officer is ultimately responsible and should own the

system. More than any other individual, the chief executive should uphold integrity, ethics

and other factors of a positive control environment. In a large company, the chief executive

fulfills this duty by providing leadership and direction to senior managers and reviewing

the way they are controlling the business. Senior managers, in turn, assign responsibility

for establishment of more specific internal control policies and procedures to personnel

responsible for their departmental functions. However, in a smaller entity, the influence of

the chief executive, often an owner-manager is usually more direct.

Board of Directors: Management is accountable to the board of directors, which provides

governance, guidance and oversight. Effective board members are objective, capable and

inquisitive. They also have knowledge of the entity’s activities and environment, and

commit the time needed to fulfill their responsibilities. Management may override controls

and fabricated information to the board for enjoying undue benefits. A strong and active

board is often best able to detect and overcome such problems.

Internal Auditors: Internal auditors play an important role in evaluating the effectiveness

of control system. By conducting an extensive audit throughout the year and reporting their

findings in an appropriate manner internal audit team help management to address and

resolve different risks and irregularities in business operation.

Other Personnel: Internal control is, to some extent, the responsibility of everyone in an

organization and therefore should be an explicit or implicit part of everyone’s job

description. Virtually all employees produce information used in the internal control

system or take other actions needed to effect control. All personnel should also be

responsible for communicating upward problems in operations, noncompliance with the

code of conduct, or other policy violations or illegal actions. A number of external parties

often contribute to achievement of an entity’s objectives. External auditors, with an

independent and objective view, contribute directly through the financial statement audit

and indirectly by providing information useful to management and the board in carrying

out their responsibilities. Other stakeholders providing information to the entity useful in

effecting internal control are legislators and regulators, customers and others transacting

business with the enterprise, financial analysts, credit rating agencies, non-government

organizations, and the news media. External parties, however, are not responsible for, nor

are they a part of, the entity’s internal control system.


Internal Audit in Banks

In many banks internal control is identified with internal audit though the scope of

internal control is not limited to audit work only. It is an integral part of the daily

activities of a bank, which on its own merit identifies the risks associated with the

process and adopts measures to combat the same. Internal Audit, on the other hand, is

a part of internal control system which reinforces the control system through regular

inspection. Internal audit basically focuses on strengthening the risk management and

control practices of an organization by providing reasonable assurance to

management and the board about the adequacy and effectiveness of the control

system. There should be an effective and comprehensive internal audit of the internal

control system carried out by operationally independent, appropriately trained and

competent staff specially designated by the management. The significant deficiencies

identified by the audit team should be reported to the board on a periodic basis.

In the past, audit system in banks used to concentrate on transaction testing, testing of

accuracy and reliability of accounting records and financial reports, integrity,

reliability and timeliness of control reports and adherence to legal and regulatory

requirements3. But risk inherent in the process of business and control were mostly

overlooked. Risk-based Internal Audit (RBIA) is a technique that brings risk

orientation in its approach. RBIA tends to identify whether a bank has failed to

consider an important risk factor, economic event or transaction. RBIA assures that

banks have focused on emerging risks that may not yet be well understood or

managed. In order to identify risks, risk based auditor obtains a thorough

understanding of bank’s controls, financial condition, sources of revenues,

expenditures, competition and other factors that affects or may affect the business of

banking. Instead of full-scale transaction testing in all areas, RBIA focuses on risk

identification, prioritization of audit areas and allocation of audit resources in

accordance with the risk assessment. The risk assessment, as an independent activity,

would cover risk at various levels and also in the processes in place to identify,

measure, monitor and control the risks. The objectives of RBIA are to ensure that the

risk faced by the bank are identified, properly assessed and the process followed for

monitoring and control of the risks are effective; to ensure proper allocation of audit

resources and monitoring of activities of the bank according to the risk profile; to help

3 Guidance note issued by Reserve Bank of India on Risk Based Internal Audit on December 27, 2002.


tailoring the audit plan as per the risk assessment; to deepen the scrutiny of areas with

high or increasing risk; identification of potential risks with greater emphasis on role

of mitigation, etc.

3. Regulatory Framework of ICC

The scope, extent of coverage and control environment ultimately depends on the

nature, size and complexity of activity in a bank. However, some common principles

and structures are considered as ideal irrespective of the nature of banks. Bangladesh

Bank (BB) issued a detailed guideline on ICC along with a set of other core risk

management guidelines in 2003 with a view to improving the risk management

capacity of the banks in a uniform manner. There are some other directives of BB in

which the responsibility of ICC has been specified. In global context, we find two

major guidelines issued by Basel committee in the areas of internal control and

internal audit. The following section briefly presents ICC guidelines of Bangladesh

bank and two other Basel documents on internal control and internal audit.

Local Standards

In order to manage the internal control and compliance risk in banks, BB has

provided the banks with a guideline titled “Framework for IC system in Banking

Organizations” that consists of four major parts - (i) internal control policy,

(ii) organization structure, (iii) process guidelines, (iv) internal control process &

compliance process. The first part starts with definition and objectives of internal

control. Responsibility of board of directors and senior management is given

thereafter. Another key issue is formation of a Management Committee (MANCOM)

and an Audit Committee and their function. A detailed BRPD circular was issued in

2002 regarding constitution of the audit committee of board of directors, objectives,

roles and responsibilities of the audit committee. The responsibility of the audit

committee has been fixed in terms of internal control, financial reporting, internal

audit, external audit and compliance with existing laws and regulations. Courses of

action relating to risk recognition and assessment, control activities and segregation

of duties, management reporting system (MIS), monitoring activities and correcting

deficiencies, role of external auditors in evaluating internal control system, regulatory

compliance, establishment of a compliance culture have also been given in this part.


Probable organizational structure and segregation of duties for ensuring effective

internal control system and a suggested separate organizational structure for internal

control department is put in the next section of the guideline. BB has emphasized on

having policy guidelines in major areas of operations. These are credit policy manual,

operation manual, finance and accounting manual, treasury manual, human resource

and internal control manual. Major issues to be covered under each of this manual are

pointed out. For example, credit manual will include risk assessment, credit

authorities, lending guidelines and approval process, documentations and collateral

issues. Internal control process part includes regulations regarding departmental

control function checklist, loan documentation checklist, quarterly operations report,

risk analysis of control functions, monitoring & follow-up, reporting, compliance

process and audit procedures.

Apart from this framework, BB has also given some guiding instructions about

compliance risk management and internal control mechanism in its Risk Management

Guidelines for banks published in February, 2012. In addition to this, internal control

and compliance is covered in supervisory review process of the guidelines of Risk

Based Capital Adequacy for banks.

International Standards

There are two Basel guidelines relating to internal control and internal audit:

framework for internal control systems in banking organizations, and internal audit in

banks and the supervisor's relationship with auditors, which are briefly presented

below.

Basel Guideline: Framework for Internal Control Systems in Banking Organizations

As part of its efforts to address bank supervisory issues and enhance supervision

through guidance that encourages sound risk management practices, the Basel

Committee on Banking Supervision (BCBS)4 issued this framework for the

evaluation of internal control systems. The objective of the framework is to outline a

number of principles for use by supervisory authorities when evaluating banks’

4 The Basle Committee on Banking Supervision is a Committee of banking supervisory authorities which was

established by the central bank Governors of the Group of Ten countries in 1975. It consists of senior

representatives of bank supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy,

Japan, Luxembourg, Netherlands, Sweden, Switzerland, United Kingdom and the United States. It usually meets

at the Bank for International Settlements in Basle, where its permanent Secretariat is located.


internal control systems. In developing these principles, the Committee has drawn on

lessons learned from problem bank situations in individual member countries.

The principles are intended to be of general application and supervisory authorities

should use them in assessing their own supervisory methods and procedures for

monitoring how banks structure their internal control systems. After giving the

background information is section I, the objectives and role of an internal control

framework is set out in Section II, and sections III and IV of the paper elaborates

thirteen principles divided into six groups for banking supervisory authorities to

apply in assessing banks’ internal control systems. Box-2 summarizes the thirteen

principles under six categories.

Box-2: Principles for the Assessment of Internal Control Systems

Management Oversight and the Control Culture (Principle 1, 2 & 3): The board of

directors is ultimately responsible for ensuring that an adequate and effective system of

internal controls is established and maintained. Senior management should have

responsibility for implementing strategies and policies approved by the board. The board of

directors and senior management are responsible for promoting high ethical and integrity

standards, and for establishing a culture within the organization.

Risk Recognition and Assessment (Principle 4): An effective internal control system

requires that the material risks that could adversely affect the achievement of the bank’s

goals are being recognized and continually assessed.

Control Activities and Segregation of Duties (Principle 5 & 6): Control activities should

be an integral part of the daily activities of a bank. An effective internal control system

requires that there is appropriate segregation of duties and that personnel are not assigned

conflicting responsibilities.

Information and Communication (Principle 7, 8 & 9): An effective internal control

system requires that there are reliable information systems in place that cover all

significant activities of the bank. It also requires effective channels of communication to

ensure that all staff fully understand and adhere to policies and procedures affecting their

duties and responsibilities and that other relevant information is reaching the appropriate

personnel

Monitoring Activities and Correcting Deficiencies (Principle10, 11 & 12): The overall

effectiveness of the bank’s internal controls should be monitored on an ongoing basis.

Internal control deficiencies should be reported in a timely manner to the appropriate

(Continued)


management level and addressed promptly. Material internal control deficiencies should be

reported to senior management and the board of directors.

Evaluation of Internal Control Systems by Supervisory Authorities (Principle 13):

Supervisors should require that all banks, regardless of size, have an effective system of

internal controls that is consistent with the nature, complexity, and risk inherent in their on-

and off-balance-sheet activities and that responds to changes in the bank’s environment and

conditions.

Basel Guideline: Internal Audit in Banks and the Supervisor's Relationship with

Auditors

Basel Committee on Banking Supervision has given this guideline for better internal

audit practices in banking organizations. In this guideline, audit has been defined by

BCBS defines as “Internal auditing is an independent, objective assurance and

consulting activity designed to add value and improve an organization’s operations.

It helps an organization accomplish its objectives by bringing a systematic,

disciplined approach to evaluate and improve the effectiveness of risk management,

control, and governance processes.” Advising senior management on the

development of internal controls is often a cost-effective way of ensuring that

management makes an informed decision when controls need to be introduced.

However, other forms of advising or consulting should be ancillary to the basic

function of internal audit, which is an independent appraisal function established

within the bank to examine and evaluate its internal control systems, including

controls over financial reporting. After this conceptual discussion, the framework has

given detailed picture of objectives and tasks of the internal audit function, principles

of internal audit, scope of activity, the bank’s internal capital assessment procedure,

functioning of internal audit, and management of the internal audit department. The

relationship of the supervisory authority with the internal audit department and with

the external auditor, the relationship of the internal auditors and the external auditor,

Audit Committee and its definition, composition; powers and functioning,

outsourcing of internal audit – its definition, outsourcing of internal audit activities in

small banks have also been discussed in the guideline. The following box compiles

and presents the key points of twenty principles (Box-3).

Box-2: (Continued)


Box-3: Principles of Internal Audit

Objectives and Tasks of the Internal Audit Function (Principle 1, 2 & 3): The bank’s

BOD has the ultimate responsibility for ensuring that senior management establishes and

maintains an adequate and effective system of internal controls. At least once a year, the

BOD should review the internal control system and the capital assessment procedure.

Internal audit is part of the ongoing monitoring of the bank's system of internal controls

and of its internal capital assessment procedure.

Permanent Function – Continuity (Principle 4): Each bank should have a permanent

internal audit function. In fulfilling its duties and responsibilities, the senior management

should take all necessary measures so that the bank can continuously rely on an adequate

internal audit function appropriate to its size and to the nature of its operations.

Independent Function (Principle 5): The bank’s internal audit function must be

independent of the activities audited and must also be independent from the everyday

internal control process.

Audit Charter (Principle 6): Each bank should have an internal audit charter that enhances

the standing and authority of the internal audit function within the bank.

Impartiality (Principle 7): The internal audit function should be objective and impartial,

which means it should be in a position to perform its assignments free from bias and

interference.

Professional Competence (Principle 8): The professional competence of every internal

auditor and of the internal audit function as a whole is essential for the proper functioning

of the bank’s internal audit function.

Scope of Activity (Principle 9): Every activity and every entity of the bank should fall

within the scope of the internal audit.

The Bank’s Internal Capital Assessment Procedure (Principle 10): Within the framework

of the bank’s internal capital assessment process, internal audit should carry out regularly

an independent review of the risk management system developed by the bank to relate risk

to the bank’s capital level and the method established for monitoring compliance with

internal capital policies.

Working Methods and Types of Audit (Principle 11): Internal audit includes drawing up

an audit plan, examining and assessing the available information, communicating the

results, and following up recommendations and issues.

(Continued)


Management of the Internal Audit Department (Principle 12): The head of the internal

audit department should be responsible for ensuring that the department complies with

sound internal auditing principles.

The Relationship of the Supervisory Authority and the Internal Audit Department

(Principle 13, 14 &15): Bank supervisors should evaluate the work of the bank’s internal

audit department and, if satisfied, can rely on it to identify areas of potential risk.

Supervisory authorities should have periodic consultations with the bank’s internal auditors

to discuss the risk areas identified and the measures taken.

The Relationship of the Internal Auditors and the External Auditors (Principle 16):

Supervisory authorities should encourage consultation between internal and external

auditors in order to make their cooperation as efficient and effective as possible.

The Relationship Between the Supervisory Authority and the External Auditor

(Principle 17): Work performed for a bank’s supervisory authority by an external auditor

should have a legal or contractual basis. Any task assigned by the supervisory authority to

the external auditor should be complementary to his/her regular audit work and should be

within his/her competence.

Cooperation among the Supervisory Authority, the External Auditors and the Internal

Auditors (Principle 18): Cooperation among the supervisor, the external auditor and the

internal auditor aims to make the work of all concerned parties more efficient and

effective. The cooperation may be based on periodic meetings of the supervisor, the

external auditor and internal auditor.

Audit Committee (Principle 19): The creation of a permanent audit committee is a solution

to meet the practical difficulties that may arise from the board of directors’ task to ensure

the existence and maintenance of an adequate system of controls. In addition, such a

committee reinforces the internal control system and the internal and external audit.

Therefore, banks are encouraged to set up a permanent audit committee. Banks’

subsidiaries should also consider the appropriateness of setting up an audit committee

within their board of directors.

Outsourcing of the Internal audit (Principle 20): Regardless of whether internal audit

activities are outsourced, the board of directors and senior management remain ultimately

responsible for ensuring that the system of internal control and the internal audit, are

adequate and operate effectively.

Box-3: (Continued)


4. Major Activities Performed by the ICC Department

The main function of Internal Control & Compliance (ICC) is risk identification of

various activities of a bank. It verifies whether the control policies and procedures are

being complied with. ICC continually recognizes and assesses all of the material risks

that could adversely affect the achievement of the bank’s goals. The risk assessment

by internal control focuses more on compliance with regulatory requirements, social,

ethical and environmental risks that affect the banking industry.

The head of the internal control is responsible for the both compliance and control

related tasks which include compliance with laws and regulation, audits and

inspection, monitoring activities and risk assessment. The head of internal control

unit should have a reporting line with the bank’s board. The audit committee of the

board can be the contact point for the internal control unit. This unit must also have a

reporting line with the Managing Director (MD) of the bank. The organization

structure for the internal control unit is based on the basic tasks that are to be

performed by this department. Depending on the size of the bank and its requirement

this may vary. The ICC comprises the following three units-Internal Audit &

Inspection Unit, Monitoring Unit and Compliance Unit.

The audit team of the ICC assesses the effectiveness of the internal control system of

the bank through periodic internal audit. A bank may have different sections within

this team responsible for carrying out specific tasks. For instance, a bank may have a

special audit section responsible only for credit inspection. Each year the head of

internal control will set out an audit plan for the year approved by the MD and should

be agreed upon by the Audit Committee. This should be a risk based plan where

sensitive areas will be given priority. The significant deficiencies identified during

audit should be notified to the appropriate level and significant audit findings should

be reported to the top management. At the end of the year there should be a summary

report on the audit findings and corrective actions taken should be forwarded to the

Audit Committee and the MD. Based on the review of monitoring reports the audit

team should also conduct surprise check on the branches where regular gaps are identified.

The monitoring unit will be responsible to monitor the operational performance of

various branches. They will collect relevant data and analyze those to assess the risk

of individual units. In case they find major deviations they will recommend to the

internal control head for sending audit & inspection team for thorough review.

The Internal Control Team (ICT) will review the Quarterly Operations Report (QOR)


of branches and exceptions report (if any). The internal control team will also instruct

the branch / unit to rectify the exception and report the same. If deemed necessary the

ICT will instruct the Audit & Inspection Team (A&IT) to carry out an inspection on

the specific deviation. Depending upon the gravity of the deviation the ICT will

report the matter to the MD with a copy to the Audit Committee for taking necessary

action and rectification. A copy of the loan documentation checklist would be sent by

each branch / unit to the ICT, who will review the same. On a quarterly basis ICT will

submit a report to the MD/Audit Committee on the nature of the discrepancies in

credit documentation. ICT will prepare an annual report on the health of the bank to

be submitted to the MD and the Audit Committee for onward submission to the Board

of Directors.

The compliance unit of ICC will be responsible to ensure that bank complies with all

regulatory requirements while conducting its business. They will maintain liaison

with the regulators at all level and notify the other units regarding regulatory changes.

If required, this unit would contact regulatory authorities for proper clarifications on a

particular issue and notify the concerned departments accordingly. If any major

deviation is identified by the regulatory authority they must ensure that the Audit

Committee of the Board is also notified along with the senior management of the

Bank. Major issues to be considered for proper functioning of ICC include

commitment from branch and divisional heads, standard operating process, regular

discussion at management level to review compliance, adequate manning of ICCD,

and appointment of experienced officers in the technical areas. As a part of the study,

views of ICC division have been taken as regard to the major tasks that are performed

by audit & inspection, monitoring unit, and compliance unit. These are summarized

in Box-4.


Box-4: Major Tasks of ICC Department

Audit & Inspection unit

Preparing annual action plan and conducting audit.

Conducting audit periodically/surprise and checking cash and other valuables.

