OCR Document

93

IXINTRODUCTION

Introduction

1.1Background of the StudyI am the student of Masters of Business Administration (M.B.A) study the subject's related to business including Accounting, Management, Finance, Marketing, Mathematics, and Social and cultural status and little about science and technology. The schools of business at home and abroad try to familiarize each student as they move comfortably in the business environment. But only the theoretical study in the class rooms is not enough rather a practical experience and the only means of practical experience is internship program.

1.2 Rational of the Study

In the business environment at home & abroad there are lots of financial institution, business firms, and industries which provide this facility towards us. If we could not get this facility of internship then a wide gaps will take place between our study and experience. I think this is an extremely valuable asset for us.

We the students of business do this usually for three months. In our country there are many banks particularly the esteemed private sector banks, and elite business firms provide this. In this respect I have done my internship at IFIC bank ltd. the one of the most renowned private bank in Bangladesh. I am thankful to IFIC Bank for this.

1.3 Objective of the Report

The objectives of the reports is to provide

(A general description of the banking

(An exposure of practices of different banking activities in IFIC Bank Ltd...

(Relevant rules, regulations, theories and practices for banking.

SignificanceIFIC BANK LTD. is one of leading private commercial banks of the country. Through it has 62 branches all over the country; it is performing banking activities very successfully. To mobilize funds from surplus units and deploy funds to deficit units, the bank is playing a great role in the economic development of the country. IFIC BANK LTD. is one of the key players of countrys economic development. 1.4 Scope of the ReportThe report covers different departments of IFIC BANK LTD, like General Banking, Loans and Advance & Foreign Exchange etc. It also presents a brief scenario of IFIC BANK LTD in total.1.5 The limitations of the Study

This is my first report. I am not aware of the format and writing style of the report. I think" this is the main reason why some limitations have been recognized here. But the reports submitted to IFIC Bank academic section's library by the internees student of various universitiess worked as guideline to prepare this report. I have also used reliable sources of information by using some text book, the manual etc. I have tried to do the performance measurement by using the data published in annual reports.

So I think the main limitations of this report are

- Lack of experience to prepare a report.

-Lack of clear knowledge of different ratios.

-Lack of information1.6 Methodology:I interviewed the branch incumbent, department in charges, officers and clients. I have observed the activities of the people of different desks, I did also observe the practice of the branchs Management. I have reviewed the Annual Reports of IFIC BANK LTD., Bank Companies Act-1991, Negotiable Instrument Act-1881. I have also reviewed Different Publications regarding banking functions, foreign exchange operation, credit policies, and Practical Orientation Dairy Maintained by me.

-This report is formatted into five segments

(a) The Introduction

(b) The Organizational Profile

(c) Overall Banking Operation

(d) Human Resource Function In IFIC Bank. (e) Performance Measurement (f) Analytical Study and Recommendation-In this report the banking operation has been looked into as far as possible and a performance measurement has been done by using different ratios and diagrams.

.

iFIC Bank at a sketch2.1 OVERVIEW OF IFIC BANK LTD.

International Finance Investment and Commerce Bank Limited "IFIC Bank" came in to existence In 1976 as a joint venture between the Government of Bangladesh and sponsors In the private sector with the objective of working as a finance company within the country and setting up joint venture banks/financial Institutions abroad. IFIC was Incorporated as a public limited company with an authorized capital of Tk. 20 core and paid up capital of Tk.10 core. IFIC commenced Its operation on February 28,1977 with a Subscribed capital of Tk.5 core, contributed by leading private sector entrepreneurs In the country. the Government held 49 percent shares and the rest 51 percent were held by the sponsors and general public.

But, In 1983 when the Government allowed banks In the private sector IFIC was converted Into a full-fledged commercial bank. the Investment company has transformed Into banking company In June 13,1983 and started activities from June 24,1983 through Its Motijheel Branch.

At the very beginning the 60 percent share are owned by private entrepreneur and 40 percent are owned by Govt. at the end of 1984 the authorized capital was 10 core and the paid up capital was 7crore 15 lacs Taka only.

Annual report as on 1983. the ownership of non Govt. sector is included-

1. Mr. Jahurul Islam, Chairman.

2. Salman F. Rahman, Vice-Chairman.

3. A.M. Aga Usuf.

4. Syed. Mohsen Ali.

5. Mr. Ahmadul Kabir. Owner of "Dainic Shangbad".

2.3 Mission, Vision, Strategy Statement

To establish and conduct all types of banking financial investment and trust business in Bangladesh and abroad.

To carry on any business relating to wage earners scheme as may be allowed by Bangladesh Bank from time to time including maintaining of foreign currency accounts and any other matter related there to.

To contract or negotiate all kinds of loan.

To form, promote, organize, assist, participate or aid in forming, promoting or organizing any company or others.

To encourage, sponsor and facilitate participation of private capital in financial, industrial or commercial investment.

To purchase or otherwise acquire, undertake the whole or any part in the business.

To take part in the formation, management, supervision or control of the business or operations of any company.

2.3 OWNERSHIP STRUCTURE

The government of the peoples' Republic of Bangladesh now holds 35 percent of share capital of the bank. Leading Industrialists of the country having vast experience In the field of trade and commerce own 34 percent of the share capital and the rest Is held by the general public.

2.4 Composition Of the Board

Unlike others bank in the private sector, Board of directors of this bank is an unique combination of both private and Govt. sector experience. Currently it consist nine (9) directors, of them four represent the sponsors and general public and four senior officials in the rank and status of Join secretary/ Additional secretary represent the government. The Managing Director is the ex-officio director of the board. Board of Directors, the apex body of the Bank, formulates policy guidelines, provides strategic planning and supervises business and performance of management while the Board remains accountable to the company and its shareholders. The Board is assisted by the Executive Committee and Audit Committee.

2.5 CAPITAL AND RESERVE

IFIC Bank has been consistently maintaining the Capital Adequacy Ratio, as prescribed by Bangladesh Bank. This has been possible by a policy of building up both capital and reserves. It started with an Authorized and Paid-up Capital of Tk. 100 million and Tk. 63.20 million respectively in 1983 which stand at Tk. 500 million and Tk. 406.39 million respectively in 2003

Overseas Branch

The bank has a branch in Karachi in Pakistan which has started operations in early 1987. Within the short span of its operations the branch procured sizeable business subsequently. The bank opened its second branch at Lahore in 1993. Bath the branches enjoy reputation and good will in Pakistan and have been operating profitably.

Branch Network (Domestic)

The branches of the Bank cover all the important trading and commercial centers in Bangladesh. As of date, it has 62 branches within Bangladesh. All the branches are equipped with computers in addition to modern facilities, logistics and professionally competent manpower.

2.10 Key Figures

IFIC Bank follows the credit policy within the framework of three main objectives namely, maintenance and improvement of quality assets, recovery on time and building up an efficient customer oriented credit delivery system..

The portfolio includes working capital financing, project financing, and import-export financing and domestic trade financing etc. the continued to extend working capital facilities to customers to ensure smooth and uninterrupted operation of their business. At the same time, it expanded project financing portfolio to meet the growth demands of the economy for long term finance in a depressed capital market.

So far the Bank has financed 295 projects. Among them 48 projects were financed during 2013 amounting to Tk. 1205.60 million. The Bank also participates in Syndicate Financing and so far has disbursed Tk. 1000 million in 10 projects. The bank successfully handled two credit lines viz-IDA credit No.2340 and ADB loan No.1070 BAN (SF) with recovery rate of 100% and 87% respectively. Under these programs the Bank sanctioned loans of Tk.428.00 million to as 53 units.

2.11 Terminology

IFIC Bank has been successfully providing in the recent years a good number of new products besides so called traditional services to meet the increasing demands of the clients and the members of the public. Some of them are: Visa Credit cards, ATMs, Phone Banking, Pension Saving Scheme, Death Risk Benefit Scheme, Consumer Credit Scheme, and Education Plan.

2.12 Human Resource Department: (HRD)Human resource department involves all management decisions and practices that directly affect or influence the people, or human resources, who work for the organization. In recent years, increased attention has been devoted to how organizations manage Human Resources. This increased attention comes from the realization that an organizations employees enable an organization to achieve its goals and the management of these human resources is critical to an organizations success.

