Role of Banks in Indian Economy

During the last two decades, there has been a turmoil in the field of international money market resulting in various changes in the international subject of foreign exchange in a rather difficult one for it is highly technical and strictly governed by regulation which changes frequently. After a successful completion of internship program on Dhaka Bank, Khatungonj Branch over the topic of “Foreign Exchange Dealings”, I have attempted to produce a report over the mentioned topic. FOCUS OF THE REPORT This report highlights the theoretical as well as practical background of foreign exchange.

As the DBL Ktg Branch deals with Import Business as well Export Business, this report will focus on import & export business mechanisms of foreign exchange. Initially this report will make a brief highlight on the overall Dhaka Bank Limited (DBL) & its Khatungonj (Ktg) Branch. Then it will discuss the basics of foreign exchange, means and methods for settlement of International trade, Import procedures, Details of documenting credit, exchange rate determination and financial statistics on foreign exchange business.

In the end, the report will enclose an appendix, which will show the various financial results’ summary of the DBL Ktg Branch. I hope the report will achieve its ultimate objective. SAIDUL ALAM ACKNOWLEDGEMENT I have the pleasure to express my gratitude to the Almighty Allah (SWT) for giving me opportunity to complete my BBA course, internship Program and finally to Prepare this report. First and foremost, I hold the pleasure to express my deepest gratitude to Mr. Mohd. Mujibul Quader, the honorable Vice President & Manager of DBL, Ktg. Branch for allowing me to conduct my internship in his prestigious bank.

I sincerely acknowledge the helps and suggestions of all the executives and officials of the DBL, Ktg. Branch without whose helps my internship program would have not been possible. I am mentioning some names of officials who were my source of motivation and with whom I was in touch: Mr. Mohammad Ali (in charge, foreign exchange & Credit), Mrs. Hasina Begum Mr. Naimul Ahsan Mr. Tarek I am grateful to my supervisor Mr. Md. Rizwan Ahmad for his cordial supervision and support to prepare this report. SAIDUL ALAM EXECUTIVE SUMMARY We’ve entered into a new dynamic millennium of 21st century.

It is very fascinating to observe how organizations are implicated to shape them for a new arena. Especially we know banks are directly in action to up-grade the economic position of countries every time. I conducted and experienced the internship from that approach. Surely the Banking sector contributes vastly and rapidly to the development of business as well as the economy. This paper summarizes the principal findings of research that sought to provide a comprehensive understanding of the product for liability of Dhaka Bank and its distinctive features from the others.

The methodology used was of major importance in obtaining data that are grounded largely in the personal experience of managers, but also in documentary evidence and in direct observation by myself. The purpose of the study was to investigate the feasibility of its products for liability, what are the contextual factors that affect the customers to deal with the products, and also how they react. All kinds of service provided by a Bank are closely related to the customer/ client. A Bank is called the businessman of others money.

Since a customer is a very important factor for the Bank. Every Bank should try to satisfy their customer by providing their various types of service. A banker should know about the customer needs & wants to achieve their ultimate goals. For this reason Dhaka Bank tries hard to satisfy their customer through their products and services due to establish their own business in the most competitive business world. Chapter One: Introduction INTRODUCTION The subject of foreign exchange is rather difficult one.

For it is highly technical and strictly governed by regulations which change frequently. During the last two decades, there has been turmoil in the field of international money market resulting in various changes in international monetary system; even now changes are made off and on. This report deals with the precise theory and practice of foreign exchange with a limited study of foreign exchange operation of Dhaka Bank Limited, Khatungonj Branch. Dealings in Foreign Exchange in one of the main activities of the bank’s Treasury Division.