Detecting deviations in compliance and preventing fraud and forgeries.

Ensuring reliability of accounting data and reporting to proper authority.

Examination of documents and books of account and evaluating branch efficiency.

Implementing and following up the report.

Implementation of Shariah Principles.

Monitoring unit

Identifying risk areas, risk grading and assessing the health of bank.

Establishment of monitoring mechanisms.

Analyzing various reports, documents and check list.

Reviewing and monitoring operational performance.

Notify regulatory changes to the related departments.

Compliance unit

Ensuring compliance of regulatory requirement and Bangladesh Bank inspection

reports, internal audit reports, etc.

Compiling all relevant circulars and guidelines and maintaining strong liaison with

regulatory authorities.

Timely dissemination of all regulatory updates and establishing compliance

culture.

Reviewing all inspection reports and proactive review of high risk process.

Providing training & guidance on regulatory issues.

5. Review and Analysis of the Activities of ICC Department-2011

As was mentioned in the methodology, we have collected information from seventeen

banks through a structured questionnaire (Appendix). The questionnaire was finalized

after visiting the ICC department of a few banks and getting a fair idea about the ICC

department. All the questions have been covered under four different categories with

regard to general features of ICC department, performance objectives, information


objectives, and compliance objectives. The review team visited the banks for having

discussion with the ICC department regarding the questionnaire when it was required.

Data collection period was February-May 2012. It may be noted that we could not

ensure getting the reply of all the questions from all the sample banks. Findings of the

survey result have mainly been presented in tabular form. We have also used some

boxes and described verbally some findings of the study when it was suitable to do so.

Table 2: Establishment of ICC Department in Banks

Year Number (%)

Before 2003 1 5.88

2003 – 2005 8 47.06

2006 – 2008 5 29.41

2009 - 2010 2 11.76

After 2010 1 5.88

Source: Survey result

Graph 1: Establishment of ICC Department

5.88

47.06

29.41

11.76

5.88

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

Before 2003 2003 – 2005 2006 – 2008 2009 - 2010 After 2010

Ban

ks (

%)

Year of Establishment of ICCD

Source: Survey result

Table 2 shows the year of establishment of ICC department. We have found some

variations in the name of the department with the most common one as Internal

Control and Compliance Division. It reveals that most of the banks (47.06%) have

established ICC Division in between 2003-05 which may be connected with the

issuance of Bangladesh Bank guidelines on ICC in 2003. One good thing about our

banking sector is that all the banks have their own internal policy in written and


94.12% of the banks have separate organizational structure for ICC operations.

However, it was found that 70.59% of the banks have never updated their ICC policy.

But, 40% banks do not have any mechanism to evaluate the performance of the unit.

Internal control operations are carried through the head office and other units in about

18% banks (Table 3).

Table 3: ICC Policy and its Structuring

Issues Response

Yes (%) No (%)

Is there any separate IC (Internal Control) organizational structure? 94.12 5.88

Is there any additional ICC unit other than Head Office? 17.65 82.35

Is there any own ICC policy guideline in written? 100 0

Did the bank review the ICC policy 29.41 70.59

Do you have any mechanisms to evaluate the performance of ICC

Dept.?

60 40

Source: Survey result.

Having adequate manpower is prerequisite for the proper functioning of ICC

department. We have tried to find out the divergence between approved manpower

and actual strength of ICC division. Some banks reported that there was not any fixed

number of manpower for ICC division. 35.29% of banks did not report any gap in

employee. Rest of the banks had varying degrees of deviations between the approved

and actual manpower among the banks as shown in the following table and graph.

Table 4: Shortfall of Actual Manpower from Approved Manpower

No. of Banks Banks (%)

Less than 10% 1 5.88

10% to less than 20% 4 23.53

20% to less than 30% 3 17.65

30% to less than 40% 1 5.88

40% and Above 2 11.76



Graph 2: Shortfall of Manpower of ICC Department

5.88

23.53

17.65

5.88

11.76

0

5

10

15

20

25

Less than 10% 10% to less than 20%

20% to less than 30%

30% to less than 40%

40% and Above

Ban

ks (

%)

Shorfall of Manpower

Tasks and duties are found to be perfectly assigned, delegated and segregated in all

the banks. All the banks have reported that there was no conflicting responsibility of

employees working in ICC. 29.41% and 11.7% banks had specific job requirements

and separate transfer policy for ICC department respectively. A substantial number of

banks (58.82%) have training policy targeting ICC. Adequacy of manpower for ICC

division can be assessed by looking at branch per employee. Although it is difficult to

think of any benchmark in this regard, we see large variations among the sample

banks in terms of branch per employee of the department. About 53% banks had

maintained 2 to 4 branches per employee while one of the bank’s branches per

employee ratio was as high as 27.65% (Table 6). As regards to the training about 53%

banks arranged departmental training for their employees with a frequency of 2 to 9.

The rest of the banks did not conduct such training.

Table 5: Job Specification and Segregation in ICC Department

Aspect Response

Yes (%) No (%)

Whether the tasks of each person of this department are segregated? 100 0

Are the duties assigned to specific employees? 100 0

Is there any conflicting responsibility of any person in ICC? 0 100

Is required authority delegated to perform segregated duty? 100 0

Do you have job description of each employee in ICC Dept.? 100 0

Is there any special job requirement for posting in this Dept.? 29.41 70.59

Is there any separate transfer policy for employees of ICC Dept.? 11.7 88.24

Is there any policy for ICC Training? 58.82 41.18



Table 6: Bank Branch per Employee of ICC Department

Branch per Employee No. of Banks (%)

Less than 2 2 11.76

2 to less than 4 9 52.94



8 and above 1 5.88


Graph 3: Bank Branch per Employee of ICC Department

11.76

52.94

17.65

11.76 5.88

0

10

20

30

40

50

60

Less than 2 2 to less than 4 4 to less than 6 6 to less than 8 8 and above

Ban

ks (

%)

Bank Branch per Employee

Table 7: Training on ICC Conducted by Own Training Institute

No. of Training No. of Banks Banks (%)

0 8 47.06

2 6 35.29

4 1 5.88

6 1 5.88

9 1 5.88


Nature and features of audit plan is summarized in Table 8. All the banks prepared

their audit plan for a year and 60% of those made this in the last quarter of the

previous year. Seventy one percent banks’ audit was risk based that implies that

twenty nine percent banks followed transaction based audit. We see a mixture of audit

type with 53% banks audited all the branches and 47% performed sample audit.


Implementation of audit plan was quite satisfactory as 87.50% banks implemented

more than 90% of their targets.

Table 8: Internal Audit Plan of ICC Department

Aspect of Audit Plan Option Response (%)

Time of preparation of audit plan In previous year 60

In current year 40

Duration of audit plan Yearly 100

Other 0

Whether audit plan was risk-based Yes 70.59

No 29.41

Nature of internal audit Sample 47.06

Population 52.94

Implementation of audit plan 2011

(91-100)% 87.50

(81-90)% 6.25

(71-80)% 6.25


The majority of the banks (82.35%) have used prescribed format for audit report and

58.82% banks have submitted internal audit reports to the board (Table 9). All the

banks have management reporting system but 23.53% banks mentioned problems

such as lack of proper IT support, delay in getting information from the branch in

management reporting. System of checking the accuracy of information was present

in 77% banks. Most of the banks (86.67%) reported full awareness and adherence to

policies by their staffs. The requirement as per BB guidelines of preparing an annual

report on the health of the bank in 2011 has been observed by 62.50% till study

period (Table 10).

Table 9: Audit Report of the ICC Department

Aspect Response

Yes (%) No (%)

Do you have any prescribed format of Audit Report? 82.35 17.65

Do you submit internal audit reports to the Board? 58.82 41.18



Table 10: Management Reporting System of Banks

Aspect Response

Yes (%) No (%)

Do you have management reporting system? 100 0

Do you face any problem for management reporting? 23.53 76.47

Is there any system to check the accuracy of information before

placing to management?

76.47 23.53

Whether all staffs are fully aware and adhere to policies of

information system?

86.67 13.33

Did internal control team prepare an annual report on the health of

the Bank in 2011 by April 2012?

62.50 37.5


Assessment of banking risk is an important task of ICC. In our survey it was found

that 77% banks have assessed all material risks. However, 94% banks could not

quantify the magnitude of risk (Table 11). Compilation and dissemination of

regulations among the units is depicted in Table 12. It is evident that a large number

of banks do not have any dedicated unit for compiling all directives and regulation.

Half of the banks distributed regulations among different units through ICC

department.

Table 11: Consideration of all Material Risks by ICC Department

Aspect Response

Yes (%) No (%)

Does Internal Control System assess all material risks? 76.47 23.53

Assessment of all material risk in amount 5.88 94.12


Table 12: Compilation and Dissemination of Directives and Regulations

Aspect Response

Yes (%) No (%)

Are directives and regulations compiled by any

wing/department?

58.82 41.18

Does ICC distribute all regulations among different

departments/units?

50 50



It is required that ICC department will receive a copy of Quarterly Operation Report

(QOR) timely from each branch. As Table 13 shows that 88.24% did comply that

norm. However, all the banks evaluate QOR. Deviation is taken care of mostly (94%)

by the ICC department. Receiving customer complaints by ICC department is

observed in 53% banks while 65% banks address customer complaints this

department (Table 14).

Table 13: Quarterly Operation Report and ICC Department

Aspect Response

Yes (%) No (%)

Do you receive copy of Quarterly Operation Report (QOR) on

time (10th day of next month) from each Branch/ Centre?

88.24 11.76

Does ICC Dept. evaluate this Quarterly Operation Report? 100 0

Do you take any action if there is any deviation? 93.75 6.25


Table 14: Customer Complaints and ICC Department

Aspect Response

Yes (%) No (%)

Does ICC receive customer complaints? 52.94 47.06

Does ICC address customer complaints? 64.71 35.29


There are three major objectives of ICC department e.g., performance objective,

information objective and compliance objective. The degree of achievement as

perceived by ICC division is presented in Table 15. According to the opinion,

perception of this unit 20% banks achieved 91% – 100% of their target performance

objective whereas 40% banks in the range achieved their information objectives in

this range. But 37.5% banks achieved compliance objective in the range 91% – 100%.

Table shows that majority of the banks achieved 81% - 90% of their targeted

performance, information and compliance objectives in 2011.


Table 15: Achievement of Objective as Perceived by ICC Department (%)

Target

Achievement of Objectives

Performance Objective

(Banks %)

Information Objectives

(Banks %)

Compliance

Objective (Banks %)

91% - 100% 20 40 37.50

81% - 90% 66.67 46.67 43.75

71% - 80% 13.33 13.33 18.75


Opinions were sought from the ICC department of banks regarding value additions by

them and making it visible to the management, immediate future plan, and

expectations of ICC department from top management, Bangladesh Bank, and BIBM.

The opinions are summarized in the following Boxes.

Box 5: Value addition by the ICC department

Value addition by the ICC department

Identifying irregularities and lapse in operational activities, policies and processes

for betterment of the bank.

Taking corrective actions to maintain asset quality and minimizing risk.

Preventing fraud and forgeries and improving control environment.

Mitigating banking risk and helps to achieve the objectives.

Making value addition visible to the management

Disseminating performance to management and board.

Minimizing non-performing loans.

Proving required information to management in timely manner for policy decision.

Improving CAMELS rating.

Bringing down irregularities to tolerable level.


Box 6: Immediate Future Plan of the ICC Department of Different Banks

Reviewing/and updating operational manuals.

Strengthening the knowledge base of ICC officials.

Implementing the IT based operation.

Formulating fully risk-based audit plan.

Conducting inspection at least twice in a year in AD branches.

Sorting transaction by quantifying risk, frequency, and volume.

Box 7: Important Suggestions of ICC Department of Different Banks

Expectations from the Bank Management

Ensuring de facto autonomy of ICC department.

Providing sufficient skilled manpower and need-based training.

Taking corrective measures as per recommendations and audit reports.

Taking initiatives for automation of branches and ICC department.

Providing logistic support including office space, manpower and information

Technology.

Recognizing and rewarding the activities of ICC department.

Expectations from Bangladesh Bank

Formulating proper guidelines for risk-based audit.

Arranging seminar for the board of directors and top management.

Spot rectification of irregularities identified by audit and inspection team.

Arranging need-based training for officials of Bangladesh Bank.

Giving more emphasis on ICC department.

Creating on line interaction facilities between BB and banks.

Expectations from BIBM

Conducting more research, training, workshop, seminar on ICC.

Helping BB in providing inputs for the issuance of pragmatic guidelines on ICC.

Educating top management and board of directors about ICC culture.

On-line learning system for bankers.



1. Policy Issue: Survey result shows that ICC manuals of individual banks are not

reviewed regularly. Since banking operations and activities are undergoing rapid

changes due to technological advancements, the ICC manuals should also be

updated in accordance with the changing nature of banking activities.

2. Audit Plan: The report suggests that some of the banks formulate their audit plan

during the last quarter of the previous year whereas some of them formulate this

during the first quarter of the current year. In addition to this, some of the banks

have not yet introduced risk-based audit plan. Regulatory response on the part of

Bangladesh Bank in the form of a detailed guideline alongwith time schedule for

implementing risk-based audit will be effective to develop a common standard

for the banking sector. The system of concurrent audit is very effective in

ensuring accuracy and compliance with the policies as it timely and regularly

verifies the activities. There should remain a system of exit meeting to be

conducted by the auditors with the branch management for minimizing the gap

between the expected and actual level of performance.

3. Concurrent Audit: The system of concurrent audit is very effective in ensuring

accuracy and compliance with the policies as it timely and regularly verifies the

activities. Spot correction also gets momentum through concurrent audit.

4. Autonomy of ICC Department: Job description of the personnel of ICC

department indicates they have the autonomy for their activities. But the

personnel of ICC department de facto do not have the freedom to take corrective

action. This is important for ICC to have capacity to take corrective measures

against irregularities on its own rather than acting more passively by raising

non-compliances issues to their senior management level.

5. Human Resources: The study finds that there exists a large gap between

approved and actual manpower in some banks for their ICC department. As the

effective operation of ICC demands sound banking knowledge and skill, the issue

of proper training for ICC division is of utmost importance. Paying attention on

right number and right type of people for ICC division have not found in all

cases. Banks should have separate HR policy for ICC division.

6. Use of IT: For the effective and efficient operation of the activities of ICC

department, sophisticated information technology like on-line monitoring and

reporting facility should be implemented in each and every banks of Bangladesh.


Findings demonstrate that a few banks have adopted these technological

facilities. So, there remains opportunity to improve the capacity of ICC

department in our banking sector.

7. Coordination with Risk Management Unit: According to the BB guidelines,

most of the banks have Risk Management Units (RMUs) which are separate from

their ICC department. As, one major objectives of ICC is to minimize risk, there

should be a close coordination between RMU and ICC department. Active

collaboration between these two units will improve the risk management capacity

of a bank.

8. Preparation of Bank’s Health Report: Current review depicts that almost all the

banks prepare the banks’ health reports which are ultimately submitted to the

board of directors. But, the preparation and submission are not as timely as

expected. We can think of having a uniform timeframe for preparation and

submission of the health report for the banks. However, Bangladesh Bank should

give more clear instructions about the contents of the health report.

9. Compilation and Distribution of Regulations: At present different

departments/divisions of banks are compiling and distributing the various types

of internal and external regulations. A dedicated unit/section for compilation and

distribution of various regulations in a bank will make the dissemination of

regulations consistent, harmonious and effective.

10. Performance Evaluation of ICC Department: Observations reveal that some of

the banks have the mechanism for performance evaluation of the ICC department

while some other banks do not have this type of mechanism. The banks having

performance evaluation mechanism do that through different units (MANCOM,

Audit Committee, other departments). Annual Confidential Report of the

employee working in ICC division should be given by the Board/Audit

Committee. Explanation should be given in case of transfer of an employee to

other division.

11. Arranging Seminar for the Board of Directors and Top Management: Opinion

survey reveals that the directors and top management are not always well aware

about modus operandi of the activities of the ICC operation. So arranging

seminar/workshop on ICC related matters for the directors and top management

might be helpful in improving the credibility and visibility of the ICC division.


REFERENCES

Ashbaugh-Skaife, H., D. Collins, R. LaFond, W. Kinney (2006), “The Effect of

Internal Control Deficiencies and Their Remediation on Accrual Quality.” Working

Paper, University of Iowa.

Ashbaugh-Skaife, H., D. Collins, W. Kinney (2005), “The Discovery and

Consequences of Internal Control Deficiencies Prior to SOX-Mandated Audits”

Working Paper, University of Iowa.

Bangladesh Bank (2002), “Internal Control and Compliance Framework for Internal

Control Systems in Banking Organizations”, Dhaka, Bangladesh.

BIS (1998), “Framework for Internal Control Systems in Banking Organizations” ,

September.

BIS (2001), “Internal audit in Banks and the Supervisor's Relationship with

Auditors”, Basel Committee on Banking Supervision, August.

BIS (2006), “Core Principles for Effective Banking Supervision”, Basel Committee

on Banking Supervision, October.

Carnell, S. (1997), “Treasury Defends FDICIA Bank Reform.” Journal of

Accountancy.

Doyle, J., W. Ge, S. McVay (2005), “Determinants of Weaknesses in Internal Control

over Financial Reporting and the Implications for Earnings Quality,” Working Paper,

New York University.

Institute of Internal Auditors (2008), “Sarbanes–Oxley Section 404: A Guide for

Management by Internal Controls Practitioners,” 2nd ed. Online at:

www.theiia.org/download.cfm?file=31866

Internal Controls a Guide for Directors and Managers of Liberian Banks, Bank

Supervision Department Central Bank of Liberia Monrovia, Liberia March, 2005.

Niemeier, C. (2006), “Remarks Before the National Association of State Boards of

Accountancy.” Atlanta, GA. www.pcaobus.org

The KPMG Review Internal Control: A Practical Guide (c) KPMG October 1999.

Weili Ge & Sharah McVay (2005), “The Disclosures of Material Weaknesses in

Internal Control after the Sarbanes–Oxley Act”, Accounting Horizons, Vol. 19, No.