Functions of HRD:

1. Planning for Organization, Jobs and People

Strategic Human Resources

Human Resources Planning

Job Analysis

2. Acquiring Human Resources EEO (Equal Employment Opportunity)

Recruiting

Selection

3. Building performance

Human Resources Development

Human Resources Approaches to improving Competitiveness

4. Rewarding employees

Performance Appraisal

Compensation and Benefits

5. Maintaining Human Resources

Safety and Health

Labor Relation

Employment Transitions

6. Managing Multinational HRDImportance of HRD:Today, professionals in the human resources area are important elements in the success of any organization. There jobs require a new level of sophistication that is unprecedented in human resources management. Not surprisingly, their status in the organization has also been elevated. Even the name has changed. Although the terms personal and human resources management are frequently used interchangeably, it is important to note that the two connote quite different aspects. Once a single individual heading the personal function, today the human resource department head may be a vice president sitting on executive boards, and participating in the development of the overall organizational strategy.

Philosophy:

Human Resource works with the employees in the organization. Its main views are to put the right people in the right places and also make them an asset for an organization.

Objective:

Human Resource Management refers to the practices and policies one need to carry out the people or personnel aspects of ones management job. These include:

Conducting job analysis (determining the nature of each employees job)

Planning labor needs and recruiting job candidate.

Selecting job candidates

Orienting and training new employees

Managing wages and salaries (determining how to compensate employees)

Providing incentives and benefits

Appraising performance

Communicating (interviewing, counseling, disciplining)

Training and development

Building employee commitment.

2.13 District Wise Branch Distribution:

2.14 Balance Sheet:

2.15 Profit and Loss Account:

2.16 Cash Flow Statement:

.

3.1 General Banking: During my practical orientation I was placed in IFIC Bank Limited. First I was placed in Branch. I have completed General Banking and some exposure in Advance in this branch. General Banking is the starting point and main function of all the banking operations it is the department which provides day-to-day service to the customers. Everyday it collects deposit from the customers by allowing broking interest rate, meets their demand for cash by honoring Cheques and lend it to the customers against ending interest rate. Lending interest rate in higher than borrowing interest rate, this is the profit for the bank.Functions of this departmentAccounts opening section. Cash section Remittance section. Clearing section. Accounts section.Establishment.3.1.1 Accounts Opening SectionThis section opens different types of account for their valued customers. Selection of customer is very important for the bank because banks success and failure largely depends on their customers. If customers are bad they creates fraud and forgery by their account with bank and, this destroys the good will of the banks. So, this section takes extreme caution in selecting its valued customer.

Types of Accounts Accounts can be classified into two types:

Operative Account Non-Operative Accounts

PSS AlC

Current Deposit Account

MIS A/CSavings Deposit Account

FDR AlCSOD AlC

STD AlC

3.1.2 Documents for Opening Special Account: ParticularsNecessary Documents

3.1.3 Limited Company

Certificate of incorporation

Certificate of Commencement of Business (in case of Public Limited Company only)

Form XII, (List of all Directors, Designation, Address, Specimen signature)

Memorandum of Association

Articles of Association

Power of attorney

Resolution of the Board of Directors authorizing opening of an account.

3.1.4 Societies/Clubs/Associations

Other than above-mentioned common documents, resolution of who will operate the account must be noted.

3.1.5 Proprietorship Firm/ Partnership Firm

Name of authorized persons, designation, specimen signature, Trade license, Passport (if there is no introducer) Account must be opened in the name of the firm,

Three form should describe the names and addresses of all partners,

Partnership deed is required,

Trade license from City Corporation is needed,

Letter of authority is achieved

Account Opening Procedure in a flow chart:

Issuing Cheque books to the customersThe bank issues 10 leaves cheque book for savings account and 20, 50 and 100 leaves cheque books for current account. To complete the issuing of cheque books a customer has to fill up the requisition form for cheque books. Then a new cheque book will be filled up by the account number of the customer. The requisition slips are maintained and recorded in a register as voucher.

Dormant accountIf any account is inoperative for more then one year is called dormant account. To operate this accounts manager's permission is necessary.

Transfer of AccountAccount holder may transfer his account from one branch to another branch. For this he must apply to the manager of the branch where he is maintaining his account. Then the manager sends a request to the manager of the branch where the account holder wants to transfer his account for opening the account.

Kinds of Account HoldersBranch may open accounts of the following categories of depositors:

1) Individuals - Individuals are adult persons of 18 years age or more who are competent to

enter into contracts.

2) Joint accounts - More than one adults jointly or adult with minor(s) may constitute joint

accounts.

3) Sole Proprietorship concern - A business trading concern owned by a single adult person

is sole proprietorship concern.

4) Partnership firms - A business concern owned and managed by more than one persons

which may be registered or not registered is a partnership firm.

5) Private limited - A body corporate formed and registered under companies Act 1994,

with limited members.

6) Public limited - A body corporate formed & registered under companies Act 1994 with

limited liability of the shareholders and with no upper ceiling of shareholding both

certificate of incorporation and certificate of commencement has given by registrar.

7) Trusts - Trusts are created by trust deed in accordance with the law.

8) LIQUIDATORS - Liquidators are appointed by court of law for companies going into

liquidation.

9) EXECUTORS - Executors are appointed by a deceased himself before his death by

"with" to settle the accounts of the person after his death.

10) Club/Associations/Societies - There are organizations created & registered or not

registered under societies registration act.

11) Co-operatives - There are corporate bodies registered under societies registration Act or

companies Act or the co-operative societies Act.

12) Non-Govt. Organization - NGOs are voluntary organizations created & registered and

society's registration Act or co-operative societies Act.

13) Non-Trading concern - These are organization registered under societies registration Act

or companies Act or co-operative societies Act.

3.1.6 Other Products and Service Current Deposit Accounts (CD account)- A current account may be opened by any individual, firm, company, club, associates, etc. Bank: may, however, refuse without assigning any reasons to open current account to any body.

- Minimum balance of Tk. 5000 while open.

- No current account will be opened with Cheques.

- Fund in the current deposit account shall be payable on demand.

- Minimum balance to be maintained of Tk. 1000.

- If minimum balance falls then incidental charges of Tk. 50 will be realized half is early.

- No interest is payable on the balance of CD.

- In case of closing of current account Tk. 100 is to be realized against incidental charges.

Saving Deposit Accounts (SB account)- 6.5% interest is provided to depositors.

- The minimum amount of balance to be maintained with this type of account is Tk. 2000

- A depositor can withdraw two times in a week for more withdrawal depositors are not entitled for any interest.

- To withdraw above Tk. 20,000 the depositors has to notice.

- No savings account will be allowed to be overdrawn.

Short term deposit (SID A/C). . - Generally opened by big business firm.

- Interest depends on the amount deposited.

- Minimum amount of balance has to be maintained with STD account is Tk 2 lacs, while open

- Interest is given at a rate of 4%

- Minimum amount is Tk 5000 must be maintained.

Pension Savings Scheme (PSS)- This is a scheme to make the customer introduced to the banking system under this schemes the customers are to pay a certain of money at monthly interval up to a period of 5 to 10 years and after the period they will get the returns along with the full interest earned during the period and the principal amount. Most of the clients under this scheme are middle crass and lower middle class people

- Generally opened by small sever.

- Minimum Amount Tk 500 and minimum Tk 2000

- Interest rate 9.00%

- Maturity 5 to 10 years.

PSS 5 yearsMonthly installment Principal amount BonusWith Bonus

50036,265150037,765

100072,530 300075,530

20001,45,0606000 '1,51,060

Liquidation of PSS

- In case of premature encashment if the period is below 1 year then no interest will be provide.

- ff above 1 year interest will be given @ Savings.

Monthly Income Scheme (MIS)- This is another attractive scheme offered by this bank under this scheme the depositors an: to deposit a fixed amount to the bank' and for their fixed amount they are entitled to earn :; monthly payment from the bank. This is an attractive scheme for the retired person. This i_ also a kind of FDR, but here the interest is given monthly to the customers the deposit will b_ 50,000, 10,00,000, 1,50,000 respectively.

- The rate of interest is 10.80%

- Maturity is 05 years.

Liquidation of MIS- 200 bank charge for premature encashment as out access duty.

- Closing before 6 months no benefit will be providing.

- Preen casement between 6 months to 1 year interest are provide according to savings rate. - Pre encashment between 1 to 3 years savings interest are provide 0.50 + saving rate

- Pre encashment between 3 to 5 years. Interests are providing 1.00+saving rate.

Fixed Deposit Reserve (FDR)- FDR is neither transferable nor negotiable.

- It can be opened by all.

- Provided 7.50% - 8.25% interest.

- Interest rate very on principal amount.

- The deposited principal amounts have not fixed by the Bank.

- One can deposit any sum of amount under fixed deposit reserve.