As the DBL Ktg Branch deals in both import & export business, this report will concentrate its discussions on those practices which are related with import & export business. OBJECTIVES OF THE STUDY This report has been prepared aiming to describe the following: • The basics of Foreign Exchange • Import procedures • Export procedures • Details of documentary credit • Securitization, lodgment and retirement of L/C • Post Import Financing • Exchange Rate determination • Financial results summary on foreign business. Methodology

The internship program was basically executed by observing the daily activities of the officers and working with in progress. The following methods and sources have been used in preparing this report: Methods: 1. Personal observation 2. Personal Interview 3. Questionnaires 4. Telephonic Interview 5. File inspection Sources: • Internal Records < Head Office and Bangladesh Bank circulars < Head Office Orders < Office Notes files < Bangladesh Bank guidelines < Bangladesh Bank circulars. • Library Sources: < Annual Report of Dhaka Bank Limited < Journal, magazines on Foreign Exchange Business.

< Text Books on Foreign Business < Records of the branches. SCOPE Internship is a field project for a student of Business Administration of final year that gives the student a chance to apply business theory in practice in any organizational environment. The key functional area of any Bank is Corporate Banking, Personal Banking, International Trade & Foreign Exchange, Lease Finance, Capital Market Services, Marketing and Personnel. There are also various operations, which have to be performed to run a Bank successfully. It will overview all sectors in resize form.

In my report I tried to touch all area of Banking operations in Dhaka Bank but the scope of Internship as per proposal is as follows: • Short history of the Bank • Description of the general banking operations • Credit disbursement policy • Credit disbursement criterion • Credit application & evaluation process • Credit payment process • Monitoring process • Credit collection process • Action against defaulters • Previous statistical data on credit management Limitations I’ve tried my best level to make the report fruitful in seeking its prime objectives as outlined.

Nevertheless, my study has able to reach its ultimate target due to the following shortcoming: • Time constraint. • Professional accountability of the branch personnel’s in disclosing numerical data. • Professional work pressure of the branch personnel’s. • Broader aspect of the topic selection. • The survey was done only for the Chittagong market. As a result of this the implication of the findings of the report will be applicable only within Chittagong. However, I have tried my best to make this report fruitful and resourceful in the face of these constraints. Chapter Two: Brief Corporate picture of

DHAKA BANK LIMITED CORPORATE PROFILE Name of the Company: Dhaka Bank Limited Legal form: A public limited company incorporated in Bangladesh on 6th April 1995 under the Companies Act, 1994 and listed in Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited. Dated of Commencement: 5th July 1995. Registered office: Biman Bhaban (1st Floor) 100 Motijheel C/A, Dhaka-1000, Bangladesh. Swift Code: DHBLDBBH E-mail: [email protected] info Web Page: www. dhakabankltd. com Auditors: ATA Khan Co. Chartered Accountants. Managing Director: Shahed Noman Company Secretary: Arham Mosudul Huq.

HISTORICAL BACKGROUND Bangladesh economy has been experiencing a rapid growth since the ’90s. Industrial and agricultural development, international trade, inflow of expatriate Bangladeshi workers’ remittance, local and foreign investments in construction, communication, power, food processing and service enterprises ushered in an era of economic activities. Urbanization and lifestyle changes concurrent with the economic development created a demand for banking products and services to support the new initiatives as well as to channelize consumer investments in a profitable manner.

A group of highly acclaimed businessmen of the country grouped together to respond to this need and established Dhaka Bank Limited in the year 1995. The Bank was incorporated as a public limited company under the Companies Act. 1994. The Bank started its commercial operation on July 05, 1995 with an authorized capital of Tk. 1,000 million and paid up capital of Tk. 100 million. The paid up capital of the Bank stood at Tk. 663. 83 million as on 31 December, 2004. The total equity (capital and reserves) of the Bank as on December 31, 2004 stood at Tk. 2,817. 80 million.

The Bank has 28 branches across the country and a wide network of correspondents all over the world. The Bank has plans to open more branches in the current fiscal year to expand the network. The Bank offers the full range of banking and investment services for personal and corporate customers, backed by the latest technology and a team of highly motivated officers and staff. In it’s effort to provide Excellence in Banking services, the Bank has launched Online Banking service, joined a countrywide shared ATM network and has introduced a co-branded credit card.