3, pp.137-15.

www.qfinance.com/contentFiles/QF02/g1xtn5q6/12/4/implementing-an-effective-

internal-controls-system.pdf

http://www.theiia.org/download.cfm?file=31866

http://www.pcaobus.org/


Paper Six

Human Resource Management

of Banks

Fahmida Chowdhury1

Mahammad Tazul Islam2

Md. Masudul Haque3

Rexona Yesmin4

A. K. M. Nurul Islam5

1 Associate Professor and Director (EMBM) of Bangladesh Institute of Bank Management (BIBM) 2 Assistant Professor Bangladesh Institute of Bank Management (BIBM) 3 Assistant Professor Bangladesh Institute of Bank Management (BIBM) 4 Lecturer of Bangladesh Institute of Bank Management (BIBM) 5 Senior Vice President and Company Secretary of National Credit and Commerce Bank Limited




CV Curriculum Vitae

DGM Deputy General Manager

DMD Deputy Managing Director

DU Dhaka University

ESR Erythrocyte Sedimentation Rate

EVP Executive Vice President

FCB Foreign Commercial Bank

HR Human Resource

HRD Human Resource Development

HRIS Human Resource Information System

HRM Human Resource Management

HRP Human Resource Planning

ICAB Institute of Chartered Accountancy Bangladesh

ICMAB Institute of Cost and Management Accountants Bangladesh

LFA Leave Fair Assistance

MD Managing Director

NSU North South University


PF Provident Fund

RDS Rural Development Scheme

SB Specialized Bank

SEVP Senior Executive Vice President

SHRM Strategic Human Resource Management

SME Small and Medium Scale Enterprise

SOB State Owned Commercial Bank


Human Resource Management of Banks

1. Introduction

As intermediary of the saving-investment process, the banking sector plays a

predominant role in economic development. The areas of banking services have

expanded and the banks are concentrating more on universal banking and also giving

emphasis on the issue of financial inclusion. Supportive technology has become an

integral part of the banking operation and customer awareness has increased

tremendously over the years. Today, the banker - customer relationship has come

under sharp focus both from the bankers‟ as well as the customers‟ end. Customer

retention has thus gained top priority for banks. If the bank‟s management does not

understand its customers at the ground level, it may end up taking unprofitable

decisions and pursuing wrong strategies, which may push away the customer. There

is no better alternative of efficient banking services for retention of customers and

overall performance of banks. The knowledge, skills, experiences, judgment capacity

and the wisdom of the bankers are essential and the inseparable part of the services

provided by the banks to the customers. It is the human resources (HR) that really

matters for efficient services of banks and ultimately for the performance of banks.

Without efficient employees, the best ideas, strategies and business plans fail to

achieve goals. Hence, Human Resource (HR) systems, policies, procedures and

practices should receive due emphasis in banks. Though, generally banks started

giving due emphasis to HR in Bangladesh only in recent years, some have, by now,

undertaken notable initiatives to streamline the HR activities by installing computer

networks and HR information system software.

In the context of Bangladesh, the information on the practices of human resource

management is not readily available due to inadequate attention in this area. For

having a better understanding and for improving of the human resource management

activities, it is important to understand and comprehend the functions, scopes,

processes and initiatives taken by different HR department of different banks.

Generating detailed information on the HR trends, changes, dimensions and

challenges would also facilitate practitioners to undertake future course of action.

Moreover, the activity review is expected to contribute in creating the backdrop for

further research activities. Ultimately, this collective endeavor of bankers,


academicians and researchers is necessary for improving the efficiency of the human

resource management activities by banks.

Specific Objectives

Keeping the above issues in mind, the study attempted to review the overall activities

of human resource management of banks for the year 2011 as its broad objective. The

specific objectives of the review are: one, to discuss different functional areas and

activities performed by the human resource management department of the banks;

two to examine the issues related to HRM and their application status in banks for the

year 2011; and three, to identify the challenges of human resource management

activities of banks and also to suggest future course of action in Bangladesh.

Methodology

Both primary and secondary data have been collected to fulfill the objectives of the

study. Secondary data were collected from different publications related to human

resource management. Annual reports of banks have been the major secondary data

sources. To gather primary data, a questionnaire survey has been conducted. Both

open-ended and close-ended questions have been incorporated in the questionnaire

for the survey. For the survey, sample banks are selected purposively based on three

considerations: one, the size1 of the bank; two, the ownership structure

2 of banks and

three, and the generation time of establishment3. A total number of twenty banks

(Table-1) were selected for administering the survey of human resource

department/head offices. The twenty sample banks include two SOBs, sixteen PCBs

including three Islamic banks of different generations, and two FCBs. The draft

review study report is to be presented in the review workshop to be participated by

the expert practitioners from different banks. The report will be finalized after

accommodating comments of the participants and HR experts of the banking sector.

1 Number of branches and business operation both large and small banks are brought under the survey. 2 State Owned Bank (SOB), Private Commercial Banks (PCBs) and Foreign Commercial Banks (FCBs). 3 Banks that have commenced their commercial operations during 1980-1990 under the regulation of Bank

Company Act 1991are considered as generation-1, banks established during 1990-1995s are generation- 2 and

banks set up during 1995-2000 are generation-3.


Table 1: Distribution of Sample Banks

Bank Category No. of total

banks

Sample banks

Number %

of population

State Owned Banks 4 2 50

Specialized Banks 4 1 25

Foreign Banks 9 2 22.22

Private Commercial Banks including

three Islamic banks 30 15 50

Total 47 20 42.55

Source:

Scope and Limitation of the Report

This study tries to examine the major areas of HRM in banks. The study also attempts

to find out the standard practice/format for different HR activities. Data of the banks

are qualitative in nature, which may vary widely depending on the personal opinion.

In most of the cases, HR policy related documents are considered confidential and

bankers were hesitant to share these.


The report has been organized under four sections: section I is the introductory

discussion with the objectives and methodological issues, section II focuses on the

conceptual aspects of human resource management in banks as a whole, section III

explains the review and analysis of the activities of HRM department of bank in

2011. Finally section IV identifies a few challenges and puts forward a few

recommendations.


2. Human Resource Management and its Functional Areas in Banks

Human resource management (HRM) refers to the policies, practices, and systems

that influence employees‟ behavior, attitude and performance. In Bangladesh there

are different types of HRM practices followed by the bank. For having a better

understanding of banks‟ HRM, it is important to consider different dimensions of

human resources activities that banks perform. The human resource (HR) department

of a bank is solely responsible for labor law compliance, record keeping, employee

compensation, and some aspects of benefits administration. It is common practice for

HR department to collaborate with other organization functions on employment

interviewing, performance management and discipline, and efforts to improve quality

and productivity. Roles and responsibilities performed by the HR department of a

bank vary depending on the size, characteristics of the workforce, the industry

composition, and the value system of its management. HR department of a bank

mainly undertakes three lines of activities. The first line of activity is providing

administrative services and transactions4, which is the traditional activity that HR has

historically provided. The second newer HR activity is business partner services5 and

the third is the strategic partner6 role of the HR functions that are being challenged by

top managers to deliver. It is generally observed that in Bangladesh some of the

bank‟s HR department takes full responsibility for human resource activities, while

others are sharing the roles and responsibilities with managers of other departments

such as finance, operations or information technology. In some banks HR department

is playing an advisory role to top-level management for handling different issues

while others are taking decisions on the basis of top management guidelines.

Available literature (SHRM-BNA 2001) reveals that the general responsibilities of

HR departments should cover at least the following components (box -1):

4 Compensation, hiring and staffing by giving emphasis on the resource efficiency and service quality. 5 Developing effective HR systems and helping implement business plans, talent management giving emphasis

on knowing the business and exercising influence, problem solving, designing effective systems to ensure

needed competencies 6 Contributing to business strategy based on considerations of human capital, business capabilities, readiness,

and developing HR practices as strategic differentiators. This emphasis on knowledge of HR and of the

business, competition, the market, and business strategies.


Box -1: Responsibilities of HR Departments

Employment and Recruiting: Interviewing, recruiting, testing, temporary labor

coordination.

Training and Development: Orientation, performance management skills

training, productivity enhancement.

Compensation: Wage and salary administration, job descriptions, executive

compensation, incentive pay, job evaluation.

Benefits: Insurance, vacation leave administration, retirement plans, profit

sharing, stock plans.

Employee Services: Employee assistance programs, relocation services,

outplacement services.

Employee and Community Relations: Attitude surveys, labor relations,

publications, labor law compliance, discipline.

Personnel Records: Information systems, records.

Health and Safety: Safety inspection, drug testing, health, wellness.

Strategic Planning: International human resources, forecasting, planning,

mergers and acquisitions.

Source: SHRM-BNA Survey No. 66, 2001.

HR Policy Issues in Banks

In terms of human resource management of banks, formulation of HR policy is the

starting point. No organization can function effectively without having Human

Resource policies7. While the process of developing HR policies can take time, once

policies are developed they only need to be reviewed to ensure remaining current.

However, policies must be useable and used. It is to be noted that any policy that is

not used is not a policy (Mathew 2007). There are many banks in Bangladesh which

are presently revising their HR policies in line with global standard. A few of them

have very old and redundant policy documents. Some of the banks have already

revised their HR policy manuals and waiting for the approval from the authority.

7 HR policy is the documented procedures and guidelines that provide structure to work expectations. These

guidelines define the roles and responsibilities of both the bank and the employee. Issues such as work

conditions, legal requirements (in accordance with local and national labor laws), salary administration, and

many other issues are generally included in a written HR Policy Handbook (Pityn, et. al. 2007).


HR policies provide consistency, fairness, and efficiency in dealing with employees.

Having a written policy document also gives the ability to establish and communicate

the rights and responsibilities of the bank and its staff. HR policies can be a valuable

tool to ensure equal treatment to all employees, to communicate to staff what is

expected from them, what bank provides, and what procedures are followed; to

handle legal issues with employees to reinforce institutional culture by treating

employees fairly and providing benefits that reinforce banks values (Pityn et al. 2007).

We all know that today‟s banks are increasingly faced with resource constraints due

to the economic downturn that are prevalent all over the world. With large amounts of

budgets being spent on the human resources, it is very important to get good “value

for money” through making sound HR policies and putting them in practices8. HR

policies serve as governing mechanisms that drive the selection of HR practices

needed to execute these policies (Poutsma et al. 2009).

After making policies, communication is important. They should be written in clear

language that is easily comprehensible for employees. Employees may be given a

hard copy of the policies, or they may be posted on a notice board in a common area

that is accessible to all workers. Depending on the organization, it may be appropriate

for HR policies to be posted on the internet or emailed to employee. Though policies

will not provide an answer for every situation but there is always the temptation to

make decisions based on „unique circumstances‟. Every time a decision is made

which affects staff environment, there may be an unanticipated effect in the future

(Mathew 2007). In Bangladesh, almost all banks treat the HR policies as a very secret

document. People do not have an easy access on it. Many times, even an employee

does not have an access to the HR manual.

Human Resource Management (HRM) Practices in Banks

Sound HRM practices in banks should include analyzing and designing work,

determining human resource needs (HR planning), attracting potential employees

(recruiting), choosing employees (selection), teaching employees how to perform

their jobs and preparing them for the future (training and development), rewarding

employees (compensation), evaluating their performance (performance management),

8 http://www.mainstayin.com


and creating a positive work environment (employee relations). Effective HRM helps

enhancing company performance by contributing to employee and customer

satisfaction, innovation, productivity, and development of a favorable reputation in

the firm‟s community (Tsui 1998). The potential role or functions of HRM in a bank

can be visualized as follows (Figure -1).

Figure – 1: Standard Human Resource Management Practices in banks

Acquisition

Analysis and

designing of job

HR

Planning Recruitment Selection

Employee

Socialization

Human Resource Development

Training Career Development

Retention and Motivation

Performance

Management Reward, Compensation and Benefit Discipline

Maintenance

Employee Relations Safety and Health

Source: Sternberg Isaac Meg 1984.

Acquisition

Acquisition is the first and most complex job for the bank. It includes analysis and

designing of job, HR planning, recruitment, selection and employee socialization.

These are discussed below.


Analysis and Designing of Job

Bank employees perform a number of jobs. So, it is very important to know the types

of jobs, duties and responsibilities to be performed by a banker at first. It also needs

to consider the work condition, element of risk involved, skills, age (experiences) etc.

Job analysis9 is treated as the very important task for a bank. Basically, it considers

two dimensions of the job named job description10

and job specification11

. Almost all

the banks in Bangladesh have their specific job description and job specification.

Recently, some of the banks are taking initiatives for analyzing their job and having a

new job description of it from top to bottom.

HR Planning in Banks

HR planning has several dimensions in which managers attempt to anticipate forces

that will influence the future supply of and demand for employees. At first, the

demand of HR is submitted by the department which is assessed by the head of HR to

comprehend its requirement. When the head of HR finds that the extra HR needs is

logical then HR planning is done through understanding the current HR position in

the organization. Already, three NRB banks and six commercial banks got license to

start banking business in Bangladesh. It will create a huge demand for efficient

bankers. Major source of filling these positions will be the existing bankers. Most of

the banks are well aware about this situation and already having their HR plan in

advance. Some of them are trying to revise their compensation packages so that it

becomes competitive and they can retain their employees. The scenario is totally

different in case of state owned banks. As the banker of SOBs do not get any benefit

if they leave the bank before attaining twenty years of the job they will not switch to

other bank. So, the demand for bankers will remain unchanged. Again, the HR

planning of an organization is influenced by the future need of HR. How many extra

employees are needed in future for an organization is absolutely dependent on growth

and expansion decision of the bank.

9 Job analysis is a procedure for obtaining information which is relevant for a job or a number of jobs. 10 Job description is a broad statement of the purpose, scope, duties and responsibilities of a particular job

performed by employees (http://books.google.com.bd/books). 11 A statement of the human qualities required to fill the job performed by employees. It is a detailed statement of

the physical and mental activities involved in the job.


HR Demand from the Department Level

HR Planning by the Head of HR

Assessing the current HR position Future Need of HR

HR Inventory Chart,

Succession Planning, HRIS

Growth and Expansion

Decision

Find the gap between current HR position and

future need of HR

Recruitment Decision

Assessing the current HR

position

Recruitment through externally

Manage through internally Advertisement to different Medias

Reception of application

Recruitment and Selection

Recruitment12

is the activity that links the employers and the job seekers. It is the first

and foremost job for HR department in banks. Recruitment process starts from HR

planning and ends with the reception of the job application. The standard recruitment

process can be summarized in the following way (Figure-2). However, the

recruitment decision of an organization can be implemented by two ways-

recruitment through internally and recruitment through externally. The sources within

the organization itself to fill a position are known as internal sources13

of recruitment.

Recruitment candidates from all other sources are known as external sources14

of

recruitment. There are two basic factors that affect recruitment decision of a bank;

these are internal factor15

and external factors16

.

12 Recruitment refers to the process of attracting, screening, and selecting qualified people for a job. DeCenzo

(2007) said “Recruitment is the process of searching the candidates for employment and stimulating them to

apply for jobs in the organization”. 13 like transfer of employees from one department to other, promotions, retired and retrenched employees,

dependent and relative of deceased employees and demotion. 14 like press advertisement, educational institutions, placement agencies/outsourcing, unsolicited applicants,

employee referrals etc. 15 Internal factors include recruitment policy of an organization, HR planning, size of the organization, cost of

recruitment and growth and expansion. 16 The external factors cover supply and demand of HR, employee market in a country, image/goodwill of the

organization, political-legal-social environment, unemployment rate and competitors in an industry.

Source: Decenzo 2007.

Figure-2: Recruitment Process in Banks


Figure-3: Selection Process of Banks in Bangladesh


Step-1:

Initial Screening

After receiving the applications from the applicants the head of

HR initially screen it based on job description and job

specification. By this process, some of the candidates are eliminated from this stage.

Step-2: Employment Test

Organizations use intelligence, aptitude ability, analytical ability,

interest and dexterity text.

Step-3:

Comprehensive Interview

Candidates who qualify in the employment test are selected for

comprehensive interview and send interview card for facing interview. Here comprehensive interview is conducted by the

interview board.

Step-4: Final Employment

Decision

Candidates who perform successfully on the employment test and the comprehensive interview, get an appointment letter to

join in the organization

Step-5: Medical Test

After having the placement letter, candidates are asked to join the organization within a stipulated time with medical test

reports. If the medical test reports have positive outcome

regarding health of the candidate the head of HR accept the candidate joining.

Step-6:

Background Investigation

After reception of the joining report from the candidate, the head

of HR will verify the background information. This report affects the employee to be permanent in the organization.

Step-7: Permanent Employee

If the background report confirms positive message the head of

HR confirm the employee as permanent after the stipulated time period as mentioned in the placement letter. The selection

process then turned into end by this stage.

Source: Primary Survey


The buzzword and the latest trend in recruitment is the “E-Recruitment”17

or “Online

recruitment”. Many big and small banks are using internet as a source of recruitment.

They advertise job vacancies through worldwide web. Many PCBs and SOBs

operating in Bangladesh are receiving the Curriculum Vitae (CV) from the job

seekers through e-mail using the internet.

Selection comes after recruitment. Basically, the selection18

process starts from

scrutiny of the application and ends with the issue of appointment letter. By selecting

best candidate for the required job, banks can save time and money, get quality

performance of employees, get less employee turnover and less absenteeism. To get

the right candidate, proper screening should take place during selection procedure.

All banks practice selection task as a part of HRM in Bangladesh with their own

selection process. However, the selection process of Bangladesh can be summarized

as follows (figure-3).

Employee Socialization

Employee socialization is a process by which new employees understand the

company's policies, the internal culture, how the company hierarchy works and the

ways to function effectively in the organization. When new employees join the

organization they have huge gap in relation to expected and actual behavior. This

ultimately could affect their career. Like other organization banks also initiate many

attempts in developing programs and policies that help the bank to maintain a

consistent corporate culture. On the other hand, it also encourages the development of

teamwork between new hires and current staff members. Allowing employees to

become more familiar on a social as well as professional level can develop strong

bonds that improve productivity and help to reduce employee turnover. All the banks

have orientation program starting from a week to four months in the name of

foundation course.