- In case of with drawl before maturity the previous maturity period is considered to pa: interest according to savings interest rate 6.5% it is known as pre matured en-casement.

Interest rate have been rated by the Management of IFIC Bank on FDR have given below

Maturity periodRate of interest

3 months7.5%

6 months8.00%

1 year8.25%

2 year8.25%

3 year8.25%

Liquidation of FDR

- Only the account holder himself and the authorized person can liquid the FDR after maturity.

- In case of joint name authentication from both is necessary.

- If demand before maturity the last expired duration is considered to pay interest.

Account opening processStep l- Receiving filled up application in bank's prescribed form mentioning what type of

account is desired to be opened.

Stop 2- The form is failed up by the applicant.

Step 3-Two copies of passport sized photographs for individual and in case of firm's

photographs of all partners are necessary.

Step 4-Applicant must submit required document.

Step 5-Applicant must sign specimen signature sheet and give mandate.

Step 6-Introducer's signature and accounts number verified.

Step 7- Authorized officer accepts the application

Step 8- Minimum balance is deposited only cash is acceptable.

Step 9- Account is opened and deposit slip and a cheque book has given.

3.2 Remittance in Bangladesh

Cash handling from one place to another is risky. So, bank remits funds on behalf of the customers to save them from any mishaps through the network of their branches. IFIC has a wide network of branches all over the country and offers various types of remittance facilities to the public. They serve as best media for remittance of funds from one place to another. This service is available to both customers as well as non-customers of the bank. The followings are some of the important modes of transferring funds from one place to another through banks. These are

i) Payment Order (PO)

ii) Demand Draft (DD)

iii) Telegraphic transfer (TT)

3.3 Local Remittance Sending money from one place to another place for the customer is another important service of the bank. This service is an important part of transaction system. In this service system, people, especially businessman can transfer funds from one place to another place easily. There are three kinds of technique for remitting money from one place to another these are

-Demand draft (DD)

-Pay order (PO)

-Telegraphic Transfer (TT)

3.3.1 Pay Order (P.O) IssuePay order gives the right to claim from the issuing ban1e A payment is an instrument from one branch another branch of the bank to pay a specific sum of money. Unlike cheque there is no possibility of dishonoring because before issuing pay order the bank takes money in advance. There are three reasons behind use of P.O:

Remitting Purpose

Advice to Pay

Payment against bill submitted to the bank.

Pay Order consists of three parties:

- Beneficiary

- Applicant

- Counter Part.

Commission and charges of P.O:

Amount of P.O Commission on Remittance15% VAT on Commission

Up to TK. 100,000 254

100,001 to 500,000 508

Above 500,00010025

Payment Process of Paying Bank:

Payment is made through clearing.

Payment of Pay Order :

An the PO issued by the bank is crossed one it is not paid over the counter. On the contrary the amount is transferred to the payees account. To transfer the amount the payee must duly stamp the PO.

Cancellation of P. 0:

Step-I: Application writes to the manager of the account maintaining branch. Step-2: Verification of specimen signature.Encasement of P.O: To encashment of that P.O. the payee of the instrument deposits the P.O. to his bank. The bank sends the pay order to the issuing bank through clearing. Then the P. O. is passed through the deposit section and the P. O. is send back to the clearing house again and later the amount of P.O. credited to payees account.Flow Chart of P.O.-How It Works :

If any A/C with

IFIC BANK(the collecting

Banker)

3.3.2 Demand Draft (DD) Issue DD is an order of issuing branch on another branch of the same bank to pay specified sum of money to payee on demand. It is generally issued when customer wants to remit money in any place i.e. outside or the clearing house area of issuing branch. Payee can be the purchaser himself or another mentioned in the DD. It is safe technique of transferring money from one place to another.

Payment process of the paying bank:

-Test confirmation if the DD value is more then Tk. 25,000.00

-Confirm that the DD is not forged one.

-Confirm with sent advice.

-Make paymenCommission and charges of DD:

Postal charge Tk. 15.00 + commission 0.10% + 15% Vat on commission.

How DD Works:

Cancellation of DD:

Step - I : Application is writing to the manager of the account maintaining branch.

Step - 2 :Verification of specimen signature.

Step - 3 :Journal posting for incoming:

-Bills payable DD payable Dr.

- IFIC General AIC Cr

Journal posting for outgoing:

-IFIC general A/C Dr.

-Party A/C Cr.

Step - 4 : Send a letter to paying bank

3.3.3 Telegraphic Transfer (TT)

Issuing branch requests to another branch to pay specified sum of money to a specific person on demand by telegraph or telex or telephone. Transfer of fund by TT is the rapid and Convenient but expensive method.

TT (Issue):

(Customer fills up the TT form and pays the amount along with commission in cash or by cheque.

(The respected officer issues a cost memo after receiving the TT form with payment seal, then sign it and at last give it to the customer.

(Next a TT confirmation slip is issued and its entry is given in the TT issue register.

(A test number is also put on the face of the slip. Two authorized officer signs this slip.

(The respective officer transfers the message to the drawee branch mentioning the amount, name of the payee, name of the issuing branch, date, test number and his her power of attorney (P.A.) number.

(The confirmation slip is send by post.

How TT Works (Outward) :

Payment Process of TT:Step-I: Test confirmation

Step-2: Confirm issuing branch

Step-3: Confirm payee's account.

Step-4: Confirm amount

Step-5: Make payment

Step-6: Advice sends to the Head Office for reconciliation.

Commission and Charges of TT:

-Telephone or Telex charge TK.30.

-Commission of Principal amount.

-15% VAT on commission.

Entry for TTa)On Issuing of TT :

1.Cash / Respective A/C (issuer) -------------- Dr.

IFIC BANKGeneral A/C ---------------------------- Cr.

(Principal amount)

Income A/C-postage -------------------------- -------Cr.

Income A/C-Commission on TT ---------------- --Cr.

2.IFIC BANKGeneral A/C -------------------------- Dr.

Bills Payable A/C-TT Payable ------------------- Cr.

b)On Payment of TT

Bills Payable A/C TT Payable ---------------------- Dr.

Party A/C --------------------------------------- Cr.

Test Arrangement of TT & DD

Test is the security code by decoding which any branch can be sure that the TT or DD is not forged one. Only the authorized officers know the test code. Each bank maintains secret code for this. That is the test arrangement is the combination of different secret codes.

3.4 Clearing Section This section receives all kinds of cheque in favor of the valued client for clearing on the part of their banking services. After receiving cheque it is necessary to endorse it and cross it specially. Clearing of cheque is done through the clearing house in Bangladesh Bank.

- 1 st clearing

- 2nd clearing

Types of cheque for clearingThere are four types of cheque for clearing:

1) Inward clearing cheque.

2) Outward clearing cheque.

3) Inward bills for collection.

4) Outward bills for collection.

Inward clearing cheque

It refers the instruments drawn on IFIC bank received by other banks in the clearing house from the representative of other bank.

Outward bills for collection

When our branch sends Cheques to other branch ofIFIC bank is called OBC. Accounting treatment of this process:

IFIC general (Sender's Branch) Dr.

Depositor's A/C Cr.

Inward bills for collection (lEC)

There are two types of clearing, firstly cheque collects from the other branch of IFIC banle These Cheques are settled by sending mCA i.e. debiting depositors account and crediting

sender's branch account..

Secondly cheque collects from another bank outside the clearing house. These cheque are settled debiting depositors account and sending DD or TT in favor of senders bank.

Outward Clearing ChequeCheque drawn of another branch of IFIC bank are called Outward Clearing Cheque. These types of cheque are directly sent to the respective branch and request them to send IBCA.

3.5 Cash Section

Cash department is the most vital and sensitive organ of a branch as it deals with all kinds of cash transactions. This department starts the day with cash in vault. Each day some cash i.e. opening cash balance are transferred to the cash officers from the cash vault. Net figure of this cash receipts and payments are added to the opening cash balance. The figure is called closing balance. This closing balance is then added to the vault. And this is the final cash balance figure for the bank at the end of any particular day.

Functions of cash department-Cash payment

-Cheque cancellation process

-Cash receipt Cash payment

Cash payment is made only against cheque.

This is the unique functions of the backing system which is known as "payment on demand" .It makes payment only against its printed valid cheque.

Cheque cancellation processReceiving cheque by the employee in the cash counter and verification of the following by the cash officer in the computer section:

i) Date ofthe cheque. (it is presented within 6 month from issue date)

ii) Issued from this branch.

iii) An amount in figure and in word does not differ.

iv) Cheque is not torn or mutilated. Then gives pay cash seal and sends to the payment counter and payment office makes payment.