A process is also underway to provide e-business facility to the bank’s clientele through Online and Home banking solutions. Dhaka Bank Ltd. is the preferred choice in banking for friendly and personalized services, cutting edge technology, tailored solutions for business needs, global reach in trade and commerce and high yield on investments. MISSION Dhaka Bank’s mission is to be the premier financial institution in the country providing high quality products and services backed by latest technology and a team of highly motivated personnel to deliver Excellence in Banking.

VISION At Dhaka Bank, inspiration is drawn from the distant stars. The bank’s team is committed to assure a standard that makes every banking transaction a pleasurable experience. The bank’s endeavor is to offer the valued customers razor sharp sparkle through accuracy, reliability, timely delivery, and cutting edge technology, and tailored solution for business needs, global reach in trade and commerce and high field on the bank’s investment. The bank’s people, products and process are aligned to meet the demand of its discerning customers.

The bank’s goal is to achieve a distinctive like the luminaries in the sky. The DBL’s prime objective is to deliver a quality that demonstrates a true reflection of its vision – Excellence in Banking. VALUES ? Customer Focus ? Integrity ? Team Work ? Quality ? Responsible citizenship ? Respect for the Individual STRATEGIES • To achieve synchronized and steady growth of the bank. • To utilize all available resources to develop various plans, policies and procedures and implement them. • To utilize a team of professional employees. GOALS • To develop a realistic mobilization plan.

• To develop appropriate leading risk assessment system. • To develop an effective system to make good advances. • To develop recruitment, compensation, training and orientation plan. • To develop a plan for offering better customer services. OBJECTIVES • To build up a low cost fund base. • To make sound loan and investment. • To meet capital adequacy requirement at all advances. • To ensure 100% recovery of all advances. • To ensure a satisfied workforce. 5 YEARS FINANCIAL HIGHLIGHTS | | | (Figures in million Taka) | | | |2000 |2001 |2002 |2003 |2004 | |Actual-2003 |66.

77 |201. 64 |289. 39 | |6. 75 |6. 04 | |Budget-2004 |82. 50 |220. 00 |300. 00 | |9. 55 |7. 50 | |(Head Office) | | | | | | | |Our Achievement |84. 64 |195. 61 |290. 41 | |6. 83 |7. 61 | |Up to December ‘04 | | | | | | | |Achievement (%) |102. 59% |. 89% |96. 80% | |71. 52% |102. 27% | |(Up to December) | | | | | | | Chapter Four: Foreign Exchange Dealing Section 1 Basics of Foreign Exchange MEANING of FOREIGN EXCHANGE F oreign Exchange refers to the process by which the currency of one country is converted into the currency of another country.

In banks, when we talk of foreign exchange, we refer to the general mechanism by which a bank converts currency of one country into that of another. The term Currency as stated above includes not only such notes and coins as are legal tenders, but also bank balances and deposits in foreign currency and instruments, credit instruments which are capable of being used as currency, such as, bill of exchange, promissory notes, letter of credit, travelers cheques, drafts, airmail transfer, telegraphic transfers and all other instruments which convey to holder a right to wealth.

“Foreign exchange” means foreign currency and includes- 1. all deposits, credits and balances payable in any foreign currency and any drafts, traveler cheques, letters of credits and bills of exchange or drawn in local currency but payable in any foreign currency; and 2. any instrument payable, at the option of the drawee or holder thereof or any other party thereto, either in local currency or in foreign currency or partly in one and partly in the other.