17 the use of technology or the web based tools to assist the recruitment process. The tool can be either a job

website like naukri.com, the organization‟s corporate web site or its own intranet (http://recruitment.naukrihub.com)

18 Employee Selection is the process of putting the right men on the right job. It is a procedure of matching

organizational requirements with the skills and qualifications of people (http://www.whatishumanresource.com).

http://www.whatishumanresource.com/


Human Resource Development

Human resource development19

is a continuous process to ensure the development of

employee competencies, dynamism, motivation and effectiveness in a systematic and

planned manner (Rao 1990). For managing and retaining the employees, banks need

to concentrate on HRD. Especially for banks, there must be a systematic HRD model

(Figure-4). For ensuring better performance of HRD model the honest commitment of

top management is essential. Side by side the involvement of line management in the

HR development program is very crucial for the effectiveness of the overall success

of the HRD in the banks as they are the frontline in the implementation of the

activities. On the other hand, there is a need for favorable HRD climate which is a

sum of perceptions of members about the organization and its HRD philosophy,

systems and practices prevalent in the banks in the form of values of OCTAPACE20

elements. In the presence of these values, harmony is required for conducting HRD

practices. So, there is a need for assessing the HRD climate in order to understand the

preparedness of the banks for initiating HRD practices. All these issues are important

because it affect the overall outcome of banks.

19 planning, organizing, directing and controlling of a programme that has a wide range of activities relating to

the development of employees in terms of enabling them to acquire competencies needed to perform their

present and future jobs with ease and enthusiasm (http://www.mainstayin.com).

20 OCTAPACE means openness, confrontation, trust, authenticity, pro-action, autonomy, collaboration,

experimentation (http://www.mainstayin.com).

http://www.mainstayin.com/

http://www.mainstayin.com/


Source: http://www.mainstayin.com

Training

For sustaining in the increasing competitive environment, banks need to have

competent and developed workforce. To get the competent and developed workforce,

they focus on acquiring specialized people and develop the existing banker through

training. Training gives employees the opportunity to enhance knowledge & skill

which affect their behavior. It also gives job satisfaction to employees (Karl et. al.

2010).

Today banks in our country are spending a huge amount to train up their employees

both in home and abroad. They are also arranging training both on the job and off the

job situation. Banks not only train their workforce for short-term needs but also

develop their employees to meet the future challenges. To keep the importance of

training in mind all the banks have set their own training wing and many of them are

Figure-4 Model of HRD in Banks


operating their separate training institute. A number of banks are thinking to extend

their training institutes‟ activity by adding many new dimensions.

Career Development

A career refers to all of the jobs that people hold during their working lives. Career

development means all of the technical and managerial skills employees acquire to

achieve their career plans. According to Armstrong (2001) career development is of

great importance to both the individual employee and the organization. An employee

develops his/her career through a continuous acquisition of managerial or

professional skills and experience which may bring about rewards and promotion.

Graham and Bennett (1995) agree with this and contend that career development

involves higher status and responsibilities which can take place in one organization or

through movement between organizations or a combination of both. Employees could

move from one institution to another not necessarily in the same career, but probably

from one field to another or from one level to another. In Bangladesh, it is widely

seen that bankers are developing their career in a particular bank or they are

considering the whole banking sector for their career progression as banks have a

very well defined transparent career development path.

Retention and Motivation

For retaining the efficient employees in an organization it is needed to have a proper

concentration on performance management system, reward, compensation and benefit

administration. At the same time banks need to look after the issues related to

employee discipline.

Performance Management

Managing employee performance is an integral part of the work that all managers and

rating officials perform throughout the year. It is important because employee

performance or the lack thereof, has a profound effect on both the financial and

program components of any organization. Performance management policy is

designed to document the expectations of individual and organizational performance

and provides a mechanism to improve individual/organizational performance as

necessary. Banks in Bangladesh have developed a very scientific performance

appraisal form considering the participation of both parties (appraiser and appraised).


Bankers appraise themselves along with their supervisor. This is a two-way appraisal

method. Many banks have introduced another form of this method where

performance ratings need to have an agreement of both the parties on by giving the

counter signature of appraise. Though the banks performance appraisal system is

generally objective based as the job of the bankers are very much target oriented but

there we can see the presence of subjective judgment also.

Compensation, Reward and Benefit

Compensation is one of the fastest changing fields in Human Resource Management,

as banks continue to investigate various ways of rewarding employees for their

performance. Compensation21

plans are vehicles of delivery of pay to the executives

in a manner that attempts to motivate them to maximize shareholder's wealth. The

primary functions of an executive compensation plan are to attract, retain and

motivate executives. The compensation plan should be easy to monitor and it should

be based on some objective criteria that easily can be observed by all concerned

parties and incapable of being manipulated. A few commercial banks in Bangladesh

have already redesigned their compensation package considering the needs of

employee, tax issues and other factors. Compensation of employees has two main

components: (a) wages and salaries payable in cash or in kind and (b) the value of the

social contributions payable by employers22

. People look for jobs that not only suit

their creativity and talents, but compensate the them in terms of salary and other

benefits accordingly. Compensation and benefit issues and the status of bankers in

Bangladesh can be seen in box-2.

Discipline

Discipline in the workplace is the means by which supervisory personnel correct

behavioral deficiencies and ensure devotion to established company rules. The

purpose of discipline is to correct behavior. It is not designed to punish or embarrass

an employee. Often, a positive approach may solve the problem without having to

discipline. However, if unacceptable behavior is a persistent problem or if the

21 Compensation of employees is the total remuneration, in cash or in kind, payable by an enterprise to an

employee in return for work done by the latter during the accounting period (Flippo 1984). 22 These may be actual social contributions payable by employers to social security schemes or to private funded

social insurance schemes to secure social benefits for their employees; or imputed social contributions by employers providing unfunded social benefits (http://www.managementhelp.org).


employee is involved in a misconduct that cannot be tolerated, management may use

discipline to correct the behavior. Most of the banks in Bangladesh are very much

structured in this regards. For minimizing the disciplinary action, private commercial

banks follow the open door policy for the employees. They arrange many training and

counseling sessions for the new comers and the existing bankers. Discipline need to

be progressive where step by step process is followed for giving harder punishment to

the employee. Main focus is to facilitate employee to overcome performance

problems and satisfy job expectations. Progressive discipline is most successful when

it assists an individual to become an effectively performing member of the

organization.

Box-2: Compensation and benefit issues and the status of bankers in Bangladesh

Salary Deviation: Salary is an important component of effective compensation

program. A well-designed salary structure allows management to reward

performance and skills development. Generally banks do not practice salary

deviation for the same position but in some cases, banks practice salary deviation

for the same position.

Happiness with the Compensation package: Usually bankers are highly paid

across the world Bangladesh being no exception. In our country, most of the

bankers are well paid considering various types of service benefits. They are quite

happy with their compensation benefits.

Long-term Benefits such as Provident Fund, Gratuity: Provident Fund and

Gratuity are two schemes designed to benefit the employees. In PF, a portion of the

employee‟s salary is deducted and deposited with some portion of the employee‟s

salary. Gratuity is a scheme to motivate people to serve for longer durations with

the same employer.

Social Security Benevolent Fund: Sometimes banks offer social security

benevolent fund for its employees to help them in case of emergency. Employees

can avail such benefit at the time of their or their family members treatment,

meeting urgent needs etc.

Long term Benefits such as Car loan, Housing Loan: Banks generally offer long

term employee benefits such as car loan, housing loan to retain good employees in

long run. This is some sort of employee retention technique.

(Continued)


Leave Fair Assistance (LFA): LFA is given as a vacation bonus to employees.

This is the assistance to provide employees to travel for recreation and annual

leave. The objective is to encourage high-stress employees to rejuvenate their mind

and body cells.

Mandatory Leave: Mandatory means that something is compulsory; which means

that employees have no choice but to do it. There are some jobs that insist

employees to take mandatory leave because it is vital for the organization. In the

banking sector employees usually take mandatory leave with LFA benefits.

Leave Encashment Benefits: In some banks, there is a provision of leave

encashment benefit in addition to other benefits provided by the employer to their

employees. Leave encashment is a lump sum amount payable to the employees

against their deposited leave.

Maternity Leave: Maternity leave refers to the period of time that a mother takes

off from work following the birth of her baby. In Bangladesh, maternity leave

period is six months.

Death Benefit: Benefits are payable if death occurs while employee is on service

and if beneficiary presents proper notice and proof (death certificate, claim form,

etc.). This type of benefit considered as social security of the employees.

Medical Services Benefits: It takes care of the health of the employees. In some

cases, employer appointed doctors to provide medical services for the employees.

Scope to Get Early Promotion: Some organization offers scope to get early

promotion in case of really deserving candidates. This is some sort of employee

stimulus technique for the excellent performer.

Recommending others to Apply: If the employees are pleased with their job then

they will inspire other to apply to their organization. It indicates whether existing

employees are pleased with their job or not.

Source: Source: Primary Survey and Flippo 1984.

Maintenance

Maintenance is widely related to establishing a good employee relations and ensuring

safety of the employee in the work place.

Box-2: (Continued)


Employee Relations, Safety and Health

Banks need to concentrate on good employee relations. To facilitate good employee

relations, activities associated with employee health, safety, and security must be

addressed by giving the first priority as they are inseparable part of employee relation.

We know that good employee relations help to retain employees. It is about

occupational health23

of an organization. Maintaining occupational health indicates

(i) the maintenance and promotion of workers‟ health and working capacity; (ii) the

improvement of working environment and work to become conducive to safety and

health and (iii) development of work organizations and working cultures in a

direction which supports health and safety at work.

3. Review of the Activities of Human Resource Management for CY-2011

While conducting the survey, we have observed that the banks have changed a lot

relating to operations of human resource management. Banks perception of HRM has

changed a lot over the years. Survey data show that all banks have their separate HR

department for human resource activity while 35% perform these activities as part of

other department of bank. In a few cases these activity are directly controlled by the

office of chief executives. In private commercial banks 90% head of the department

are from the top management having designation of EVP, SEVP and DMD. In case of

SOBs DGMs are placed as the head of the department. In most cases (over 50%) HR

departments undertake dictated decision. The number of employees working in the

HR department of PCBs ranges from 8 to 30 people depending on the size of that

department; in case of SOBs number goes up to 200 peoples. In the year 2011 one of

the SOBs divided their HR department into three parts.

Acquisition Functions in Banks

Analysis of Job and HR Planning: In regard to acquisition function the study covers

analysis and designing of work, HR planning, recruitment and selections and

employee socialization. In 2011 a few banks (5%) have changed the job title, job

23 According to ILO/WHO23, Occupational health should aim at: the promotion and maintenance of the highest

degree of physical, mental and social well-being of workers in all occupations; the prevention amongst workers of departures from health caused by their working conditions; the protection of workers in their employment from risks resulting from factors adverse to health; the placing and maintenance of the worker in an occupational environment adapted to his physiological and psychological capabilities; and, to summarize, the adaptation of work to man and of each man to his job (http://www.ilo.org).


description and job specification in line with current banking environment. Another

5% has performed a salary survey to identify the right compensation package.

Considering in line with HR policy 30% introduced new strategies for their

employees in the area of grievance handling, promotion and recruitment. As for HR

planning 20% banks have their new strategic plan for their HR departments in the

year 2011.

Recruitment and Selection and employee socialization activities in Banks:

The recruitment and selection process vary from bank to bank in Bangladesh. The

recruitment process of a bank in Bangladesh starts with the reception of the employee

demand from the branch level in Bangladesh. The Head of HR then cram the need of

extra HR at the branch level as well as the management decision for branch and

business expansion. Majority of the banks recruit employees through external sources

by advertising the need of HR but at the lateral entry banks use internal channel of

recruitment. Different sources of recruitment used by the banks in Bangladesh have

been summarized in Box-3.

Box-3 : Sources of Recruitment used by the banks in Bangladesh

On-line job application by the banks website: The bank has own managed

website by which candidate can apply for a post without having job circular or

having job circular. In case of without having job circular, the data will be stored at

the data center of the bank and when necessary the candidate is asked for interview.

On-line job application by the job agency: The bank might have an agreement

with other(s) agency for recruitment such as bdjobs.com, jobsA1.com etc. In that

case, the applicants have to open separate on-line account which is dedicated to the

agency/ies and is automatically attached to the bank data base.

Newspaper advertisement: The bank uses newspaper advertisement to attract and

recruit the potential candidates for a particular post. The daily published

newspapers which are popular among the banks are the Daily Prothom-Alo, the

Daily Star, the Financial Express, the Daily Ittefaq etc.

Educational Institutions: Different educational institutions are now working as a

recruiting agent in our country. The bank first of all, offers the selected recruiting

agency to complete the selection process. Here, it includes only conducting written (Continued)


test and interview which depends on the contract with the recruiting agency.

Different agencies work in the form of consultancy in our country such as

Bangladesh Institute of Bank Management (BIBM), Dhaka University (DU), East

West University, Institute of Chartered Accountancy (ICA), Institute of Cost and

Management Accountants of Bangladesh (ICMAB), North South University

(NSU), BRAC University, etc.

However, the banks sometimes asked different educational institutions to send the

candidates to join at a particular post. It basically depends on the understanding

between the bank and the educational institution.

Internal Employee References: A few banks in our country use internal

references from the existing employees to recruit employees in banks.

Hunting by personal references: For lateral entry many banks hire employees

from other banks with considering merit, business performance, relationship,

market reputation, etc.


The selection process varies from bank to bank. Immediately after receiving the

application a scrutiny committee is formed to select candidate for preliminary

interview. The qualifying candidates sit for written test followed by viva-voce. At the

viva-voce, the board generally checks the candidate‟s personality, ability to handle

stress, psychology, etc. The selection board basically selects candidates whom the

appointment letter to be issued. However, the finally selected candidates are required

to submit medical test reports (such as Blood test, ESR, Chest X-Ray) with medical

certificate from a registered doctor. Many PCBs are enlisted with the private medical

hospital for medical checkup and SOBs are listed with the government medical

hospital.

The survey finds that all of the banks (100%) in Bangladesh have recruitment policy.

There has been remarkable change in recruitment process over the years. A good

number of banks have shifted to E-recruitment in recent years. In 2011, 93.75% banks

had on-line facilities where the candidates can apply for a post via on-line portal.

However, along with the on-line submission banks commonly ask for the submission

of hard copy. 81.25% banks ask finally selected candidates to sign security bond

while joining the bank and 31.25% banks send the appointment letter through e-mail

(Table-2).

Box-3: (Continued)


Table-2: Recruitment and Selection practices in Banks

Particulars Banks Response %

Availability of Recruitment policy 100

Maintain regulation regarding recruitment and selection 100

On-line job application submission 93.75

Asking Hard Copy of job Application before starting

selection process

93.75

SMS/e-mail/phone call for preliminary interview 87

Issue Written Card for preliminary interview 50

Psychological test of the candidates 25

Physical examination of the candidates 25

SMS/e-mail/phone call for finally selected candidates 81.25

Issue Written card for final interview 81.25

Final appointment letter through e-mail 31.25

An option to receive medical test report 100

Signing a security bond before joining 81.25


A significant percentage of banks have changed the recruitment and selection process

in 2011. The remarkable change is observed in the submission of CV via on-line.

30% banks attempt to collect CV through the banks website, which works as a

gateway to enter in a bank as an employee (Table-3). Banks explore the option for

submitting CV via on-line at any time with or without having vacancy announcement.

Of the total, 5% banks have opened new windows in their website for recruitment and

selection purpose. These new windows are operating for processing the appointment

of mid-level officers directly from other banks to their special24

departments.

24 SME and Agricultural Loan Division, Green Banking Unit or Cell, Rural Development Scheme (RDS) Unit, Assessment Center at British Council, Appointment at Card Division


Table-3: Changes of Recruitment and Selection process/steps in 2011

Particulars Banks in %

On-line submission of job application. 30

Mid level officers directly recruit from outside banks for special

department 5

Appointment of employees at SME and Agriculture loan

division 5

Recruitment for Green bank unit/ cell 5

Rural Development Scheme (RDS) unit recruitment 5

Assessment center at British council 5

Regional recruitment 5

Appointment at Card Division 5

opened new windows in the website for recruitment and

selection purpose 5


Different banks require different time frame to complete recruitment and selection

process. The following diagram illustrates time required to appoint an employee from

recruitment to placement in a bank. It shows that 37.5% banks need 4 to 6 months to

complete the recruitment and selection process followed by 31.25% to 2 to 4 months.

However, 12.5 % banks complete their selection process within 2 months (Figure -5).

Figure-5: Time frame to complete recruitment and selection process



Human Resource Development: Two broad areas of HR, training and career

development are considered in this section. Survey data shows that 65% of the banks

have their separate training institute; others operate their training activity with having

a training cell along with other job. 30% banks are doing their training activity having

full autonomy. Training department basically does the training need analysis and

arranges the training program for their employees though, nomination finalized by the

head office. Only 25% has their own trainer. Training obtained in 2011 ranges from

800 to 3000; in case of SOBs the number exceeds 8000. Considering the foreign

training this number is 2 to 28 for the year 2011. Employees were trained at home

including the banks‟ own training institutes and others training institutes in the

country and abroad for career advancement and development. In the banking

industry, on an average about 1974 employees were trained at home and abroad out

of which around 1794 at the banks‟ own training institute or internal arrangement,

approximately 213 at others training institutes and roughly14 were at abroad in 2011.

Again, 99.63% employees were trained at home, 91.16% were at the banks‟ own

management and 8.84% at the others management. Only 0.37% employees were

trained abroad in 2011. Furthermore, for employees training and development, banks

spent about Tk. 1.17 million on average (Table- 4).

Table - 4: Employee Training and Development in 2011


Particulars

In-house

Training

(Average)

Others

(Average)

Total Home

(Average)

Abroad

(Average)

Total

(Home and

Abroad)

No. of Employees

Trained and

Developed through

training (Average)

1793.55 212.67 1967.55 13.33 1974.82

Employees Training

and Development (%) 91.16 8.84 99.63 0.37 100%

Average Cost of

Training &

Development

- - - - 11760933.6


For career development 2% banks have restructured their hierarchy by assigning new

name and job descriptions. This year banks have taken different steps for developing

their employee career. These steps are introducing higher increment, diploma prize,

special honorarium, double promotion, providing training (both local and abroad),

career development counseling, performance based rewarding, attractive promotion

policy, certification courses, re-treat workshop/division or branch wise gathering,

family night and different certificate awarding scheme.