Cash receipt.

Another important function of this department is receipt of cash. Depositors deposit money in the account through this section by deposit slip.

i) It receives deposit from depositors in from of cash.

ii) So it is the "mobilization unit" of the banking system.

iii) It collects money only its receipts from.

iv) It receives cash for issuing pay order TT, DD.

Books maintained by this section:i) Vault register: It keeps accounts of cash balance in vault at the bank.

ii) Cash receipt register: Cash receipt in whole of the day is recorded here.

iii) Cash payment register: Cash payments are made in a day are entries here.

iv) Rough vault register: Cash collection for final entry in vault registers done here, as

any error and correction is not acceptable.

v) Cash balance book: Balance here is compared with vault register. If no deference is

found, indicate no error and omission.

3.8 Closing of Account To close an account parties may be request to send an application along with the unused leaves of the cheque book. On receipt of the application the following steps are taken.

i) The signature of the account holder is verified.

ii) The number of the unused cheque leaves shall be noted therefore.

iii) Debiting the incidental charges to the account.

iv) The account holder is advised to draw the remaining balance.

3.9 Accounts section This is obviously an independent and unique department, which works as the composition of all the departments of the branch. This section is fully computerized. So the conventional large ledger and journal books are not kept like the some nationalized bank. It receives the vouchers from all departments and prepares the subsidiaries and maintains accounts.

Establishment sectionThis section deals with employees salary, many types of internal expenses such as purchases of stationary, equipment, machinery, payment of labor cost and convence. In case of leave of absence employee collects prescribed form from this section.

Locker facilitiesLocker facility is available in this branch. Generally people keep their valuable ornaments in the locker. Lockers are three sizes one are small and other are middle and big. If any body want to open a locker s/he has to pay rent Tk. 1800 for big size, Tk. 2500 for large and Tk. 1200 for small size annually. Any individual can open a locker.

3.10 Credit and Risk Management

The word credit comes from the Latin credo means I believe. It is a lenders trust in a persons/firms/companys ability or potential ability to command goods or services of another in return for promise to pay such goods or services of another in return for promise to pay such goods or services at some specified time in the future. The making of loans and advances has always been prominent profitable function of the banks. Sanctioning credit to customers out of the funds at its disposal is one of the principal services of a modern Bank.

As a financial intermediary the primary objective of a bank is to collect deposits from the surplus units (who have surplus fund) and utilize the same by lending the deficit units (whose requires funds). Bank is the proper medium of those parties to utilize the capital properly. Bank guild the surplus parties where to invest. Bank collect deposits from surplus parties in return bank give them some percent of benefits that are gained out of the different loan or credit extended to the borrowers. Bank takes residual portion of benefit from the credits.

As Bank deals with the money collected from the depositors repayable on demand. So, it can not afford to lock up it fund for long or uncertain periods. Consequently, Bank must safeguards its deposits through effective management of all possible risks associated with its credits.

One of the most significant risks of a bank is exposed to is, what is generally termed as Credit Risk, which is the primary risk in the banking system. Since the largest slice of income generated by a bank and a major percentage of assets is subject to this risk, it is obvious that prudent management of this risk is fundamental to the sustainability of a bank. Management of Credit Risks needs to be a robust process that enables the Banks to proactively manage the credit portfolio in order to minimize losses and earns an acceptable level of return for the Shareholders.

Risk is inherent in all aspects of commercial operation. However for Banks Credit risk is the fundamental to the sustainability of a bank. Thus Credit Risk is an essential factor that needs to be managed.

Credit Risk

Credit risk is the possibility that a borrower will fail to meet its obligation in accordance with agreed terms. Credit risk, therefore, arises from the Banks dealings with or lending to corporate, individual and other Banks or financial institutions.

To prevent excessive flow of credit and proper use of it, banks require taking on the appropriate credit appraisal procedure to impose financial discipline on borrowers. The procedure that organize, control and motivate the borrowers will called credit management.

Some Definitions related with Credit Risk are quoted below :

The concept of high quality loan cannot exist in the absence of objective credit standards.

- R. Taggart Murphy.

Asset quality is the most important fundamental dimension of bank analysis. Asset quality ultimately drives everything, including margins, capital adequacy, underlying profitability, investment sentiment and valuations. Roy Ramos, Head of Banking Analysis, Goldman Sachs, Hong Kong.

Necessity of Credit Risk Management:

Banking in the new century is even more prosperous than the past owing to revolutionary advancement in technology, as well as, development of new ideas and systems. Consequently, every Bank has to be wellequipped to coup with the modern banking system and to adopt effective means and ways to negotiate its all possible risks especially the Credit Risk.

Credit constitutes the major part of the Banks asset portfolio and managing credit risk is by far the most important concern of the Bank. The failure of a commercial Bank is usually associated with the problems in Credit portfolio and is less often the result of shrinkage in the value of other assets. As such, Credit portfolio not only features dominates in the assets structure of the Bank, it is critically important to the success of the Bank as well.

While Banks have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a banks counterparties. This experience is common in both G10 and non G10 countries.

For most banks, loans and advances are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book, and both on and off the balance sheet. Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments other than loans and advances, including acceptances, inter bank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in the extension of commitments and guarantees, and the settlement of transactions.

Management of Credit Risks needs to be a robust process that enables Banks to proactively manage credit portfolio in order to minimize losses and earns an acceptable level of return. Given the fast changing dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and disintermediation, it is essential that Banks have robust Credit risk management polices and procedures that are sensitive and responsive to these changes.

Since exposure to credit risk continues to be the leading source of problems in banks worldwide, banks should be able to draw useful lessons from past experiences. Banks should now have a keen awareness of the need to identify measure, monitor and control credit risk.

To provide a board guideline for the Management of Credit Risk towards achieving the objectives of the Bank, for efficient and profitable deployment of its mobilized resources and to administer the Credit portfolio in the most efficient way, a clearly defined, well planned, comprehensive and appropriate Credit policy and Control Guidelines of the Bank is a prerequisite

On the other hand, IFIC is a new generation Bank. It is committed to provide high quality financial services/products to contribute to the growth of G.D.P. of the country through stimulating trade & commerce, accelerating the pace of industrialization, boosting up export, creating employment opportunity for the educated youth, poverty alleviation, raising standard of living of limited income group and over all sustainable socio-economic development of the country.

In achieving the aforesaid objectives of the Bank, Credit Operation of the Bank is of paramount importance. Hence,IFIC has changed a lot as credit culture has been shifting towards a more professional and standardized Credit Risk Management approach. In view of the above, the report is prepared on Management of Credit Risks through the case study of IFIC Bank Ltd., which an effort to carry out a comprehensive study on how to manage the Credit risks and how to keep it in acceptable and appetite level.

Core Risks of Banking:

The risks of banking are complex and multidimensional. Banks are exposed to a number of risks of different types. Resultantly, managing risk is an art of identifying, measuring and mitigating the risks.

In view of the above, Bangladesh Bank has identified 05(five) core risk area relating to banking business which are as follows:Core Risks of Banking

The Management of above Core Risks of Banking are described below :

Credit Risk Management It has already been stated in this report that Management of Credit Risk is the most significant and key task of the bank. Credit Risk refers the probability of loss arising from the failure of a counterparty/ customer to perform as per agreement with the Bank. The failure may result from unwillingness of the borrower or decline in either his/ her financial condition or in the market scenario. Eventually, credit risk comes as the most sensitive part of risk management of the Bank.

Credit Risk has been discussed further in detail hereinafter.

Asset Liability/ Balance Sheet Risk Management A Bank assets are mainly developed with and backed by its liabilities. Thus successful banking requires efficient and effective management of its assets and liabilities. Banks should have wellorganized Asset Liability Management desk to monitor Balance Sheet Risk and Liquidity Risk.

The term Balance Sheet risk refers to potential change in earnings due to change in the rate of Profit, Quality of assets, etc.

On the other hand, Liquidity risk can be defined as the risk or chance of failure to meet up any withdrawal/ disbursement request by a counterparty/ customer.

Foreign Exchange Risk Management Since Foreign Exchange involves purchase and sale of foreign currencies against local currency, thus Foreign Exchange risk is the risk or chance of loss due to unexpected movement of market price of the currencies of different countries or the price of the assets denominated by foreign currencies.

In our country all the foreign exchange transactions are carried out on behalf of the customers against underlying exchange transaction rules and regulations laid down by Bangladesh Bank, UCPDC (Uniform Customs & Practices for Documentary Credit)and other Government bodies.