Foreign exchange is concerned with the settlement of international indebtedness, the methods of effecting the settlements and the instruments used in this connections, and the variation in the rates of exchange at which the settlement is made. Administration of F/E in Bangladesh: Foreign Exchange Regulation Act, 1947 was adapted in Bangladesh immediately after independence to regulate certain payments, dealings in foreign exchange and securities and the import and export of currency and bullion. However, a few provisions have been added under the foreign exchange regulation (Amendment) ordinance, 1976.

The Act has 27 sections and a number of sub-sections. The main objectives of the Act are to conserve the limited foreign exchange resources and to ensure that the available foreign exchange is utilized only for priority requirements in the economic and financial interests of Bangladesh and the maintenance of the proper accounting of foreign exchange receipts and payments. Under the Act, the responsibility and authority of administration of foreign exchange is vested by the government with the Bangladesh Bank.

Bangladesh Bank reviews the exchange control measures from time to time and revise the instructions on policy and measures, whenever necessary through different Foreign Exchange (FE) circulars. Authorized Dealers: In exercise of the powers conferred by of the Foreign Exchange Regulation Act, 1947 certain schedule banks are authorized by Bangladesh Bank to deal in foreign exchange, the selected branches of the bank can transact such businesses. They are known as “Authorized Dealers”.

These Authorized Dealers have generally been delegated powers to – • buy foreign exchange from the customers without limits, • sell foreign exchange against imports authorized under Import Policy of the country, • provide forward exchange covers in respect of eligible transactions, • sell foreign exchange for travel overseas at the prescribed quota and • sell foreign exchange to customers to cover remittances of various nature. Authorized dealers are required to bring the foreign exchange regulations to the notice of their customers and ensure compliance with the regulations by the customers in their day to day dealings.

Authorized Dealership License: Bangladesh Bank issues licenses to deal in foreign exchanges empowered by the Foreign Exchange Act, 1947. Licenses to deal in foreign exchange are normally granted only to schedule banks who have offices in Bangladesh, after being satisfied that they have adequate number of stuff/officers properly trained in handling foreign exchange transactions and will be able to comply with the requirements of the administration of exchange control.

However, license can at any time be withdrawn by Bangladesh Bank if the bank in whose favor it is issued fails to conduct its business to the satisfaction of the Bangladesh Bank. Central bank may issue general licenses or licenses with authority to perform limited functions only. The authorized dealers must maintain adequate and proper records of all foreign exchange transactions and furnish such particulars in the prescribed returns for submission to the Bangladesh Bank. Guidelines governing F/E: 1. Bangladesh Bank Guidelines For Authorized Dealers – Volume I – Volume II 2. Import Policy issued by the Ministry of Commerce. 3. Export Policy issued by the Ministry of Commerce. 4. The Uniform Customs and practice for Documentary Credits (UCPDC) 5.

Uniform Rules for Bank to Bank Reimbursement (URR) 525. 6. Public Notice, Time-to-Time Issued by Bangladesh Bank. Section 2 Means & Methods for Settlement of International Payment T he Banks which maintain foreign exchange departments are the main channels through which international payments are made. Such banks may have branches in different countries and at every branch they have substantial balances in the currency of that country to settle the payment. If a bank has no branch at a centre it keeps balance with some other bank which is prepared to act at its agent in exchange dealings.

Banks acting as agents of other banks are called “correspondents”. Foreign Account of Banks: In order to effect foreign exchange transactions, banks maintain accounts in their own name in various foreign currencies, with banks overseas. These accounts are credited with the claims receivable overseas in the respective currency of the country concerned, and debited with the payments denominated in the respective currency of the country in which the accounts are maintained. NOSTRO ACCOUNT: “Nostro” is a Latin word meaning “OURS”. So Nostro account means “Ours” account.

Nostro accounts are just reflection or mirror accounts showing the position as it obtains in the foreign currency account with each correspondent bank. In the Nostro account, the bank will show the foreign currency accounts of each transaction and alongside the respective items the domestic currency equivalents are indicated. When the bank makes a purchase of foreign currency, the Nostro account will be credited by the foreign bank. When it makes a sale it will result in a debit in the Nostro account. In the mirror account the purchase will be debited and sale credited.