Compensation and Employee Benefits: Table-5 shows the survey results regarding

various aspects of compensation in the context of the banking sector of Bangladesh.

It has been found that 44% banks practice salary deviation for the same position. It is

noticeable that 94% bankers are happy with their compensation package. This is a

positive sign for the banking industry of Bangladesh. The study also shows that 63%

bank offers leave encashment facility and all banks (100%) reported that they offer

employee benefit such as car loan or housing loan. These types of facilities encourage

bankers to serve in a particular bank for a longer period of time. This is also the part

of employee socialization.

Table-5 various aspects of compensation

Aspect Positive Response %

Practice salary deviation for the same position 44

Employees happy with the compensation amount 94

Presence of leave encashment benefits 63

Other benefits (car loan, housing loan etc.) 100


Figure-6: various aspects of compensation



The study also shows that all banks offer long term employee benefits by the name of

Provident Fund (PF), Gratuity etc. (Table-6). 94% of the banks offer employee loan

from PF and 75% banks offer social security benevolent fund and leave fair

assistance with mandatory leave (69%). All banks offer maternity leave for the

female employees which indicate strict compliance with the government policy in this

regard. In relation to the study leave for employees it has been observed that 75%

banks offer this opportunity to their employees and 94% banks offer financial benefits

in case of death of an employee but the amount varies widely.

Table-6: Different types of employee benefits

Aspect Positive Response %

Provident fund, gratuity etc. 100

Loan facility from provident fund 94

Social security benevolent fund 75

LFA with mandatory leave 75

Avail mandatory leave with LFA benefits 69

Maternity leave 100

Study leave 75

financial benefits for death of the employee 94


Figure-7: Different types of employee benefits



The leading part for employees‟ job satisfaction in banks is employee‟s salary and

allowances. In 2011, the banking industry spent around Tk.123.61 million for

employees‟ salary and allowances on average. Again, for MD‟s remuneration, the

banks spent around Tk. 1.05 million (Table-7).

Table-7: Average cost of Salary & Allowances in 2011

Particulars Amount in Tk.

Average Employees Salary and Allowances 123,60,52,793

Average MD's Remuneration 104,76,013.6


Employee Turnover Rate:

The employee turnover rate is quite satisfactory in the banking industry in 2011. It is

observed that on an average employee turnover rate is 3.49% of which 23% is female

and 77% is male. The rate is 3.5 times higher for female (Figure-8).

Figure-8: Employee Turnover rate


4. A FEW CHALLENGES AND RECOMMENDATIONS:

1. HR Policy Issues: Survey result shows that all the banks have their HR policy

though most of these are not up to date and fully implemented. Developing HR

policy need to have rigorous effort and in-depth analyses; however, most of the

time banks are not ready to spare resource on it. So, keeping policy up-to-date is a

challenge for the banks which requires immediate attention.

2. Recruitment and Selection: Recruitment and selection policy should go beyond

writing eligibility criteria. Man power planning, recruitment and selection policies


should be reviewed and institutionalized. Considering the banks in Bangladesh,

job descriptions are still not drawn up in greater detail so as to cover individual

posts in a branch or departments and controlling offices. Job description and job

specification does not match with every post. Very insignificant number of bank

has taken the initiatives related to this issue. A wider participation from banks is

required to have in this regard.

3. E-recruitment and selection: It is noteworthy that different banks have started e-

recruitment and selection. The process should help reducing steps, time and

should save paper. It is found that in the name of e-recruitment, the so-called

process turned more time-consuming. The banks asked the applicants to submit

the hard copy of application after submitting the CVs via on-line that are rather

more cumbersome to the applicant. So, banks must make sure that by means of

e-recruitment and selection, the total placement process is shorter, paperless and

applicant-friendly.

4. Training and development: Major challenges for many banks are to develop the

special competencies and skills for different operational areas like credit

appraisal, risk management and handling trade services. In most of the banks,

there is no scientific method of selection of trainees. Random selection of trainees

is widely common. Banks have hardly built databases to capture the training

needs of employees and rarely use any IT based decision support system to select

right type of trainees. Traditionally, training has been a neglected function in

banks.

5. Performance appraisal: As many bank stated that the performance appraisal is

done jointly (boss and subordinate jointly prepare the report on the basis of joint

agreement), but in reality subordinate hardly contradict a boss. Even they sign the

performance appraisal report before having any rating on it. So ensuring a proper

appraisal environment is a very challenging job for the bankers.

6. Promotion: Any organization, if it wants to be successful, should have a system

of recognition for the key performers and motivation through job enrichment.

Rewards like promotions should be based only on performance and merit.


In SOBs, rigidity in the system of rewards is commonly observed. Promotions

have little or no linkage with performance. On the other hand, PCBs exercise lots

of dynamism in this area. However there are complaints of offering undue benefit

to a few. Sometime changing bank is considered as a way to get promotion in

private banks. Such a situation may discourage the committed employees of a

bank. So, specific strategies must be formulated by a bank to handle these issues.

7. Compensation: Banks need to develop such compensation standards, which can

provide a linkage between risk and reward, performance and payment. It is seen

that there is a huge difference in pay among the banks in a same position. This

creates an imbalance in the society. Banks are trying to adjust these gaps but still

it appears as a great challenge to them.

8. Retention of Qualified Employees: One of the major challenges of human

resource management is recruiting and retaining qualified employees. Study finds

that employee turnover rate in the banking sector of Bangladesh is not that much

high but still need to concern the issue. Also the costs of recruitment-selection and

employee development are also high. Frequent change of job in the first line

management slow down the total HRM process.

The list of challenges is not exhaustive and is made through observing mainly the

practices of the year 2011, and the recommendations represent mainly the views of

the review team. Incorporation of the comments and opinions from the review

workshop would complete the review process and finalize the paper.


REFERENCES

Armstrong M. (2001), Human Resource Management Practice: Handbook, 8th

Edition, Kegan Paul Ltd., London.

DeCenzo A. Davis and Robbins P. Stephen (2007), Personnel/Human Resource

Management. Prentice Hall, India.

Flippo Edwin B. (1994), Personnel Management, McGraw Hill series, India.

Graham H.T. and Bennett R. (1995), Human Resources Management, 8th Edition,

The M & E Handbook Series, Longman Group UK Ltd, London

http://www.managementhelp.org/payandbenefit/index.htm.

http://www.oecd-ilibrary.org

http://www.mainstayin.com/HRD%20in%20Banks.pdf

http://www.whatishumanresource.com/employee-selection

http://recruitment.naukrihub.com/e-recruitment.html

http://books.google.com.bd/books

http://www.ilo.org/safework_bookshelf/english?content&nd=857170174

Karl P., Alan C. and Nigel G. (2010), “Formal Development Opportunities and

Withdrawal Behaviors by Employees in Small”.

Mathew Maureen (2007), Best Practices Module-Human Resource Management,

British Columbia Museums Association.

Pityn Kim and Helmuth Jennifer (2007), Human Resource Management for MFIs

Toolkit.

Poutsma Erik, Ligthart Paul E. M., John Delery and Bart Dietz. (2009), “Beyond HR

Practices: Interacting HR Policies and Firm Performance”, Draft Prepared for the

Research Seminar, Australian Centre for Research in Employment and Work

(ACREW), August 5 at Monash University.

Rao T.V. (1990), The HRD Missionary, Oxford & IBH, New Delhi.

http://www.mainstayin.com/HRD%20in%20Banks.pdf

http://www.whatishumanresource.com/employee-selection

http://recruitment.naukrihub.com/e-recruitment.html

http://www.ilo.org/safework_bookshelf/english?content&nd=857170174


SHRM-BNA (2001), “Policy and Practice Forum: Human Resources Activities,

Budgets, and Staffs: 2000–2001,” Bulletin to Management, Bureau of National

Affairs Policy and Practice Series, June 28, 2001 Survey No. 66 (Washington, DC:

Bureau of National Affairs).

Sternberg Isaac Meg (1984), “Organizational Model for Human Resource Planning”

Baltimore, USA.

Tsui A. S. and L. R. Gomez-Mejia (1988), “Evaluating Human Resource

Effectiveness in Human Resource Management: Evolving Rules and

Responsibilities”, L. Dyer (Washington, DC: BNA Books).


Paper Seven

IT Operations of Banks

Md. Shihab Uddin Khan1

Md. Mahbubur Rahman Alam2

Kaniz Rabbi3

Engr. Shamsur Rahman Chowdhury4

Shah Alam Patwary5

1 Associate Professor of Bangladesh Institute of Bank Management (BIBM) 2 Assistant Professor of Bangladesh Institute of Bank Management (BIBM) 3 Assistant Professor of Bangladesh Institute of Bank Management (BIBM) 4 Executive Vice President of Jamuna Bank Limited 5 Chief Information Officer of Mutual Trust Bank Limited



ATM Automated Teller Machine

BAB Bangladesh Association of Banks

BACH Bangladesh Automated Clearing House

BACPS Bangladesh Automated Cheque Processing System

BB Bangladesh Bank

BDT Bangladeshi Taka

BEFTN Bangladesh Electronic Fund Transfer Network


BIS Business Intelligence Software

BPR Business Process Reengineering

BTCL Bangladesh Telecommunications Company Limited

BTS Base Transceiver Station

BUET Bangladesh University of Engineering and Technology

CBS Core Banking Solution

CCNA Cisco Certified Network Associate

CIB Credit Information Bureau

CTO Chief Technology Officer

DBA Database Administrator

DC Data Center

DFID-UK Department for International Development-United Kingdom

DMS Document Management System

DRS Disaster Recovery Site

EFT Electronic Fund Transfer

FCB Foreign Commercial Banks

GP GrameenPhone

HV High Value

ICT Information and Communication Technology

ISO International Organization for Standardization

ITCL Information Technology Consultants Limited

IVR Interactive Voice Response

LAP Loan Application Processing

MCP Microsoft Certified Professional


MCSE Microsoft Certified Solutions Expert

MICR Magnetic Ink Character Recognition

MIS Management Information System

OCP Oracle Certified Professional

OEM Original Equipment Manufacturer


POST Point of Sale Terminal

RPP Remittance Payment Project

RTGS Real Time Gross Settlement

RV Regular Value

SB Specialized Banks

SCB State-owned Commercial Bank

SMS Short Message Service

SWIFT Society for Worldwide Interbank Financial Telecommunication

UPS Uninterruptible Power Supply

VSAT Very Small Aperture Terminal

WAN Wide Area Network


IT Operation of Banks

1. Introduction

The nature and magnitude of business as well as the degree of competition in the

banking industry has increased manifold in recent years due to the IT (Information

Technology) based business globalization as well as the development of online

products and services on the basis of 24 x 365 hours. Use of information technology

in the banking sector or e-banking activities increased tremendously over the years.

In the context of developed global economies, use of IT and IT based services are part

of their day to day operation and one of the main determinants of their efficiency.

A good number of developing countries are not also far behind. Banking sector of

Bangladesh has also undertaken remarkable initiatives to accept global technological

improvement and to offer IT based financial services. At present, several Private

Commercial Banks (PCBs) and Foreign Commercial Banks (FCBs) of the country

offer limited services of Tele banking, Internet banking, and M-banking facilities.

As a part of stepping towards online banking, the FCBs have played the pioneer role

with the adoption of modern technology in retail banking since the early 1990s,

whereas the State-owned Commercial Banks (SCBs) and PCBs came forward with

such services on a limited scale in the late 1990s. Moreover, the banking industry as a

whole, except for the state owned banks, rushed to offer technology based banking

services during the 2009-2011. At present, alongside FCBs, some PCBs are capable

enough to provide up-to-date online services through state-of-the-art technology.

With the rapid growth of online banking transactions, the risks (operational risk,

reputation risk, legal risk, strategic risk, credit risk, etc.) in e-banking activities are

also increasing. The risk management issue has become one of the major concerns for

the policy makers and top management of banks in the country today.

As a regulatory body, Bangladesh Bank has been playing notable role to maintain

smooth and secured e-banking operations. BB has taken necessary initiatives to start

e-commerce, e-banking, automated clearing house system, mobile phone banking,

etc. Banks have been allowed to make online money transactions, payment of utility

bills, transfer of funds, payments for trading goods and services through e-channels

like Internet, ATM, Mobile phone, etc. Considering the paramount importance of

Information systems security in banks BB has issued an ICT security guidelines for

banking and financial institutions. Online access to Credit Information Bureau (CIB)


has been successfully started by the initiative of the Central Bank. In addition,

Bangladesh Bank has been implementing the Remittance Payment Project (RPP)

funded by DFID-UK (Department for International Development-United Kingdom)

for modernizing inter-bank national payment and settlement system. Installation of

Bangladesh Automated Clearing House (BACH) and Magnetic Ink Character

Recognition (MICR) cheque is another remarkable event in the history of our

financial sector.

Collective efforts of the Central Bank and the bank managements have allowed the

scheduled banks of Bangladesh to be connected to each other for conducting inter-

bank online transactions to smoothen the operation of full-fledged online banking in

Bangladesh. In the way of ICT development in our banking sector, some banks are

yet to upgrade the IT infrastructure. The progress has been slow for some banks due

to lack of available software, skilled manpower and infrastructures. For the

improvement and progress of the e-banking activities of banks, it is important to

understand the current scenario of the IT operations and their challenges. Against this

backdrop it might be useful to review the various activities of IT division of banks in

Bangladesh. The review study is basically to capture and evaluate the use of IT in

banking activities, and to identify the associated problems in technology driven

banking. The specific objectives of the study are: one, to discuss the IT based product

and services in the banking sector of Bangladesh; two, to analyze the activities of IT

department of banks in 2011; and three, to identify the challenges to suggest future

courses of actions in ensuring better and secured IT based services of banks.


Methodology

Keeping in mind the background and the objectives of the study, both primary and

secondary data have been collected. Secondary information has been collected from

various publications of Bangladesh Bank, research articles, and websites of

Bangladeshi banks. Primary data have mainly been collected from the IT department

of banks on the basis of questionnaire. A total of 17 banks have been selected as

sample banks. The selection of banks has been determined purposively based on the

consideration that the sample banks should represent all categories of banks in terms

of ownership, number of branches and state of computerization. For that reason, the

banks are categorized into four groups/levels based on their state of automation: L1

[scattered and partial branch automation where customers can only transact at their

respective branches using human interface]; L2 [full automation of all branches but

absence of interconnectivity where customers are still confined to respective

branches]; L3 [branch centric with interconnection where customers have the

mobility and option to transact through any of their branches]; and L4 [centralized

online banking under which customer can reach the bank and transact through

multiple channels anytime, anywhere].

In categorizing the sample banks, we also considered the automation level defined by

Bangladesh Bank ICT security guidelines: Tier-I [Centralized ICT Operation

through Data Center (DC) including Disaster Recovery Site (DRS) to which all

other offices, branches and booths are connected through WAN with 24x7 hours

attended operation]; Tier-2 [Head Office, Zonal Office, Branch or booth having

Server to which all or a part of the computers of that locations are connected through

LAN]; Tier-3 [Head Office, Zonal Office, Branch or booth having stand alone

computers]. The distribution of 17 sample banks is given in Table-1.


Table-1: Sample Distribution of Banks

Bank Category Total Banks Sampled Banks

State Owned Bank 4 3

Specialized Bank 4 2

Private Bank 30 10

Foreign Bank 9 2

Total 47 17

In order to accomplish the stated objectives, a key-note paper was prepared and

presented in a day-long workshop participated by a number of senior level IT

executives of different banks which was followed by a group discussion by the

participants. Several issues were raised in the discussion and the final report has been

prepared after incorporating the valuable suggestions where it is thought appropriate.


The paper is organized into four sections. After introduction including objectives and

methodological issues in section I, section II discusses the IT based products, online

services, and operational procedures in our banking sectors. The typical activities

performed by the IT department are also summarized in section II. Section III

describes the major part of the study i.e. review and analysis of the activities of IT

department of banks in 2011. Finally Section IV identifies a few challenges and puts

forward some recommendations.

2. IT Based Products and Typical Activities Performed by IT Divisions of Banks

All the banks have made substantial investments in technology platform and systems,

built multiple distribution channels, including an electronically linked branch

network, automated telephone banking, internet banking and banking through mobile

phones to offer its customers convenient access to various products.

With the various initiatives that the Bank has taken using technology, it has been

successful in driving the development of innovative product features, reducing

operating costs, enhancing customer service delivery and minimizing inherent risks.

IT facilitates all our core business processes and components, and serves to support,


sustain and grow transformation and the realization of our strategic objectives at

group and business unit levels. IT also plays a pivotal role in ensuring that our

business is better able to meet regulatory compliance requirements [Bhasin, 2008].

Infrastructure Setup for the Banks

Data Centre

All the banks have recently brought about a huge change of maturity in it its core

technology landscape with the bedding-down and fine-tuning of a number of new

technologies and infrastructural implementations, including the state-of-the-art data

centre, high speed multiprotocol labeling switching network, clustered servers,

virtualized server environments, precision cooling systems and central UPS backed

by standby generators.

Disaster Recovery Site

Considering the practicality of availability of high speed data network, many banks

established Disaster Recovery Sites deploying state of the art cluster servers with

replicating servers at geographically dispersed locations.

Communications

Most part of the country in which banks operate have limited telecommunications

infrastructure, which hampers data transfer and branch network coverage. To increase

capacity and service levels as well as to minimize network downtime, all main

telecommunications links which carry critical data between individual branches and

Data Centre, are bolstered with dual connectivity.

Various Systems being adopted by Banks to bring Efficiency

The Core Banking Solution (CBS)

Using the CBS Systems, banks are providing real-time online banking services to its

customers through all the branches across the country. The software have the

capability to meet all the services being provided through various electronic delivery

channels like ATMs, POS, Internet, mobile banking etc. It has also the capability to

provide centralized MIS and ad hoc reports. Business Process Reengineering (BPR)


that has been adopted by a few banks in our country has enhanced information

processing capacity enormously and efficiently leading the higher productivity of the

bankers. Moreover, it is also helping to ensure seamless flow of information in a

secured manner at all levels of the management. In today‟s highly volatile and

competitive business environment, a centralized robust CBS that can accommodate

all the electronic delivery channels is a must for survival in the race of competition.