For effective and efficient management of Foreign Exchange Risk, Banks should have welldeveloped and wellstructured Foreign Exchange Risk Manual and International Standard Dealing Room Manual.

Internal Control & Compliance Internal Control & Compliance is the key of good management and a strong core of an organization. It ensures safe and smooth operations within the organization. All the rules and regulation practiced in the banking industry are meant to safety and efficiency in banking operations of all kind.

Internal Control & Compliance ensures that all the working units of a Bank abide by those rules and regulations without any fail. Sometimes operational loss arises out of errors and fraud due to lack of Internal Control & Compliance.

Prevention of Money Laundering Risk Money laundering refers to the act of converting black/ illegal money into white/ legal money or property. The process of money laundering requires involvement of a bank, which is very alarming for the banking industry.

Money laundering risk can be defined as the loss of reputation and expenses incurred as penalty for being negligent in prevention of money laundering. For successful prevention and efficient management of the risk Banks should designate Compliance officers at Head Office and at the Branches, who independently review the transactions of the accounts to verify suspicious transactions.

Risk assessment is the process of analyzing potential losses from a given hazard using a combination of known information about the situation, knowledge about the underlying process, and judgment about the information that is not known or well understood.

Risk is defined as the product of a hazard (such as damage costs) and the probability that this hazard occurs. In other words, (probability) x (hazard) = risk. The first two values must be known or at least estimated in order to define risk.

The process of combining a risk assessment with decisions on how to address that risk is called risk management. Risk management is part of a larger decision process that considers the technical and social aspects of the risk situation. Risk assessments are performed primarily for the purpose of providing information and insight to those who make decisions about how that risk should be managed. Judgment and values enter into risk assessment in the context of what techniques one should use to objectively describe and evaluate risk. Judgment and values enter into risk management in the context of what is the most effective and socially acceptable solution.

The combined risk assessment and risk management process can be described as a six step process. The first three steps are associated with risk assessment and the last three with risk management.

Flow Chart of combined risk assessment and risk management process:

The procedure of Managing the Core Risks in IFIC are described below :

Being a compliant bank IFIC pursues the guidelines of Bangladesh Bank meticulously, in consequence of which the bank is being able to keep the risks at low level.

JBL has formulated a comprehensive Credit Risk Management Policy Document in line with the guidelines issued by Bangladesh Bank, which is discussed hereinafter.

The bank contemplates to have its assets assessed by an independent agency for the purpose of working out strategy to manage credit risks.

In order to manage the asset liability risk IFIC has a wellorganized Asset Liability Management Desk under direct supervision of a wellformed and well groomed Asset Liability Committee (ALCO) with a view to monitor and avert significant volatility in Net Profit Income (NPI), investment value of exchange earnings. The ALCO of the Bank monitors Balance Sheet risk and reviews liquidity contingency plan. In order to manage the contingent points of time and operation, the ALCO of the Bank calls for special meetings, analyzes the situation and decides what should be done to serve the Banks interest most.

The Head Office International Division of IFIC plays the vital role to manage Foreign Exchange Risks in the process by checking the Foreign Exchange procedure performed by the Bank and by reporting it directly to the Managing Director of the Bank.

With a view to mitigate operational risk the bank has an effective Internal Control & Compliance Division that endeavors to make the internal control system effectively by intensifying the internal audit, both comprehensive and special, of the Branches and Head Office. The Audit Committee of the Board of Directors reviews the audit reports and puts forth suggestions which are being followed with due care. The bank has the plan to have Standard Operation Procedure (SOP) formulated by a reputed consultant, which would strengthen the internal control system and mitigate the operation risks.

There is an anti money laundering policy in place approved by the Board of Director, which is in line with Guidance Notes on the subject issued by Bangladesh Bank. This contains all the control points to detect money laundering and to resist terrorist financing. The Board and the Management are fully committed to prevention of money laundering.

3.10.1 Loans and Advance Introduction

This is the survival unit of a bank because until and unless the success of this section is a question to every bank. If this section is not properly working, the bank it self may become bankrupt. This is important because this is the earning unit of the bank. Banks are accepting deposits from the depositors in condition of providing interest to them as well as safe keeping their deposits. Now the question may gradually arise how the bank will provide interest to the clients and the simple answer is advance.

We often use loans and advances as an alternative to one another. But academically this concept is incorrect. Advance is the combination of such items where loan is a part only for this credit section of the bank.

Types of AdvanceAll loan and advance that are provided by this bank can be categorized into there heads according to the nature and characteristics of each product:

Figure shows the different types of advances

Nature of Different Types of Advance

Cash Credit HYPOTHECATION (CC HYPO)

Cash credit is given through the cash credit account. Cash credit is an active and running account where deposit and withdrawals may be made frequently. The debit balance of the account on any day can not exceed the agreed limit.

Instrument HYPOTHECATION DEED.

50% margin requires to open a CC account. (varies)

Operation of cash credit is same as that of overdraft the purpose of cash credit is to meet working capital needs of traders, farmers, and industrialist.

It is granted only the first class parties.

It is charged against a property where neither the ownership nor the possession is passed to the bank.

Cash Credit PLEDGE

The nature, operational work, and characteristics of CC- PLEDGE in as same as CCHYPO.

CC.PLEDGE in different from CC-HYPO only from the securities or business goods against the loan amount.

It is charged against properties where the ownership may remain to the borrower but the possession is passed to the bank.

Instrument - Pledge Deed.

Secured Overdraft (SOD)

Overdrafts are those drawings, which are allowed by the banks in excess of the balance in the current account up to a specified amount for definite period as arranged for.

Generally it is given to the businessmen to increase their business activities.

Usually provide against FDR, PSS, i.e. financial obligation or any primary securities. The interest charges from the date of first withdraw.

Interest is calculated and charged only on the actual debit balance on daily product basis.

Balance of OD account are fluctuates

The interest rate of SOD is 3% above of FDR interest rate if the FDR is in our Bank. If the FDR is in other bank then the interest r1te is 14.50%

Industries Loan

It is a term loan.

It is given for three (3) years at equal installment.

Grass period is allowed of this types of loan.

Grass period is the period that require to earn visible returns.

Others loan

Loan provided for other purpose which is productive and less risk rather industrial sector are treated as others loan.

The terms and conditions of these types of loan are same as industry loan.

House Building Loan

This loan is give for the construction of building house. It is gives for three (3) years at equal monthly installment. This loan is not provides frequently.

Staff House Building Loan (SHBL)

120 times of BASIC salary is provided as SHBL. Bank rate + 1 % interest is charged to the loan amount. Repaymeilt adjusted from their monthly salary. Repayment is made at equal monthly installment.

Consumes Credit Scheme

Under this scheme credit is given to the customer to purchase necessary and luxury commodities like computer, motor vehicle, television, refrigerator, music system sewing machine, furniture etc.

Other then the employee it is given to the valuable client.

It is a 24,36,48 installment system @ 15.50% interest.

Stuff loan against Provident Fund (SLPF)

10% of basic in contributed by employee Repayment is adjusted from their on they salary. Maximum sanction from PF.

Loan against PSS

This loan is provides against PSS fund. 80% are given of the PSS fund.

This is 100% secured for the bank.

Payment against Document (PAD)

The importers are to open letter of credit through any bank for importing goods. Most of the time they are to extend credit to the importers if not prohibited by Bangladesh bank. This loan creates, on receipt of shipping documents from the negotiating bank, is transferred and lodged to PAD.

PAD is associated with import and import financing. The bank opening letter of credit is bound to honor its commitment to pass for import bills when these are presented for payment provided that it is drawn strictly in terms of the letter of credit, in fact the amount their sends advanced on behalf of the importer.

Loan against imported Merchandise (LIM)

In many cases, a bank has to clear the goods imported under letter of credit at the request of the borrower. When the importer does not come forward to retire the documents inspire of repeated reminders bank has on forced circumstances to clear the imported consignment on arrival of the same to avoid demurrage at the port which adds to the burden of commitment. When the importer fails to retire the documents or request for clearance of goods, the outstanding under PAD is transferred to LIM account.

After clearance, consignments are taken delivery by the importer on full payment of bank's liability. Normally part delivery is not allowed while on LIM A/C. when the delivery in part is desired by the importer, the LIM is converted into cash credit account retaining proper margin and executing charge documents, the delivery is effected themselves on obtaining pro rate payment.