The Nostro account reflects what the foreign correspondent owes to the bank and what the home bank owes to the foreign bank. Example: If Dhaka Bank Ltd. maintains a current account with the Bank of Manhattan, N. Y. in dollar, the account is considered as the Nostro Account of Dhaka Bank Ltd. VOSTRO ACCOUNT: The “Nostro” account is termed as “Vostro” account by the correspondent bank. The word “Vostro” means “YOURS”. A Vostro account or “Your Account” is also called a local currency account. Foreign banks maintain current accounts in domestic currency with local banks and such accounts are called Vostro accounts.

Generally Vostro accounts are maintained by foreign correspondent banks on a reciprocal basis to effect payment as well as receive payments on behalf of their clients. Example: A bank in London may open an account with a Bangladeshi Bank and draw drafts on the account. The Bangladeshi bank on presentation of drafts to it would pay to the debit of the foreign bank’s account with it. For exchange control purposes such accounts are known as “non-resident bank accounts”. LORO ACCOUNTS: Similarly, a foreign bank’s account of any third party, whether in foreign currency or in home currency, is referred to as a “Loro” or “THEIR” account.

For example, a payment made by one bank to another for account of a third bank is for the credit of the “Loro” account of the third bank. CREDIT INSTRUMENTS: There are many types of credit instruments used in making foreign remittances. They differ chiefly in the speed at which money can be received by the creditor at the other end after it has been paid in by the debtor at his end. These are namely: – Telegraphic Transfer (T. T. ) – Mail Transfer (M. T. ) – Banker’s Draft – Bill of Exchange – Letter of Credit (L. C. ) – Stock Draft – Personal Cheques/Dividend Warrants etc. – SWIFT Section 3 Import Procedure

Import Procedure (Steps Involved): (as observed by L/C issuing bank) 1. Procurement of IRC from the concerned authority. 2. Signing purchase contract with the seller. 3. Requesting concerned bank (importer’s bank/issuing bank) to open an L/C on behalf of the imported favoring the exporter/ seller/ beneficiary. 4. The issuing bank collects information about the importer from Credit Information Bureau (CIB) of Bangladesh Bank and other concerned authorities. 5. The issuing bank also collects information about the exporter from negotiating bank and other concerned organizations in order to ensure the shipment.

6. The issuing bank opens the L/C in accordance with the instruction/request of the importer and request another bank (advising bank) located in the seller’s/exporter’s country to advise the L/C to the beneficiary. (The issuing bank may also request the advising bank to confirm the credit, if necessary. ) 7. The advising bank advises/informs the seller that the L/C has been issued. 8. As soon as the exporter/seller receives the L/C and is satisfied that he can meet the L/C’s terms and conditions, he is in a position to make shipment of the goods. 9.

After making shipment of goods in favour of the importer, the exporter/seller submits the documents to the negotiating bank for negotiation. 10. The negotiating bank scrutinizes the documents and if found OK, negotiates the documents and sends the said documents to the L/C issuing bank. 11. After receiving the documents the L/C issuing bank also examines the documents and if found OK, makes payment to the negotiating bank. 12. If discrepancies is found in the documents, bank has to inform both the negotiating bank and the importer about the discrepancies within 5 days of receiving the documents.

In this case, L/C issuing bank is not bound to make payment unless the importer is satisfied with the discrepancies and requests bank to proceed. 13. The L/C opening bank then requests the importer to receive the documents on payments. 14. The importer after paying all dues receives the documents from the L/C issuing bank and then releases the imported goods from the port authority. Import procedure from importer’s side: 1. To open an account with a Bank. 2. To get IRC (Import Registration Certificate) from CCI&E. 3. To get TIN (Tax Identification Number). 4.