Automated Clearing House

As member of Bangladesh Automated Clearing House (BACH), all the banks have

responded proactively by expanding its BACH operation facility to Chittagong,

Sylhet, Rangpur and Bogra regions under the guidance of Bangladesh Bank and have

ensured quick clearing of customers financial instruments. The banks have also

increased the number of cheque scanning points to alleviate the task of scanning at

one point. It is helping the banks to clear the financial instruments efficiently within a

very short time. Gradually the banks are expanding this facility under the guidance of

Bangladesh Bank to all the regions of Bangladesh so that all the branches of all banks

in our country can come under a single clearing house being operated in Dhaka.

Electronic Fund Transfer

As an active member of Bangladesh Electronic Fund Transfer Network commonly

known as BEFTN, all banks have initiated EFT transactions mostly for the remittance

payments. It is highly efficient and less costly for debiting some accounts in one bank

and crediting multiple accounts in multiple banks. For example, cash dividend

transfer of companies to its shareholders scattered all over Bangladesh having

accounts with various banks, salary transfer of large companies having offices at

various places of Bangladesh, Transfer of insurance premium from customer account

to the account of Insurance companies etc are being done very quickly through this

facility.

Online CIB

In response to Bangladesh Bank CIB Online Project, banks have been amongst the

proactive members providing required borrower information in time during 2011.

Many banks have automated the process to obtain the borrower information centrally

waiving the legacy system for fetching CIB information from branches and


accumulating. It has increased the information processing speed and has reduced the

time substantially to obtain CIB information of a customer.

ATM & POST Network

In Bangladesh, Dutch-Bangla Bank, BRAC Bank and Information Technology

Consultants Limited (ITCL) have established their large ATM and POST network all

over Bangladesh for providing ATM access for 24 hours to their customers. Besides

offering access to their own ATM network across the country, they are also providing

the same access to their customers worldwide through the network of

VISA/MasterCard. Other banks are also establishing and expanding their own

ATM/POST network and they are sharing the ATM networks of the above three

companies. Besides expanding the ATM networks, the banks are also giving

emphasis on increasing their POST network covering the major outlets for ease of

purchase for the customers. Many banks have installed POS terminals in major shops,

hotels, sale centre, etc., all over the country.

Internet Banking

Some of the technology driven banks are providing Internet Banking channel with

inclusion of a number of customer friendly features. The systems software are

providing the customers access to their accounts from mobile devices like smart

phones and tablets. The customers are now able to do banking from any place of

Bangladesh at any time.

Contact/Call Centre

Giving importance to customer satisfaction and easy access to banking services, some

banks have launched its high tech contact Centre. IVR, integrated with CBS and Card

system that enables customers to do banking by any phone system as well as

consultation with contact Centre agents (Phone banker).

Corporate Intranet System

Some of the banks have their in-house developed system that has a revolutionary

impact in implementing the paper-free communication inside the bank. An internal

web portal that holds features like circulars, messaging, news, instant notices,

employee profiles, on-line leave processing, on-line requisition, on-line cheque

requisition, MIS reports from CBS data and many more. Besides many banks have a


number of software being developed by its own resources or external vendors such as

Reconciliation System, Payroll System, Employees Tax Management System,

Foreign Exchange Return Software, Cash Transaction Reporting System etc.

Business Intelligence Software

Many banks of our country have crossed the first phase of automation. They have

established a modern Data Center and a Disaster Recovery Site. They have connected

all the branches and offices with DC and DRS through redundant telecommunication

links. They have expanded their service delivery outlets through incorporating

various electronic delivery channels. As the usages of various electronic and

computer systems are increasing in the banks, there is an information explosion in

such banks due to capturing more information electronically. In order to extract the

right information, banks are planning to implement various Business Intelligence

Software. After implementation of such systems, comprehensive MIS will be at the

finger tips of the top management. Data warehouse and Data mining tools are already

available in our market to establish the above system in our banks.

Document Management System

Banks are using paper based filing system and storing the files in the file cabinets in

the office. As a result, it is occupying costly office space. Moreover, this manual

filing system and storing system is not at all efficient if we consider the time of

storing the file, retrieving information from various files and compiling them to make

a report. Under such circumstance, banks are implementing Document Management

System. Under this system, whenever a document enters into bank premises, it will be

captured into the system and linked with the application where it is required.

The documents generated internally in the banks will also follow the same procedure.

There will be a searching system to retrieve the right document. The documents in the

system can be grouped in various ways for monitoring purposes. The physical

document will move to a document library located to a less costly place.

Fraud Prevention

Many banks have upgraded to send rule-based SMS alerts to prevent fraudulent

attempts while making payments over the counter as well as using Debit cards.

This prevents frauds and minimizes losses to customers, if the card has been stolen

and yet to be hot listed.


Cross Border Operations

Systems have been developed for providing support for remittance transactions by the

Overseas Exchange Houses of banks. The web based system provides real time

remittance transfer facility from overseas and instant transfer of the fund to the

customers‟ accounts or to other bank customers using BEFTN network or some other

mechanism taking help of some non-banking institutions/telephone companies etc.

3. Review and Analyses of the Activities of IT Department for 2011

ICT Infrastructure of Banks

According to the “Bangladesh Bank Information and Communication Technology

(ICT) Guideline for the Scheduled Banks and Financial Institutions”, commercial

banks are classified into three technical groups: Tier-1, Tier-2 and Tier-3. Around 59

per cent banks have introduced real time online banking, meeting the tier-1 of the ICT

guideline. The rest of the banks have introduced either tier-2 (24%) or tier-3 (17%)

[Uddin M. S. 2010].

Branch Automation

Despite the fact that the SCBs are large in terms of shares in assets and number of

branches, they could cover only around 64.92 percent of their branches under

computerization by 2011 while the PCBs and FCBs brought 99.15 and 100 percent of

their branches respectively under computerization. The performance of four SBs in

computerization is unsatisfactory, except one (BASIC Bank), with only 16.23 percent

of the branches computerized by the end of 2011. The following table (Table-2)

shows computerization of bank branches during 1998-2011 in Bangladesh.

Table-2: Computerization of Bank Branches by Categories, 1998-2011 (In %)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

SCB 2.65 4.14 7.02 8.35 10.09 11.89 14.43 16.12 16.38 19.4 21.7 23.59 40.15 64.92

SB 1.96 2.04 2.18 2.06 4.20 4.20 4.39 4.35 4.38 8.51 12.57 15.22 15.93 16.23

PCB 38.54 46.32 67.67 85.86 95.67 97.76 98.45 98.90 98.92 98.97 99.0 99.01 99.11 99.15

FCB 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Total 9.20 11.74 18.95 23.91 28.61 31.10 33.50 35.42 36.95 37.2 37.5 47.49 55.22 69.17

Source: Rahman, M. (1998-2007) and Survey Information (2008-2011)


IT Investment

In 2011, approximately, 759 crore taka was invested for IT operations in the banking

sector, excluding central bank. It can be estimated that a total of 9,108 core taka was

invested in this sector since 2000. Total investment up to 2011 would be about 20,000

crore, if we consider from the first installation of computer in the banking sector of

Bangladesh (Agrani Bank, 1968).

Computers and Servers

In banking sector of Bangladesh approximately a total of 75,756 computers and 7,487

servers are being used. All most all banks use brand computers and servers for their

day to day operations. It is found that Dell is the most popular brand followed by HP

and IBM. Moreover, Sun servers are also being used as a central server of many

banks.

Figure-1: Distribution of Computers and Servers in the Banking Sector in 2011

Source: Survey Information

Software

Operating System

In Bangladeshi Banks computers and servers are run by different operating systems.

It is found that Windows operating system is the most popular one having lower level

security compared to Linux, UNIX or Solaris. All laptops, Branch Servers, Client

PCs and Standalone PCs are run by Microsoft Windows Operating System (Windows

XP, Windows 7 and Windows Server 2003/2007). But in case of central servers

Windows (50%), UNIX (22%), Linux (11%), Solaris (11%) and OS 400 (6%) are

commonly used. Though Windows is the most popular in banking sector, use of other


robust operating systems indicate a positive sign towards security. But 28% banks

have experiences of operating system failure and, unfortunately, all were Windows

operating system.

Core Banking Software (CBS)

Core Banking Software plays the key role for an online bank and it is found that 46%

banks use foreign CBS, whereas 32% banks use local CBS. 19% banks developed

their CBS by their own experts and 3% banks use joint-venture CBS (Figure-2).

Architecture of banking software is an important issue. In Bangladesh 30%, 54% and

16% banks use two-, three- and both two- and three- tier architecture, respectively.

As number of tiers increases, security risks also increase simultaneously. As a result

more security experts are required for the operations of CBS. Interestingly, 15% of

the banks who are using three-tier architecture have security experts in the IT team.

Among the banks those are using two-tier architecture banking software have no

security experts at all.

Figure-2: Classification of Banking Software


CBS Modules

Number of modules in banking software sometimes indicates its working capacity.

Though Consumer/ Retail Banking module is common in all banking software,

Corporate Banking module is present among 75% banking software. Treasury

Management module is found in 56% software. Trade Finance and Product Analysis

module is present for 81% and 31% banking software respectively. Islami Banking

module is present only for 44% banking software.


Applications

Other than CBS a number of application software is being used in the banking sector

(Table-3). Most of the software is developed by the IT department. Minimum 5 to

maximum 70 small scale systems are developed by banks. Govt. banks are pioneer in

this regard. Janata Bank stood in the first position by developing about 70 systems for

their use followed by Sonali Bank, Agrani Bank and Rupali Bank. A major portion of

the IT professionals are engaged in this regard. It is observed that rather than develop

small systems in a scattered way by using centralized system under a single database

located in a single server would reduce the use of human resource, minimize cost

and time.

Table-3: List of Software that are being used in Banks (Except CBS)

Internal Accounting Management

System 63%

HR Management System 88%

Staff Payroll Management System 94%

Staff Provident Fund Management

System 88%

Staff Tax Management System 44%

Staff Leave Management System 63%

Staff Performance Management

System 38%

Management Information System 75%

Asset Management System 50%

Vault Management System 63%

SMS System 56%

Mobile Banking System 19%

Network Management System 10%

Virus/Malware Management System 81%

Tender Management System 25%

Recruitment Management System 63%

Customer Relationship Management 38%

Export Import Management System 6%

Share Management System 12%

Document Archiving System 12%

Workflow Management System 6%

Meeting Automation System 6%

Inventory Management System 38%

Foreign Remittance 12%

Investment Automation System 6%

Bug Tracking System 6%

IT Support Management System 6%

Card Processing System 12%

Receipt auto Printing system 6%

Photo Album System 6%

Pension software 6%

Transport Management System 12%

LC Monitoring System 18%

Bond Management System 6%

Foreign Currency Management

System

12%

Reconciliation software 6%

Nostro & Vostro A/C Maintenance

software

6%

Sanchaypatra Software 6%

Training Management System 18%

SBS 1,2,3 Reporting System 12%

Credit Management System 12%

MICR Cheque Requisition

Printing System

6%



Process Automation

Use of process automation system sometimes can help to understand the level of IT

operations of a bank. It is found that Loan Application Processing (LAP) is used by

31% banks. 44% banks use Intranet Application (Circular/Notice/Leave

Application/Attendance, etc.). Centralized Cheque Requisition is used by 81% banks.

Use of video conferencing is very low and only 25% banks use this facility. Lotus

Notes and Work Flow Management System is used by 6% and 13% banks

respectively. Blog is also used by 6% banks.

Remittance Services

To provide remittance services 63% banks use Own Exchange House Software.

Moreover, Western Union and MoneyGram is used in 69% and 38% banks,

respectively. 12% banks also use other software that is not mentioned.

Mail Services

In state-owned banks on an average only 7% employees use mail service for internal

and external communications. In case of private commercial banks it ranges from

20% to 60%. All employees of foreign banks use mail services and it is mandatory for

them. To provide mail services 40% banks use Microsoft Exchange Server, whereas,

Linux Based Email Server is used in 43% banks. Both Yahoo and Google Server are

used by 6% banks. 11% banks do not use this technology.

Database

The quality of a database sometimes poses the main problem for online banking with

a large volume of data. Currently, 7 types of database are being used in banking

sector including text file system also. Oracle is the most popular database followed by

MS-SQL Server. It is remarkable that correct decision about the selection of database

improved in the last eleven years in the banking sector (Figure-3).

Management of database is a very important and responsible job, as all types of

information regarding banking operations are stored in the database of a bank. In case

of any technical or security related issues, if database administrators fail to protect

data of a bank or reproduce data after any disaster, bank may lose its business due to

unavailability of information regarding banking transactions.


In our study, it is found that 44% of the banks using technical persons/professionals

to manage database who have no academic background of Computer

Science/Engineering or related subjects. But they have professional certificates like

OCP DBA, MCP DBA with an average experience of five years. 12% database

administrators have only short course training and they have been providing such

services in the banks with poor experience. It is also found that rest of the 44% banks

has proper database administration team with sound knowledge having professional

certificates like OCP DBA/MCP DBA, computer science background and adequate

experience of technology with minimum 6 to maximum 11 years of experience.

Figure-3: Use of Database in Different Banks in 2001 and 2011 (in %)


Clustering

High availability cluster is a group of computers that support applications that can be

reliably utilized with a minimum of down-time. Clustering provide continued service

when system components fail. Without clustering, if a server running a particular

application crashes, the application will be unavailable until the crashed server is

fixed. Clustering remedies this situation by detecting hardware/software faults, and

immediately restarting the application on another system without requiring

administrative intervention, a process known as failover. For centralized online

banking, clustered server provides high availability of data and ensures smooth data

services in case of any server failure in the data center. It is found that only 8% banks

have clustered network server, 69% banks have clustered database servers and 23%

banks use clustered application servers.

MS-

SQL

Serv

er

DB

/2

FoxP

ro

MS-

Acc

ess

Text

File

Oth

ers

45

40

35

25

20

15

10

5

0

http://en.wikipedia.org/wiki/Application_software

http://en.wikipedia.org/wiki/High_availability

http://en.wikipedia.org/wiki/Failover


Replication

Replication is the process of sharing information so as to ensure consistency between

redundant resources, to improve reliability, fault-tolerance, or accessibility. In case of

data replication the same data is stored on multiple storage devices in different places.

For example a data center may replicate its data into a disaster recovery site. Only

78% banks have real-time database replication technology, which implies that 22%

banks may not able to provide accessibility of data in case of any technical fault in the

production database server.

Licensing

Licensing of software is an important issue as no vendor will provide the highest

service or security in case of pirated software. Moreover, no liability goes to vendor if

any data loss occurred. In this regard, we found that 64% banks are using properly

licensed software (Anti-Malware, Database and Operating System with respect to the

number of users), 20% use software that are not properly licensed and 16% use

pirated software (among them a majority are going to purchase the licensed software

immediately). This is very much unexpected for this industry (Figure-4).We excluded

CBS in this regard.

Figure-4: Licensing of Software


DC and DRS

Among the surveyed banks, 59% have centralized database operations through data

center. Most of the data centers are located in Bangladesh except for foreign banks.

28% data centers have been set up at Gulshan, 54% at Motijheel, 9% at Uttara and

9% at Mohakhali. Most of the foreign banks have regional data center in India. About

http://en.wikipedia.org/wiki/Fault-tolerance

http://en.wikipedia.org/wiki/Data_storage_device


80% data centers are established in high rise buildings having high risk of

earthquakes and fire. Banks having data center also have disaster recovery site.

But 69% disaster recovery sites are hot, 16% are warm and 15% are cold. Banks

which mentioned that their disaster recovery sites as hot, expected that they would be

able to recover data within 1 to 5 hours; this duration is not acceptable for a site

which is hot, indicating risks regarding low availability of data in business hours. On

the other hand, banks having worm disaster recovery sites mentioned 2 to 24 hours is

required for data recovery which is in the acceptable range. Banks having cold sites

have no idea regarding this issue.

28% disaster recovery sites have been set up at Uttara, 14% at Savar, 16% at

Dhanmondi, 14% at Mohakhali, 14% at Mirpur and 14% at other areas. The lowest,

highest and average distances of data center and disaster recovery site are 5, 30 and

12.5 kilo-meters, respectively. For foreign banks the average distance is 1100

kilometers. Among the Bangladeshi banks 38% believe that the distance is

scientifically standard and 62% strongly believe that the distance is not enough to

avoid natural disaster like earthquake or cyclone. Moreover, 25% banks are planning

to replace their disaster recovery sites far away from data center, at least 100

kilometers away.

Regular and periodic testing of a disaster recovery site is an important and crucial

issue for a centralized online bank. This type of testing increases confidence and

expertise of recovering data in case of any disaster. Only 37.5% banks test it monthly.

In every three months 12.5% banks test it. On the other hand, 25% and 12.5% banks

test it half yearly and yearly, respectively. Unfortunately, 12.5% banks did not

mention their testing duration and 50% of the banks are afraid of testing the disaster

recovery site by shutting down the data center any time. This finding indicates the

poor quality and readiness of the technology including proper management of data

center and disaster recovery site.

Disaster Recovery Plan

In case of any disaster, disaster recovery plan plays an important role. Only 76%

banks reported that they have proper disaster recovery plan. There is no plan for 8%

banks and rest of the banks did not reply regarding this issue. Among the banks that

have disaster recovery plan, only 20% are of ISO standard. 40% banks developed

their disaster recovery plan according to the Bangladesh Bank guidelines and rest of


the 40% banks believe that they maintain their own standard which is a mixture of

several guidelines and standards.

Experiences of Disasters

23% banks informed that they have experiences of small and mid range disaster. On

the other hand 38% have no such experience and 39% banks did not respond.

Equipment failure, power outage, network failure, software failure, human error, disk

failure and virus attacks are mentionable disasters. On an average 2 to 24 hours were

needed to resolve the problems. Certainly, business was hampered seriously. Data

loss is a severe problem for online banks and 15% banks have experience of data loss

due to human error and disk failure.

Among the banks that have experiences of disasters, mentioned that they have serious

business impact due to disaster. 15% of the banks had financial loss like lost sales and

lost opportunities. 8% banks reported that relations among employees had been

hampered and it worked against the public image of the bank. Extra cost also required

to recreate lost data for 15% of the banks and 8% banks manually inputted the lost

data. Cost was also needed to purchase new hardware and software for 15% banks.