Trust Receipts (TR)

This is an arrangement under which credit is allowed against trust receipts and imported or exportable goods remain in the custody of the importer or exporter but he is to execute a stamped trust receipt in favor of the bank where a declaration is made that goods imported or bought with the bank's financial assistance are held by him in trust for the bank..

Export Cash Credit (ECC)

ECC are extended to an export to facilitate the export of goods & commodities for which there is export letter of credit or contract on hand. It is a pre-shipment & short term credit to be liquidated out of the proceeds of export documents which include negotiation or purchase of export documents.

Securities against Advances

The following securities are to be obtained by the branches depending on the nature of advances while allowing secured advances to the parties.

- Pratirakshya Sanchay Patra, Bangladesh Sanchay Patra, ICB unit certificates,

Wage Earner Development Bond

- Fixed Deposit Receipt issued by any branch of IFIC Bank Limited.

- Shares quoted in the Dhaka Stock Exchange Limited

- Pledge of goods and produce

- Hypothecation of goods, produce and machinery

- Immovable property

- Fixed assets of a manufacturing unit

Cheques, Drafts, Pay Order, Railway Receipts, Steamer Receipts, Burge Receipts of the Govt. or Corporations

Shipping document

Which Advances Against Which Securities

All securities are not suitable for all types of advances. Each security has its own suitability. Specific securities to be obtained by the branches while allowing advance are shown below against the types of advances:

Types of advances

Securities

LoansLien of various kinds of Sanchay Patras, Govt. Securities, and Shares quoted in the Stock Exchange, Debentures, Fixed Deposit Receipts, Pledge of gold/Gold ornaments, hypothecation of vehicles. Collateral of immovable properties.

OverdraftSanchay Patra, Non-resident for deposit (NFCD), shares, debt. Promissory notes, fixed deposit, insurance policies, gold etc.

Cash CreditsPledge or hypothecation of stock, produced merchandise.

Inland bills purchase (IBP) The bill itself.

PADShipping document for imports.IM Pledge of imported merchandise.

TRTrust receipt obtained in lieu of trustees.ECCPledge or hypothecation of goods receipts.

Foreign Bills Purchase Shipping document for exports.Process of Loan SectionStep-1 :Sanctioning by the competent authority

A secured advance may be grant to a party only after getting a limit sectioned from the competent authority.

Step-2 :Loan/Advance Proposal

For obtaining a loan/advance the party must make an application in standard form in writing to the branch where he maintains his operative account. After receiving the application from the party, the branch manager will take immediate steps to compile report regarding the party based on the following sources of information: Personal investigation

Confidential supports from

Other banks,

Chamber of commerce

CIB from Bangladesh bank as the earnable.

Treading account P/C, B/S. M/A if' any and other documents submitted by the party.

The average balance and the present maintained in the account. The nature of operations during the last six months and the date of opening account.

Step-3 :Preparation of limit proposals

The branch, may prepare a limit proposal after being fully satisfied with the following points: The financial position of the party. Purpose for which advance is required.

Nature of securities offered.

The payment arrangement.Step-4 :Renewal Proposal.Step-5 :Approval by Head Office and Branch responsible. Limit proposal sent to HO.

Sanction/reject

Receive the limit section advice.

Step-6 :Disbursement of loan.Step-7 :Loan monitoring and administration.Classification of Loan (CL)Advance may classified or unclassified are determine on the basis of regularity of loan recovery.

Figure: Shows the Classification or 1oan

Unclassified Loan: the repayment of advance which have regularity are called unc1assifiec advance. This is a clean loan that is these is no overdue installment or not the expire due date.

Classified: The repayments of advance which have no regularity are classified. That means which are irregular in nature, overdue installment of payment, and expire the due date. There are three standards of classification:

- Sub Standard

- Doubtful

- Bad Loan

Eligible security

- For land and building 50%.

- Financial obligation 100%.

Interest suspense

- Total balance of interest against classified loan.

Base for provision

- Formula: Outstanding - Interest surpasses - Eligible security - In case of unclassified advance the base for provision should kept 1 % of the total

outstanding amount.

- In case of bad loan the base for provision should kept 100% of the total outstanding

amount

- In case of doubtful loan the base for provision should kept 50% of the total

Outstanding amount.

- In case of sub standards loan the base for provision should kept 20% the total

Outstanding amount.

Basically this standards of classification are depends on the expansion of time. There are separate systems of classification for each type of loan. Each banking institution have develop there own system of loan classification.

Lending Risk Analysis (LRA)

LRA is the combination of analysis of various types of risks that may occur while a loan have sanctioned. This is an analysis of the measurement of performance of a company or individuals. When a loan has been provided by the bank then all types of risks have to calculate. This is not easy to express all the pros and corns of LRA are not possible in this report. Before sanctioning a loan it is necessary to analyze the LRA. IFIC Bank has formatted this analysis which contains several sheets of analysis to identify the strength and weakness and the repayment probability of the lending.

Here shows the simple flow chart of LRA where considering the business risk, company risk, industry and management risk in the following:

Figure: Shows the Components that analyzed in the LRA3.10.2 Foreign Exchange Introduction A person living in Dhaka city can make payment to another in Chittagong with money or by Cheques on any bank of the country. Such payments do not present any problems. But things are different when the debtor and the creditor live in different country. When a trader from Dhaka city imports goods from New York, the payment involves certain complication. The Dhaka man can pay in taka but taka is of no use to New York exporter. There must be some means of changing taka into dollar. Obviously the intervention of a third party is required. So there is a need for a foreign exchange mechanism.

Foreign exchange refers to the process or mechanism by which the currency of one country is converted into the currency of another country. Foreign exchange is the means and methods by which rights to wealth in a country's currency are converted into rights to wealth in another country's currency.

-L.R. CHOWDHURY

In terms of foreign exchange regulation Act 1947, as adapted in Bangladesh,

foreign exchange means foreign currency and includes all deposits. credits and balances payable in foreign currency as well as all foreign currency instruments such as, drafts, travelers Cheques, and bills of exchange in any foreign country.

3.10.3 Foreign Exchange market and Bangladesh The statute for administration of foreign currency in Bangladesh is the foreign exchange regulation Act, 1947 as adapted in Bangladesh. Under this Act, the responsibility and authority of administration of foreign exchange is vested by the government with the Bangladesh bank.

While the Bangladesh bank has full authority to administer foreign exchange in Bangladesh, it cannot do so by itself. This is not possible for Bangladesh bank to deal with a large number of exporters and importers individually. Therefore, provision has been made in the act, enabling the Bangladesh bank to delegate its powers of functions to authorized dealers.

Authorized Dealers (AD)In administering exchange control and foreign trade, Central Bank of the country (Bangladesh Bank) authorizes few branches of commercial banks to deal in foreign exchange. These branches are known as Authorized Dealers. They act as an agent of the Central Bank and work under the Foreign Exchange Regulations Act-1947 and Guidelines for Foreign Exchange Transactions-Volume 1 & 2 prescribed by Bangladesh Bank.

3.10.10 Foreign Exchange Department:The IFIC Bank deals with foreign exchange with goodwill for a long time. It is handling of foreign exchange closer to twenty (20) years. Nowadays 16 branches of this bank are authorized to deal foreign exchange by Bangladesh Bank.

IFIC BANK offers two types of credit facilities to its customers. Such as-

a)Funded Credit and

b)Non Funded Credit

a) Funded Credit :

The credit facilities in which the fund of the bank is directly invested is known as funded credit. Such as-Cash Credit, Secured Overdraft act.

b) Non Funded Credit:

The credit facilities in which banks funds are not directly invested are known as non-funded credit. Such as-Letter of Credit (L/C), Guarantee etc.

Letter of Credit / Documentary Credit (L/Cs) is the key player in the foreign exchange business. With the globalization of economy. International trade has become quite competitive. Timely payment for exports and quicker delivery of goods is, therefore, a pre-requisite for successful international trade operation. Growing complexity of international trade, separation of commercial parties across the globe etc. underlined the need for evolving a system that balances between the expectations of the seller and the buyer. Documentary Credit has emerged as a vital system of trade payment, and fulfilled the requisite commercial need. This system substantially reduces payment-related risks for both exporter and importer. Thus the letter of credit is the classic form of international export payment, especially in trade between distant partners. Payment, acceptance or negotiation of the credit is made by the bank upon presentation by the seller of stipulated documents (e.g., bill of lading, invoice, inspection certificate).

DOCUMENTARY CREDIT / LETTER OF CREDIT (L/Cs):

Documentary Credit or letter of credit is nothing but an arrangement whereby a bank (issuing bank) acting at the request and on the instruction of a customer (the applicant) or on its own behalf undertakes to make payment to or to the order of a third party (the beneficiary) or to accept and pay bills of exchange (draft) drawn by the beneficiary, or authorize another bank to negotiate against stipulated documents provided the terms and conditions to the credit are complied. Thus, Documentary Credits are akin to bank guarantees. In popular language, they are known as Letters of credit (L/Cs). Bank guarantees are, however, issued to cover situation of non-performance whereas documentary credits are issued on behalf of the buyer to cover situation of performance, i.e., the issuing bank agrees to make payment to the beneficiary one he surrenders the requisite complying documents.

Types of Letter of Credit

The figure shows the different types of L/C

Nature of Different types of L/C

Revocable Credits : A revocable credit is one which can be amended or cancelled by the issuing banker at any time without prior notice.

Irrevocable Credits : An irrevocable letter of credit contains an absolute undertaking on the part of the issuing bank to accept.

Transferable Credit : The main theme of this type of credit is transferable i.e. if the

exporters can not able to supply the goods then. they can transfer it to others.

Non-transferable Credit : These types of credit can not be transferable.

Sight L/C : In international business this types of credit is most preferable. The main theme of this credit is the payment is properly secured.

Deferred L/C : A maturity period specified there. The payment is made on between the maturity periods.

Sales Contract

Reimbursing Agreement

Documentary Credit Agreement

Law of L/C

BANK AS A PARTY OF DOCUMENTARY CREDIT :

Parties to the documentary credit are-an issuing bank, an advising bank, a confirming bank, a reimbursing bank or negotiating banks.

(Issuing Bank: The Issuing Bank or the Opening Bank is one which issues the credit, i.e., undertakes, independent of the undertaking of the applicant, to make payment provided the terms and conditions of the credit have been complied with. The payment may be at sight if the credit provides for sight payment, or at maturity dates if the credit provides for deferred payment. Especially the issuing bank should satisfy himself on the credit worthiness of the applicant. The credit application must be in accordance with the Uniform Customs and practices for Documentary Credit (UCPDC)- ICC publication no. 500 edition of 1993.

(Advising Bank: The Advising Bank advises the credit to the beneficiary authenticating the genuineness of the credit. The advising bank is generally situated in the country/place of the beneficiary.

Issuing Bank

(Bangladesh)

Advising Bank

(Singapore)

(Confirming Bank : A Confirming Bank is one which adds its guarantee to the credit opened by another bank, thereby undertaking the responsibility of payment / negotiation / acceptance under the credit in addition to that of the issuing bank. A confirming bank normally does so if requested by the issuing bank. When the creditworthiness of the issuing bank is in doubt, beneficiarys bank may request the issuing bank to give additional confirmation by another bank. It is said, Add Confirmation in practice.

(Negotiating Bank: A Negotiating Bank is the bank nominated or authorized by the issuing bank to pay, to incur a deferred payment liability, to accept drafts or to negotiate the credit.

(Reimbursing Bank: A Reimbursing Bank is the bank authorized to honor the reimbursement claims in settlement of negotiation / acceptance / payment lodged with it by the negotiating bank or accepting bank. It is normally the bank with which the issuing bank has account from which payment is to be made. Reimbursement claims in foreign exchange business is settled by the Uniform Rules for Reimbursement (URR)-ICC publication no. 525.

The Foreign Exchange Department is mainly divided into three sections. Such as-

1.Import Section

2.Export Section &

3.Remittance Section

The import Section deals with L/C in the perspective of the importers and the Export Section deals with L/C in the perspective of the exporters.

3.10.11 Import Import is the flow of goods and services purchased form one country to another. Hence, import of merchandise essentially involves two things: bringing of goods physically into the country and remittance of foreign exchange towards the cost of the merchandise and services connected with this to the importer. In case of import, the importers are asked by their exporters to open letters of credit so that their payment against goods is ensured.

Fig : Types of Importers

IMPORT PROCEDURES :

An importer is required to submit the following documents in order to get a license to import through IFIC BANK Mirpur Br.

(A bank account with the branch

(Import Registration Certificate (IRC)

(Tax Payers Identification Number (TIN)

(Performa Invoice / Indent

(Membership certificate from a recognized Chamber of Commerce & Industry or Town Association or registered Trade Association.

(Letter of Credit Authorization (LAC) Form properly filled in quintuplicate signed by the importer.

( L/C Application duly signed by the importer.

(One set of IMP Form.

(Insurance Cover Note with money receipt.

(VAT Registration Certificate (for Commercial Importers)

(In case of public Sector, attested photocopy of allocation letter issued by the allocation authority, Administrative Ministry or Division specifying the source, amount, purpose, validity and other terms and conditions against the imports.

(Any such documents as may be required as per instruction issued/to are issued by the Chief Controller of Imports & Exports (CCI&E) from time to time.

(On receipt of the LCA Form and the other documents, the branch officials carefully scrutinize the documents and lodge the same in their respective registration books and duly verify the signature of the importer put on the LCA Form.

To import, a person should be competent to be an importer. The office of the Chief Controller of Imports & Exports (CCI&E) provides the registration (IRC) to the importer. After obtaining the IRC, the person has to secure a Letter of Credit Authorization (LCA) registration from the Registration Unit of Bangladesh Bank. After getting the LCA registration, a person becomes a qualified importer. He is the person who requests or instructs the opening bank to open an L/C. He is also called the Opener or Applicant of the credit.

Proposal for Opening Of L/C In case of an L/C of a small amount only the prescribed application form, i.e., the LCA Form is enough to open an L/C. But when the L/C amount is reasonably high or where the party intends to avail a credit facility, then the importer needs to submit an application to the Foreign Exchange Department for getting a limit of the L/C amount.

The salient features of the application are (

(Full particulars of the bank account

(Nature of business

(Required amount of limit

(Payment terms and conditions

(Goods to be imported

(Offered security

(Repayment schedule

The L/C Application Form:

L/C Application form is a sort of an agreement between customer and bank on the basis of which the letter of credit is opened. IFIC BANK Mirpur Branch provides a printed form for opening of L/C to the importer. A special adhesive stamp of value Tk. 150 is affixed on the form in accordance with Stamp Act in force. While opening, the stamp is cancelled. Usually the importer expresses his decision to open the L/C quoting the amount of margin in percentage (Some L/Cs are opened for 100% margin).

Requirements of L/C Opening

(. Applicant must hold a current deposit (CD) account in the Bank.

( He must have a trade license of import

( Tax Identification number (TIN)

( Vat certificate.

( Membership certificate.

(Import registration certificate (IRC) for industrial or commercial.

An importer must ensure the above requirements while he is going to issue a L/C with any bank to import some thing form another country.

The Letter Of Credit Authorization Form (Lcaf)The Letter of Credit Authorization Form (LCAF) is the form prescribed for the authorization of opening letter of credit/payment against importer and used in lieu of import license. The authorized dealers are empowered to issue LCA Forms to the importers as per basis of licensing of the import Policy Order in force to allow import into Bangladesh. If foreign exchange is intended to be bought from the Bangladesh Bank against an LCAF, it has to be registered with Bangladesh Banks Registration Unit located in the concerned area office of CCI&E. The LCA Forms available with authorized dealers are issued in set of five (05) copies each. First Copy is exchange control copy, which is used for opening of LC and effecting remittance. Second Copy is the custom purpose copy, which is used for clearance of imported goods from custom authority. Triplicate and Quadruplicate Copy of LCAF are to be sent to concerned area of CCI&F office by authorized dealer/Registration Unit of Bangladesh Bank. Quintuplicate Copy is kept as office copy by authorized dealer/Registration Unit.

The Letter of Credit Authorization Form (LCAF) contains the following details-

(1)Name and address of the importer.

(2)IRC no. and year of renewal.

(3)Amount of L/C applied for (both in figure and in word).

(4)Description of item(s) to be imported.

(5)Import Trade Certificate (ITC) Number / Harmonized System of Code (HS Code Number.

The imp form : The IMP Form contains the followings (

(Name and address of the Authorized Dealer.

(Amount of remittance to be permitted (i.e., L/C amount).

(LCA Form number, date, value in Tk.

(Description of goods, quantity.

(Invoice value in foreign currency (i.e., L/C amount)

(Country of origin.

(Port of shipment.

(Name of steamer/airline (i.e., by road/by ship/by air etc.)

(Port of importation.

(Indentors name and address.

(Indentors registration number with CCI&E and Bangladesh Bank.

(Full name and address of the applicant.