8% banks have experiences like delayed receivable and delayed orders due to

disaster. 12% of the banks have experience of vandalism by customers (Figure-5). To

overcome the problems 26% were dependent on vendors and 74% solved the

problems with the help of their own employees. Surprisingly, no bank mentioned the

total amount of loss due to disaster.

Figure-5: Impact of Disaster



Moreover in our study we found some drawbacks in establishing fire control

measures. 73% of the banks have fire resistant wall, 53% banks have fire resistant

ceiling and 80% of the bank‟s door is fire resistant. Only 40% banks maintain

complete fire control for all components of DC.

Figure-6: Fire Resistance (FR) Status of Data Centre (% of Banks)


Communication Infrastructure

Reliability of data communication link is a matter of the utmost importance for

smooth operation of online banking. As per our study it is found that all the banks use

fiber optic links for online branch interconnectivity, 77% of the banks have radio link

and 35% use VSAT link. But 46% of the banks use all links for both branch and

ATM network connectivity.

Figure-7: Use of Communication Links in Banking Network



In banking sector WAN based links are mostly provided by private companies. But

reliability of these links is not very good. That‟s why most of the banks use

dual/redundant links in online branch and ATM networks. According to our findings

we see that around 44% banks use dual links approximately in all branches and ATM

networks, 31% banks use dual links in the range of 70% to 90% online

branches/ATMs and only 25% banks use dual links for less than 70% online branches

(Table-4). From figure-8 we observe that 50% link-down incidents occur for more

than 15 minutes, 31% of incidents occur for more than half an hour and 19%

incidents occur for more than one hour.

Table-4: Status of Dual Communication link Used in Online Branches/ATMs

Range of computerized

branches/ATMs using Dual

links

% of Banks

Less than 70% 25%

70% to 90% 31%

Above 90% 44%


Figure-8: Network link-down incidents occurred in 2011



To identify the real scenario of problems faced by banks in the area of network and

communication services, our review team put the following question in the

questionnaire:

“What types of problems does your bank face related to network/communication

services of the bank and what are the reasons behind?”

In response to this question the experienced executives of IT departments provided

valuable information/comments that are given in the table below (Table-5).

Table-5: Problems Faced by Banks in the Field of Network & Communication Services

Types of

Problems Reasons

Data

communication

link down

Power supply problem both at Service Provider‟s end and Bank‟s

end

Snapping of network cables (WAN)

Occurrences of Thunder/ Storm / Heavy rainfall

Malfunctioning of the network devices

Packet loss/service disruption for satellite communication links

due to bad weather.

Lack of Vendor Capability to monitor link-down incidences

Vendors can‟t give support in proper time for the branches

located in remote area.

Power or Device failure at the POP/ BTS end of the intercity

backbone service providers (GP, CityCell, BanglaLink, BTCL,

etc.)

Occurrences of Fiber cable cut both in Intercity service

provider‟s backbone end and last mile end.

Microwave Tower and Radio antenna are broken down due to

storm/thunder

Network outage occurred specially in radio links during the rainy

or foggy weather due to signal attenuation/ failure.

Continued


Bandwidth

congestion and

slow branch level

operation

During updating the signatures of Antivirus software from

Central Server to Branch end, sometimes it takes excessive

bandwidth

Internet users often occupy excessive bandwidth

Sometimes high latency & packet loss occur

Insufficient recharging of UPS due to frequent load shedding.

Internet

unavailable or

Network/Browsing

speed slow

ISP Problems

Internal Problem

Over utilization

Sometimes occurrences of fiber cable cut (SEA-ME-WE-4) at

sea level and all traffics are the rerouting through a backup

link (satellite) by vendors.

Slow response of

Vendor Support

Late response of hardware and software vendors for

outsourced operation.

Since the OEM does not have direct presence in our country it

takes long time to get the product delivery and warranty

replacement also take longer time than expected.

Delay in providing the replacement warranty of Switch/Router

Also expert support and service model is not up to the mark

Network sharing

problem

Due to malfunctioning of OS/Applications sometimes specific

PC(s) face problem to resolve host name. As a consequence

network access problem occurs.

Branch is facing slow response to access their application due

to failure of lease line or unregulated bandwidth.


Malware Management

Malware are the greatest threats for security now-a-days. And management of

malware is a great concern for online banks. Though, all of the banks have anti

Table 5: Continued


malware licensed software, 27% banks have experiences of malware attack and they

were not being able to provide online services for three hours on an average.

Internet Banking

As internet is the cheapest delivery channel, the authors tried to give more emphasis

on the current status of websites of different banks. To classify the interactivity, we

have adopted a model, as seen on the Table-6.

Table-6: Framework for Classification

Type Basic Intermediary Advanced

Informational

Electronic Brochure

Institutional

Promotional

Contact Us

Special Offers

Search Engine

Report Download

Recruitment Forms

Hot Links

Customize

Subscription

Advertisement

Discussion Group

Transactional

Open Account

Product and Services

Investment and

credit Application

Balance

Statement

Fund Transfer

Bill Payment

Non Branch Bank

Banking by Service

Customer

Relationship

E-mail

Suggestion and

Complain Form

Calculator

Investment Advisor

Software download

Product and Service

Development

Videoconference

According to the model the findings are shown in the Table-7 below.

Table-7: Banks’ Website Providing Different Categories of Services

Type Basic Intermediary Advanced

Informational 97.2% 35.13% 25%

Transactional 30.5% 30.5% 2.12%

C. Relationship 60.2% 4.25% 0%



Outsourcing

Outsourcing of jobs is a common phenomenon in the banking sector. It is found that

almost all banks rely on a major portion for vendors support and services. In case of

network services, 27% banks outsource their 0-25% network operations, 10% banks

rely 25-50%, 36% rely 50-75% and rest of the 27% rely 100% on vendors. In case of

software 56% banks rely 50-75% on vendors whereas 11% banks rely totally. For

hardware support and service; 27%, 9%, 36% and 27% banks rely 0-25%, 25-50%,

50-75% and 75-100% on vendors respectively.

Figure-9: Outsourcing of IT operations in Banks


Plastic Money

Both Debit and Credit Card is being used in Bangladesh. Debit card, was introduced

by one NCB in 1999 and by the end of the year, the number of customers stood at

2,014. Similarly, Credit card came into Bangladesh‟s market in 1997 through one

PCB and one FCB; and the total number of customers stood at 1,607 by the end of

1998. Up to December, 2011, total number of plastic cards are being used is

calculated as 37,30,136 (Debit card: 31,52,458, Credit Card (local): 5,03,128, Credit

Card (International): 74,550) is show in Figure-10.


Figure-10: Number of Clients Holding Debit and Credit Cards, 1998-2011


POST

An electronic device having features to identify the special plastic card encoded with

information on a magnetic strip. Actually, the device functions as a receiving desk of

cash counter of a bank branch. POST allows all types of debit card and credit cards

for making transactions. A total number of 11,852 POST is being used in Bangladesh.

Most of them are operating in divisional towns. Dhaka is the city where 85% POST

are in operation.

ATM

Basically, ATM functions as a cash counter of a bank branch. ATM machine allows

all types of debit card and credit card for making transactions. At the end of 2011, in

Bangladesh a total of 3,458 ATMs are installed all over the country (Figure-11). Most

of the ATMs are installed in the divisional cities and district level. Around 39%

ATMs are installed in Dhaka. A very few ATMs are being operated in rural areas,

less than 2%. It is mentionable that 61% ATMs is set up by DBBL. At the end of

2010 total volume of ATM transactions were recorded as BDT 290 billion (Financial

Stability Report 2010, Bangladesh Bank).


Figure-11: ATM Booths in the Banking System, 1998-2011


Figure-12: Volume of Transactions Through ATM and POS, 1998-2010


The total volume of transactions through ATM is recorded at TK. 0.70 billion in

1999, growing moderately up to 2001, and recording a transaction of TK. 2.11 billion

at the end of December 2001. Since 2001, a significant increase in transactions

through ATM is observed showing a transaction volume of TK. 37.19 billion by the


end of 2006. After that it increases exponentially due to the huge setup of ATMs by

DBBL. The total volume of transactions through ATM is recorded at TK. 290 billion

in 2010. Besides, using the POS terminals, the customers made payments of TK. 0.02

billion in 1999 against their purchase of goods and services which increased to TK.

5.58 and 30.5 billion by the end of 2006 and 2010 respectively. It is evident from

figure-12 that a significant growth in transactions through ATM is observed relative

to POS terminals during 1998-2010.

Tele-banking

Tele banking refers to the services provided through phone that requires the

customers to dial a particular telephone number to have access to an account which

provides several options of services. Despite huge potential, tele-banking services

have not been widened enough in daily banking activities in Bangladesh. Only four

banks so far provide a few options of tele-banking services such as detail account

information, balance inquiry, information about products or services, ATM card

activation, cheque book related service, bills payment, credit card service and so on.

Bangladesh Automated Clearing House (BACH)

With the technical and financial assistance from DFID, UK, Bangladesh Bank started

live operation of Bangladesh Automated Clearing House (BACH) in Dhaka region,

the first electronic clearing house in the country, from 07 October 2010. Under the

automated cheque processing system, two types of clearing are processed-high value

(HV) and regular value (RV). Instruments of BDT 0.50 million and above are

processed under high value clearing. Starting from October 2010 to end-December

2010, about 96.89 thousand HV items of BDT 757.22 billion and 3.86 million RV

items of BDT 892.19 billion were processed under the Bangladesh Automated

Clearing House (BACH) system.

SWIFT

SWIFT is a Belgium based international network for the bank community which the

commercial banks use widely for international business. It provides instant message

transmission services to its member banks, sending and receiving fund transfer

message both outward and inward, receiving NOSTRO account statement and

correspondence between banks, transmits remittance related messages, transmitting

payment instructions, transmit letter of credit (L/C) related messages such as, L/C


issuance, advising, subsequent amendments, negotiations, add confirmations and

reimbursements. Now (2010) in Bangladesh 45 banks out of 47 are the members of

SWIFT.

Reuter

A message providing electronic device linked with international financial market.

It Provides information services regarding market rate, commodity rate, market news

or market views, foreign exchange inquiry, dealing, obtaining current status of

foreign currency rate, money market information accumulation, etc. Till now 33

banks are using Reuter for accessing international financial market.

Mobile and SMS banking

Mobile banking is a term used for performing banking activities via a mobile device

such as a mobile phone. Mobile banking is most often performed via SMS or the

Mobile Internet but can also use special programs called clients downloaded to

the mobile device. According to our survey 22 banks, that means 46% banks provide

some sort of mobile banking (such as SMS and alert banking) in Bangladesh.

But only three banks adopted truly mobile banking in Bangladesh during the last

years where balance transfer is possible. A l ist of banks providing Mobile

Banking/financial services are given below (Table-8).

Table-8: List of banks providing different Mobile Banking Services

Ca

sh i

n/

Ca

sh O

ut

P2

B P

aym

en

ts

B2

P P

aym

en

ts

G2

P P

ay

men

ts

P2

G P

ay

men

ts

P2

P P

ay

men

ts

Oth

ers

(DP

S,

Insu

ra

nce,

Mic

ro

fin

an

ce e

tc.)

Inw

ard

F

ore

ign

Rem

itta

nces

TBL √ √ √ √ √ √ √ √

DBBL √ √ √ √ √ √ √

BRAC √ √ √ √ √ √ √

MBL √ √ √ √ √ √ √ √

EBL √ √ √ √ √ √ √ √

DBL √

ABBL √

PBL √

BAL √ √ √



PC Banking or PC Home Banking

PC banking refers to use of personal computer in banking activities while under PC

home banking customers use their personal computers at home or locations outside

bank branches to access accounts for transactions by subscribing to and dialing into

the banks' Internet proprietary software system using password. Only 5% banks are

able to provide PC banking in Bangladesh.

Trends in Technology Adoption

Figure-13 shows the trend in technology adoption in the country‟s banking sector

over the period 1998 to 2011. It is evident from the graph that, out of different

innovative technology driven products and services, significant response among the

banks is observed in adopting ATM, online, and SWIFT during the period 1998-2011.

Figure-13: Trends in Technology Adoption 1998-2011


Use of Online Banking by the Customers

General customers of the banks are much aware about the online banking services

that banks offer. Among the surveyed customers, about 7% use computer and 13%

know about online banking facilities. Among them 61% use this service to withdraw

money, 44% use to check account, 39% transfers fund, 34% deposits money, 17%


pays utility bills and 6% to purchase products through online (Figure-14). It indicates

the popularity of online banking now-a-days.

Figure-14: Reasons for using Online Banking


Security

Occurrence of Online Threats/Frauds and Financial Losses:

With the increase of online business and transactions banks have been facing more

and more online threats. According to our study, 23% banks faced malware attack,

31% banks faced attack through E-mail, 54% banks faced Spam-related threats and

23% banks faced Phishing attack. Due to these attacks, problems like denial of

services, file manipulation, bandwidth congestion and other operational hazards have

been faced by the banks. To fight against the above mentioned attacks/threats, the

security measures that have been taken by the banking sector are listed in the Table-9 below.

Table-9: Adoption of Security Measures by Banks

Security Measures % of

Banks

User Education Program 38%

Security Awareness related training to both customers and bank employees 38%

Regular update of software by installing security fixes and patches 38%

Firewall 46%

Use of regularly updated Anti-Malware software and filtering. 46%

Monitor Logs for Unusual Traffic 38%



Risk Perceived by the Banks

The Survey tried to find out the perceived degree of risk form the responding banks.

Some 30% banks mentioned that current situation of information security is not

enough to prevent any virtual or physical damage of information management system,

perceiving the highest risk. Around 40% of the surveyed banks believe that they are

in high risk of information loss at any moment. Reasons for this perception despite

having ICT policy in every bank were interesting. 15% banks reported that they are

under moderate risks, whereas 10% and 5% banks feel that their risk is low and very

low respectively.

Figure-15: Degree of Information Security Risk Perceived by Banks


The following table (Table-10) shows the reason for perceived risks in details.

Table-10: Why Banks Perceive Riskier Information Environment

Reasons for Perceived Risk % of Banks

Lack of proper training 31%

Lack of adequate knowledge on Information security measures 31%

Inadequate support of top management 8%

Lack of security awareness of top management 15%

Inadequate budget for Information security measures 31%

Lack of skilled IT Security Professionals 31%

Gap between Top Management and IT Management 15%

Lack of quick response by the vendors 15%

Not updated with the high tech solution regularly (time lag exists) 40%



Another important reason that increases the risks of information system is the

employees of the banks using the information system for day to day operations. Here

is the detail listing of the factors for which employees may pose security threats.

Table-11: Awareness of Employees about Information Technology

Factors Category Percentage

Are you a Computer Science/IT graduate? Yes

No

2%

98%

Do you have enough expertise in IT for your current jobs? Yes

No

38%

62%

Do you regularly read IT related news, magazines and

journals?

Yes

No

31%

69%

How frequently do you change your password?

After every1 month

After every 3 months

Once in a year

Not at all

70%

20%

4%

6%

Do you use Anti-Spam software?

Yes

No

Not respond

26%

48%

26%

Do you use Phishing filter?

Yes

No

Not respond

11%

35%

54%

Do you use Anti-Virus software?

Yes

No

Not respond

76%

19%

5%

Do you regularly update anti Virus software?

Yes

No

Not respond

78%

17%

5%

If yes, then how frequently?

Everyday

Weekly

Monthly

Auto online update

Not respond

14%

18%

32%

15%

21%

Do you use password protected or automatic screen saver

(that should be activated after a period of inactivity)?

No

Password protected

Automatic

21%

34%

45%

Do you open email/attachment that come from known

person/source without virus scan?

Yes

No

61%

39%



IT Budget

In our study we found that a major portion of the IT budget is used to purchase

hardware and it was 60% in the year 2011. Next highest sector is network and 18%

was allotted for it. Third highest budget went to software sector. Surprisingly, it is

found that budget for security, training and audit was very poor. Ignorance of these

sectors may pose serious security threats for the banks. The rest of the 6% went to

power management, vehicles, stationary and decoration purpose.

Figure-16: Distribution of IT Budget in 2011


Human Resource Management

Size of the IT Department

A common complain of IT Heads is that, the total number of employees working in

the department is not adequate and they are under tremendous pressure. In our study,

56% IT Head complained that they are not happy about the employee size of the

department and they have been facing problems to manage the day to day operations

of the banks with this limited size. In case of State-owned Commercial banks the

problem is more serious. Here the ratio of IT employees and Non-IT employee ranges

from 1:100 to 1:206. Whereas for specialized banks this ratio ranges from 1:32 to

1:523. In case of private commercial banks it is 1:26 to 1:92. No data is found for

foreign banks. Computerized branches per IT employee also measured to verify the


shortage of IT employees. For State-owned commercial banks ratio of IT employees

and computerized branch ranges from 1:7 to 1:14. For specialized banks this ratio

ranges from 1:15 to 1:54. For Private commercial banks it is 1:0.5 to 1:2.6. Data is

not available for foreign banks.

Loss of professionals is an important problem in IT department of different banks.

Sometimes, it creates severe problems if there is no alternative of the person. To hire

a qualified person within a very short time is not so easy and sometimes impossible.

8% banks have such bitter experience. Most of the cases professionals move from one

bank to another for higher salary or position. Sometimes, they leave the country

forever. 54% CTOs demanded a standard rule from Bangladesh Bank regarding

switching jobs among banks. But 30% said that it‟s a right of the professional to

move and 16% CTOs did not make any comment.

80% of the IT heads shared that their feelings towards the team is very good. They

mentioned that they have very good corporate culture and the IT officers are very

good in relation among them and they are very much co-operative. They also added

that, when any problem raises, full team works together to solve it. Rest of the IT

Heads (20%) argued that working environment should be improved. Sharing of

ideas/knowledge, cooperation among employees and relationship among team

members of these banks are very poor, which is much unexpected to work together.

Gender Discrimination

In Bangladesh female IT professionals are discouraged in banking sector, especially

in private banks. In case of foreign banks available data does not represent the true

scenario and hence omitted. Near about 14% IT professionals of govt. banks are

female. In case of private banks it is only 2%. As a whole, in the banking sector,

approximately 8% female workers are working. The reason behind the negligence of

selecting female workers in private banks, as mentioned by the IT heads, is round the

clock shifting duty that is not welcomed by the society and family members.