(Registration number of the applicant with CCI&E

(Type of LCF i.e. Commercial or Industrial.

Scrutinization of l/c application :On receipt of L/C application, the branch officials scrutinize the same very carefully giving emphasis to the following points-

1.L/C application is stamped (as per Govt. Stamp Rule) as it is a guarantee of payment.

2.All information mentioned in different columns have been furnished;

3.The items to be imported are eligible according to import entitleemnt;

4.If L/C is opened against indent, Bangladesh Banks permission, valid registration, authority to issue indent by indentor are to be checked;

5.The terms and conditions stipulated in the L/C application are consistent with the Bangladesh Bank Foreign Exchange Guidelines, Import Trade Regulations, UCPDC etc;

6.The amount and description of merchandise are relevant to LCAF and proforma invoice/ indent / purchase order;

7.Survey Report or Certificate in case of old machinery;

8.Carrying vessel is not of Israel or Serbia, Montenegro, Iraq, Israel & Afghanistan;

9.Certificate declaring that the item is in operation not more than 5 years in case of car.

Accounting Treatment in Case of L/C OpeningAs soon as L/C is opened, the bank accepts a liability on behalf of the importer to make payment against the credit. Provided that the shipment is made within the period and other term, and conditions as per L/Care complied with, naturally, bank has to pass an entry in L/C liability ledger and also in the general ledger to show its actual liability accepted on L/C. A liability voucher in passed as under:

Contingent liability voucher

Customer's liability on L/C Dr.

Bank's liability on LIC Cr.

Margin and bank charge

Margin, Commission, Postage and Cable Charge are recovered from the party by passing entries as under:

Parties AIC Dr.

Margin AlC on LIC. Cr.

All charges on LIC Cr.

Transmission of L/C

In international trade, receipt of L/C by cable, telex, fax is preferred by all. In that case the whole text of L/C is to be transmitted to the advising bank.

Transmission Process of IFIC Bank

The transmission process of L/C of IFIC Bank are much more advance. They are sending all foreign L/C to the advising bank through SWIFT.

SWIFT- Society for World Wide Inter Bank Tale Communication. This is a system of inter bank transaction. Every bank or other financial institutions must get the membership of SWIFT to share the information. This is a system of communication where further confirmation will not require.

Amendment of l/c :The letter of credit opened by a bank may need to amendment. If the supplier finds. that the terms of the credit cannot be complied with in full, he would arrange for necessary amendments by the opener before the goods have shipped. These amendments must be advised by the opening bank to the supplier through advising bank. Some time the opener also may like to amend the credit after it has been advised.

Adding confirmation:Sometimes beneficiary or supplier of the goods insists the importer for adding confirmation to L/Cs or to issue L/Cs with add confirmation. In that case, at the request of the importer, the Issuing Bank requests the Advising Bank or any third bank to add their confirmation to the L/C. Normally, add confirmation charge is borne by the beneficiary and the confirmation charge differs from bank to bank.

Lodgment & retirement of shipping documents:

On scrutiny, if it is found that the document drawn in conformity with the terms of the credit, i.e., the documents are in order, this Branch lodges the documents in PAD (Payment Against Documents) and the following accounting treatments are given-

PAD A/C --------------------------------------------------- Dr.

IFIC BANK General A/c (at HO prescribed rate) ---Cr.

Exchange A/C ---------------------------------------Cr.

The reversal entries are as follow

Bankers Liability --------------------------------- Dr.

Customers Liability ------------------------------ Cr.

(When lodgment is passed)

After passing the lodgment vouchers, the shipping documents are then stamped with PAD Number and entered in the PAD Register. Intimation is given to the customer calling on the banks counter requesting retirement of the shipping documents. The retirement vouchers are as follows (L/C Margin A/C ------------------------------------------------ Dr.

Partys A/C ----------------------------------------------------- Dr.

PAD A/C -------------------------------------------------------- Cr.

Interest / Commission A/C ----------------------------------- Cr.

P & T Charges A/C -------------------------------------------- Cr.

After passing the retirement vouchers, endorsement is made on the back of the Bill of Exchange as Received Payment and the Bill of Lading endorsed to the effect Please deliver to the order of M/S -----, under two authorized signatures of the banks officers (P.A. Holder). Then the documents are delivered to the importer.

Export Section & Export Financing:In the Export Section, two (02) types of L/Cs are handled in this branch-

1)Back-to-Back L/C; and

2)Export L/CExport financing can be done in two ways. These are:

1)Pre-shipment Financing;

2)Post-shipment Financing.Pre-shipment financing can be done by opening of back-to-back L/C and Packing Cash Credit (PCC). In case of pre-shipment financing, about 90% is financed by the bank. Of that portion, about 75% is for back-to-back L/C and 10% is for packing cash credit. Financing in Back to Back L/C changes according to the products i.e. Normal fabric, Flannel fabric, Woven fabric etc. Example of post-shipment financing by bank is Foreign Documentary Bills for Purchase (FDBP).

Back to Back L/C: In case of a Back-to-Back letter of credit, a new L/C (an import L/C) is opened on the basis of an original L/C (an export L/C). Under the Back-to-Back concept, the seller as the beneficiary it as a security to the Advising Bank. The beneficiary of the back-to-back L/C may be located inside or outside the original beneficiarys country. In case of a back-to-back L/C, no cash security (no margin) is taken by the bank; bank liens the first L/C (the master L/C). In case of a back-to-back L/C, the drawn bill is usage/time bill.

Papers/documents required for opening of back-to-back L/C are as follows ((Master L/C

(Valid Import Registration Certificate (IRC) and Export Registration Certificate (ERC)

(L/C Application and LCAF duly filled in and signed

(Proforma Invoice or Indent

(Insurance Cover Note with money receipt

(IMP Form duly signed

(In addition to the above documents, the following papers/documents are also required to export oriented garment industries while requesting for opening of back-to-back letter of credit -

(Textile Permission

(Valid Bonded Warehouse License

(Quota Allocation Letter issued by the Export Promotion Bureau (EPB) in favor of the applicant for quota items.

(A permission from Bangladesh Garments Manufacturers & Exporters Association (BGMEA).

In case the factory premises is a rented one, Letter of Disclaimer duly executed by the owners of the house / premises to be submitted. A checklist to open back-to-back L/C is as follows-

(Applicant is registered with CCI&E and has bonded warehouse license.

(The master L/C has adequate validity period and has no defective clause

(L/C value shall not exceed the admissible percentage of net FOB value of relative Master L/C

(Usage Period will be up to 180 days.

Flow Chart for back-to-back L/C

Payment for back to back L/C:In case of back-to-back L/C for 30,60,90,120 & 180 days of maturity period, deferred payment is made. Payment is given after realizing export proceeds from the L/C Issuing Bank. For Garments Sector, the duration can be maximum 180 days. For importing machinery items or capital goods for 360 days Back to Back L/C can be opened.

3.10.12 Export IFIC is running exciting as well lively export to deliver the surplus products to other countries and thereby earns huge amount of foreign currency. Payment for goods exported from Bangladesh should be received through an Authorized Dealer in freely convertible foreign currency or in Bangladeshi Taka from a Non Resident Account. The other type of L/C facility offered by this Branch is Export L/C. Bangladesh exports a large quantity of goods and services to other countries. Readymade garments (both knitted and woven), jute, jute-made products, frozen shrimps, tea are the main goods that Bangladeshi exporters export to foreign countries. Garments Sector is the largest sector that exports the lion share of the countrys export. Bangladesh exports most of its readymade garments products of USA and European Community (EC) countries. Bangladesh exports about 40% of its readymade garments products to USA. Most of the exporters who export through this Branch are readymade garment exporters.

Formalities for export L/C

The export trade of the country is regulated by the Imports & Exports (Control) Act, 1950. There are a number of formalities that an exporter has to fulfill before and after shipment of goods. These formalities or procedures are enumerated as follows

(Export Registration Certificate (ERC) : The exports from Bangladesh are subject to export trade control exercised by the Ministry of Commerce through Chief Controller of Imports & Exports (CCI&E). No exporter is allowed to export any commodity permissible for export from Bangladesh unless he is registered with CCI&E and holds valid ERC. The ERC is required to be renewed every year. The ERC number is to be incorporated on EXP Forms and others documents connected with exports.

(The EXP Form: After having the registration, the exporter applies to this Branch with the Trade License, ERC and the Certificate from the concerned Government Organization to get the EXP Form. If the branch is satisfied, an EXP Form is issued to the exporter.

(Securing the Order : Upon registration, the exporter may proceed to secur