Education and Expertise of Professionals

Among the IT professionals 32% have M. Sc, 16% have B.Sc. and 15% have

Diploma degree in IT related subjects. Whereas 14% of the existing professionals

have no IT related degree. 23% have professional certificate like MCSE, CCNA,

OCP, etc. The scenario was not so good ten years ago. Five to ten years ago it was


very difficult to hire expert professional due to the lacking of available human

resources. But now-a- days the scenery has been changed. In the job market quality

professionals are increasing day by day. The reflection is found in the industry.

IT Heads reported that 29% IT professional are good, 57% are very good and the rest

of the 14% are excellent in their experience and responsibilities.

Figure-17: Distribution of Education of IT Professionals


Training

IT changes so rapidly that without proper and regular training it is quite impossible to

maintain and boost up the technology. Without up to date knowledge it is sometimes

impossible to run the business. Security may be hampered due to the absence of latest

technological knowledge. It is the duty of the bank to upgrade their employees

regularly providing training in home and abroad. But this is much more ignored by

the most of the banks. Near about 1% budget goes to training purpose! And 62% IT

Heads are not satisfied regarding this issue.

However, within this limited budget they tried to send their employees for better

training as much as possible. The figure-18 shows that about 61% trainees received

software training, specially on Core Banking System. Hardware training received by

only 22% and 13% received training on network technology. Training on Database,

Security and Audit are seriously ignored, near about 1%.

As a team leader, IT heads also required regular inputs of latest technological

knowledge by attending conferences, seminars and workshops in home and abroad. In


2011, such opportunities were availed of by a large number of IT Heads. On an

average an IT Head attended 7 such programs. Minimum and maximum number of

such programs attended by the IT Heads ranges from 1 to 13. But this types of

facilities must be ensured for the mid and bottom level professionals also.

Figure-18: Training Provided in 2011 (%)


Surprisingly, though the budget allocation for training is very low, bypassing this

limitation some times it is not also possible to send the employees to receive training

due to the absence of sufficient time (59%), unavailability of the course (33%) and

insufficient employees (8%).

Figure-19: Why Training was not given?



Work Load

As 59% IT Heads reported that time is not available for the employees to receive

training, it indicates that they are under tremendous pressure in the industry. This is

also supported by the findings drawn in figure-20. This graph also shows that on an

average a professional of private bank has to stay near about 10.5 hours per day to

complete his/her duty. For govt. bank it is not too long. Moreover, employees of

private banks works for minimum 9 to maximum 12 hours on an average per day.

Whereas it is 8 to 10 hours for a govt. bank‟s employee.

What about the IT Heads? Are they suffering from excessive work load? Not

unlikely, 62% of them have been suffering from excessive work load. Consequently,

34% of them added that they have been suffering from hypertension, influencing

heart disesase and diabetic also. “Leave is not very easily enjoyable for an IT

professional, though it‟s a human right by definition”, one lamented.

Figure-20: Average Working Hour of IT Professionals Per Day


Figure-21: Job Satisfaction of IT employees



Job Satisfaction

Are the people who are navigating the electronic banks, by spending their life, happy

about their job facilities and benefits that are given to? Research findings show that

80% of the IT professionals are happy about their current duties. 20% are working

against their wish, indicating some risks for the banks and those employees are not

being utilized properly causing financial loss for the banks.

53% are satisfied with their salaries and a major portion (47%) are not happy at all.

Regarding bonus maximum employees are satisfied (80%). 73% employees are

satisfied with leave and loan facilities. 23% employees are not satisfied with leave

facilities, indicating an unrest in the industry. This may hamper operations of a bank

if employees don‟t get proper leave facilities. Job switching rate may increase in this

regard. Working environment and cooperation of colleagues are very nice in the

banking sector. About 94% employees are agreed with these facilities. Most

worsening situation prevails for training and library facilities. Approximately 55%

employees are not getting proper training and 74% professionals are not satisfied with

library facilities.

Salary Structure

It is found that 47% IT professionals both in public and private sector banks are not

happy about their salaries. Among them 45% and 55% belong to private and public

sector banks respectively. After critically analyzing the salary structure of IT

employees we found that salaries varies from Tk. 8,000 to Tk. 3,50,000. Average

salary of Bottom-level, Mid-level and Top-level executives are Tk. 22,063,

Tk. 60,429 and Tk. 1,62,000 respectively.

Figure-22: Salary Structure of IT employees



It is also found that private sector banks are giving higher salaries to their employees

than public sector banks. On an average a bottom-level executive of a private sector

bank is getting 1.53 times higher salary than govt. banks. In case of Mid-Level and

Top-level executives it is 2.85 and 4.22 times higher than govt. bank‟s professionals,

respectively. In the context of Bangladesh, compared to other sectors it is not very

much unusual.

Job Switching

If employees are not satisfied about their job with all aspects, unrest may prevail on

the banking sector hampering security and operations. Current switching rate of IT

professionals are shown in the graph below. It is seen that 30% IT professionals

changed their jobs 1 to 3 times. 23% professionals replaced jobs 4 to 6 times in

different banks. Only 14%, mainly the top level professionals/head of IT have

experiences of more than 7 jobs in the carrier path. 33% employees of the IT

department have no experience of switching job, of course most of them are the

newly recruited professionals have been waiting for experiences and looking for

better opportunities!

Figure-23: Job Switching of IT Professionals




ICT infrastructure: On an average 5-7 years were needed for the private banks to

become IT savvy bank, whereas govt. banks has been developing IT infrastructure

for 16 to 40 years. Still now the latter are not in a very good position to provide latest

technological services for most of the customers. Although most of the banks are

offering various types of services to their customers by incorporating latest online

banking facilities, many banks (mainly govt. banks) are lagging behind. Still now

41% banks did not meet the Tier-I status. Lack of long term vision, planning and

initiatives; shortage of manpower, adequate and approval of IT budget, inadequate

knowledge of employees, non-co-operation among employees, fear of technology,

business process reengineering, lack of proper network infrastructure, late response of

hardware and software vendors for outsourced operation, availability of good banking

software, delay in procurement process and lack of advanced training are the main

problems for them. To overcome these problems, every bank should have an ICT

budget of certain portion of their annual profit. This budget may be spent for ICT

infrastructure development and manpower training. IT Professionals can be recruited

to fill up the gap between actual demand and existing manpower. To motivate the

BOD and Top management regarding this issue, an effective steering committee

might be formed where MD/DMD may be the chairman; Head of IT will be the

member secretary; and Heads of others selective departments may be the members.

This committee may act as bridge between Top Management and IT management.

Data Center and Disaster Recovery Site: DC/DRS concept is changing day by day

due to technological development. Now the server hardware do not remain idle,

instead, all these server hardware are placed under a virtual system although these

physical servers are placed in both DC and DRS. However, a required number of

virtual servers are created and application software/ Database software are installed

on these virtual servers. As per need, the resources (processor/RAM) attached to these

virtual servers can be de-allocated /reallocated from one virtual server to another as

and when required at any time. In such implementation, both costing and efficiency

will be improved.

Datacenter of all banks are built in Dhaka. Among them 80% are in high rise building

having high risk of earthquakes and fire. On the other hand Disaster Recovery Sites

of maximum banks also established in Dhaka within a air distance of 10 kilometers


from the datacenter, showing very high risk of natural disaster like earthquake.

Distance of 30 miles is a minimum, scientifically. Foreign banks have set up their

Disaster Recovery Sites on an average 1100 kilo-meters away from datacenter.

Special decision can be taken by all banks including Bangladesh Bank in this regard.

Moreover, it is found that testing of Disaster Recovery Site is not satisfactory.

Frequency of testing should be increased by reducing the duration. By increasing

audit by the central bank proper testing can be ensured.

Training: It is found that IT training is very much neglected by the banks, though it

is a crucial issue. Necessary budgetary allocation should be there for this purpose.

Training programs can be arranged by national, international and institution (bank)

level according to current needs. Blending program can be arranged jointly by

vendors (IBM, Oracle, Microsoft, Cisco, etc.), experienced and expert IT professional

of different banks and academicians from different institutes like BIBM, BUET, DU,

etc. Specialized training and certification program for IT professionals of banks may

be conducted by BIBM (M. Sc. in Electronic Banking, Certified Electronic Banker, etc.).

Mobile Banking: In future, usage of ATM/POS will decrease while mobile banking

will take their position. Every merchant will have a smart mobile set that will act as a

POS machine and the mobile phone of the customer will act as ATM card.

The customer will pay the merchant bill through a software supplied and installed by

the bank in his/her mobile phone and the merchant will see his bank account through

his/her mobile phone in the same way. In this infrastructure, customer network can be

spread to every corner of Bangladesh. In order to provide prompt service and to

expand the customer base up to the village, this electronic delivery channel is the

cheapest and widely used delivery channels. We should reap the benefit of it.

Role of the Central Bank: Regarding the opinion about the role of Bangladesh Bank,

38% IT Heads are very happy and 24% are not, demanding additional and improved

roles of Bangladesh Bank. However, 38% banks did not make any comment

regarding the question. Bangladesh Bank generally visits the DC and DRS of

different commercial banks once in a year. CTOs feel that it is not enough; frequency

should be increased for tight and better monitoring to minimize data service risks by

including more technical experts in the team to monitor/audit the DC and DRS.


Bangladesh Bank should update its audit quality by including experts having updated

knowledge regarding new technology. IT security policy of Bangladesh Bank should

be updated in each year ensuring proper implementation of it.

Central Bank can develop a grading method with the help of bankers, IT professionals

and academicians by which banks can be rated with respect to their current ICT status

each year. This will help to identify the real ICT status of a bank, increasing the

competition among banks to boost up their technology and provide better ICT

services to the customers.

Central Bank can arrange international workshops, seminars regarding ICT to share

knowledge with developed countries and create awareness among top level

management of different banks.

Regarding purchase of foreign banking software, there should be some clear

guidelines from the central bank. For example, foreign software company must have a

local agent to provide support and services. As a result local software industry will be

developed and foreign currency will be saved in future by minimizing support and

service cost.

Bangladesh Bank can play a vital role in setting up a Cell/Wing including a Data

Bank for all of the commercial bank. That will help to collect and share, up to date

information regarding current status, growth, sufferings and problems of the banking

sector of Bangladesh. It is mentionable that Reserve Bank of India has setup an

institute in March 1996, located at Hyderabad named “Institute for Development and

Research in Banking Technology (IDRBT, www.idrbt.ac.in)” as an Autonomous

Centre for Development and Research in Banking Technology. IT Heads of all banks

agreed that banking sector should have a center for sharing electronic banking

experiences, problems and solutions. They suggested that this center can be setup in

Dhaka and Bangladesh Bank, BIBM, BAB or CTOs forum can take initiatives in this

regard.

Software: A centralized Core Banking Solution (CBS) having interfaces with all

electronic delivery channels is a must for all banks. It should have capability to

comply all international compliances like BASEL – II/III. It should have a strong and

flexible MIS feature so that the management can take any kind of report when

necessary. Besides CBS, banks are using various types of software applications.

Frictionless flow of information from one application to another is a big challenge.


Actually banks should have a master plan/strategic plan where application integration

should be given preference while choosing software. Moreover, as the usage of

application software increases, the collection of large volume of data increases which

leads to information explosion at a stage. Many types of Business Intelligence

Information (BII) are there in this large volume of data. For this reason, various types

of Business Intelligence software are available in the market. After implementation of

this software, the management will be fed with BII that will help them to take

strategic decision.

Documentation: Paper documents are occupying costly office space in preserving

them in file cabinet. It has another negative side i.e. extracting information and

compiling it takes time which is again costly. In order to overcome these problems,

the bank should implement a Document Management System (DMS) that might have

links with other application software where the documents are necessary. A faster

search mechanism should be provided with this DMS. Grouping of the documents

can be done in various ways so that a group of documents while searched should

bring all the member documents in a very faster way.

IT Security and Audit: Every year, ICT infrastructure of each bank should be

audited by qualified auditors. An interesting finding is that, auditors of 47% banks are

not trained enough to perform IT audit properly. It is clear that poor auditing system

of those banks may create another risk for security if auditors fail to identify security

holes. Banks should not compromise on this issue. More training can be provided to

the auditors or experts can be recruited. Priority should be given for IT security by the

auditors. The security of the information flow inside the bank and outside the bank

should be focused. It may include Storage security, Database security, OS security,

Application security, Network security etc. Moreover, there is a big challenge for the

banks having Internet connection to their corporate Intranet. It is the security issue

that must be addressed properly and adequately with adequate hardware, software and

manpower. Every bank should strengthen its ICT security department in ICT division.

Implementation of PKI where possible; recruitment of ethical hacker; placing a

proper IT security control and monitoring system etc., are the crying need of these

banks. Surprisingly, 15% of the banks who are using three-tier architecture have no

security expert in the IT team. Immediate actions should be taken by top level


management of those banks to recruit proper security experts or to develop security

experts quickly by providing high quality training. Awareness program should be

arranged frequently to educate both employees and users regarding ICT operations.

Communication Infrastructure and Vendor Management: Support of the vendors

is a major problem of all banks. In most of the cases vendors fail to provide better and

quick service in due time according to the SLA. Communication link-down problem

is the most common problem in this industry as it is totally guided by the third

parties. Business of all banks is being hampered regularly and frequently due to this

network link-down instance. According to our findings 15 banks have been suffered

by more than a total of 10 thousand link-down incidences in Year 2011

approximately. To overcome this difficulty banks are now using dual/redundant links

for each online branch and ATM which increases the administrative cost.

20% of the banks reported that in case of hardware failure the replacement of

components also takes longer time hampering the business often. Even network

connectivity for real time server replication between DC and DRS goes down that

interrupts business data management as well as triggers risk factors. In this regard,

appropriate SLA with Bank guarantee should be maintained properly to resolve these

problems. Dependency on vendors should be reduced by improving expertise of own

IT professionals. Reserve Bank of India developed a private network as a pilot project

that works in limited areas of India. Banking sector of Bangladesh may think of

developing a private network along that line.

Power: Power crisis and power management is another big issue in the banking

sector. Mainly, day-to-day banking operations of semi-urban and rural online

branches are seriously hampered due to shortage of power supply. Frequent power

failure, inadequate generator and insufficient charge of UPS due to frequent load

shedding are very common scenario of Bangladesh. Bank can think of using solar

energy as an alternate source of power supply at remote areas where frequency of

load shedding is very high.

Outsourcing Problems: Development or implementation of e-banking systems and

other technical tasks such as upgrading and integrating existing legacy systems are

very complex. Banks require very high level of technical and project management


competence to carry out without outside help. Even the best companies need to

recognize the limitations of their expertise and when to outsource certain e-business

functions.

Many banks outsource all or part of e-banking related operations owing to a lack of

in-house expertise or simply to cut costs. Some aspects of outsourcing, for example

the type and number of partners, can present particular management challenges.

Outsourcing works in some cases but can create a risk of the bank losing control of its

critical functions. For this reason, if a bank needs to outsource its e-banking

operations, it should do so with due consideration to outsourcing risks. General good

practice in planning, negotiating and actual outsourcing is applicable here.


REFERENCES

Ali, Muhammad Mahboob, (2001), „Globalization and Corporate Planning of Banks

in Bangladesh: An Overview‟, South Asian Journal of Management, India, Vol.76,

No. 3.

Habib, S. M. A, M. S. Uddin Khan, M. R. Alam, K. Rabbi and K. M. Bahauddin.

(2011) „Implication of the use of Information and Communication Technology in

Channeling Workers‟ Remittances to Bangladesh”, Research Monograph 001, BIBM,

Dhaka.

Bangladesh Bank (2010), Guideline for ICT Security for Scheduled Banks and

Financial Institutions, 2010, Dhaka, Bangladesh.

Bangladesh Bank (2010), Financial Stability Report, Department of Off-Site

Supervision.

Banstola, A. (2007), „Prospects and challenges of E-banking in Nepal‟, The Journal

of Nepalese Business Studies, Vol. IV, No. 1, Dec. 2007.

Bhasin T M (2008), E-commerce in Indian Banking, India: Authors Press.

Daniel, E. (1999), „Provision of electronic banking in the UK and the Republic of

Ireland‟, International Journal of Bank Marketing, Vol. 17, No. 2.

Diniz Eduardo (1998), „Web Banking in USA‟, Journal of Internet Banking and

Commerce, Vol. 9, No. 2.

Greenstein, Feinman, Electronic Commerce, UK: McGraw Hill, International Edition

Mia, Rahman and Uddin, (2007), E-banking: Evolution, Status and Prospects, The

Cost and Management, Vol.35, No.1, January-February 2007, pp. 36-48.

Ministry of Information (2010), ICT Act, 2006, Bangladesh Government, Dhaka.

Uddin M. S., M. R. Alam, K. Rabbi (2010), „IT Readiness of Banks for Business in

Cyber Space‟, Banking Research Series, BIBM, Dhaka, Bangladesh.

Uddin M. S., M. R. Alam, K. Rabbi. (2011), „Mobile Banking in Bangladesh‟,

Banking Research Series, BIBM, Dhaka, Bangladesh.

Rahman, M. (2008), „Innovative Technology and Bank Profitability: The Bangladesh

Experience‟, Working paper series 0803, Research Work, Policy Analysis Unit

(PAU), Bangladesh Bank, (www.bangladeshbank.org.bd).

Rahman, M. (2002), „Present Status of E-Banking in Bangladesh‟, Journal of the

Institute of Bankers' Bangladesh.


Raihan, A. (2000), „E-Commerce in Bangladesh: A Readiness Assessment‟, A Brief

Report, December 2000.

Shirin A.K. ( 2011), Information Technology in Financial Services, 1st Edition,

2011, Tithy Printing & Packaging, Dhaka, Bangladesh.

TechBangla.(2000). „E-commerce in Bangladesh: A Readiness Assessment‟.

Research Brief, December 2000.

The Daily Star, Dhaka, Sunday, July 5, 2010.

The Financial Express (2009), Dhaka, Wednesday, May 13, 2009.

http://en.wikipedia.org/wiki/Cyberspace