To procure Pro-forma Invoice / Indent (In case of some selective items, approval from concerned authority to be needed). 5. To place formal request to the Bank to open L/C. 6. To fill up the L/C Application Form mentioning required various clauses. 7. To sign LCAF (It may be registered or not). 8. To get Insurance Cover Note with money receipt. 9. To sign IMP. Submitting all the papers to the bank for opening L/C and get the copy of the L/C. Before retirement of documents he must have to procure a VAT Certificate to take delivery of goods from the Custom Authority.

After taken delivery of imported goods from the Custom Authority the imported deposit the Bill of Entry to the Bank which ensure that goods have entered into the country. According to the Imports and Exports Act, 1950 as adopted in Bangladesh, any one willing to carry import business needs registration with the licensing authority, i. e. Chief Controller of Imports and Exports (CCI&E). Procedures for getting IRC: To get an Import Registration Certificate (IRC) on has to apply to the CCI&E along with following documents:

i) If an Individual: Questionnaire form duly filled in and signed. a. Trade License (valid) b. Nationality Certificate c. Bank Solvency Certificate d. T. I. N. Certificate e. Required Amount of Registration Fee. ii) If Partnership Firm:a. Application b. Partnership Deed. c. Trade License d. Bank Solvency Certificate e. T. I. N. Certificate f. Required Amount of Registration Fee. iii) If Private Ltd. Co. :a. Application b. Memorandum and Articles of Association c. Trade License d. Bank Solvency Certificate e. T. I. N. Certificate f. Required Amount of Registration Fee.

iv) If Public Ltd. Co. :a. Application b. Certificate of Registration with the Registrar of Joint Stock Companies. c. Memorandum and Articles of Association c. Certificate of Commencement of Business d. Trade License e. T. I. N. Certificate f. Required Amount of Registration Fee. On receipt of application along with relative documents, the CCI&E and its regional offices scrutinizes the documents and conducts physical verification (if considered necessary) and on being satisfied, requests the applicant to pay fees towards registration through treasury challan.

After submission of the above documents and payment of requisite fees, if the documents are found in order and the CCI&E is satisfied, the IRC is issued to the applicant-importer. The IRC is a security document issued under embossing seal and duly signed by authorized officials of CCI&E and to be kept under safe custody. The IRC is required to be renewed every year on payment of usual fees. Licensing for Imports: Most imports into Bangladesh require a license from the licensing authority. Commercial Banks have been entrusted with the responsibility of licensing imports in both industrial and commercial sectors.

Licensing is done by commercial banks by means of a specially designed form known as Letter of Credit Authorization Forms (LCAF). LCAF are security documents printed by the respective bank. The following documents are required to be submitted by the importer to his banker for licensing: 1. The LCAF properly filled in quintuplicate signed by the importer. 2. L/C Application duly signed by the importer. 3. Purchase contract, i. e. indent for the goods issued by an indenter or pro-forma invoice as the case may be. 4. Insurance cover note. 5.

Membership Certificate from a recognized Chamber of Commerce and Industry or Town Association or registered Trade Association. 6. Proof of payment of renewal fees for the IRC. 7. A declaration, in triplicate, that the importer has paid income-tax or submitted income-tax return for the proceeding year. 8. 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. 9.

Any such documents as may be required as per instruction issued/to be issued by CCI&E from time to time. On receipt of the LCA Form and the other documents, the bank should carefully scrutinize the documents and lodge the same in their respective registration books and duly verify the signature of the importer put on LCAF. Registration of LCAF with Bangladesh Bank: If foreign exchange is intended to be bought from the Bangladesh Bank against an LCAF, it has to be registered with Bangladesh Bank’s Registration Unit located in the concerned area office of the CCI&E.

For such registration the LCAF, duly filled in and signed by the importer and authenticated by the Authorized Dealer, shall be submitted by the Authorized Dealer to the concerned Registration Unit. The Unit will put a registration number on all the copies and emboss a security seal. However, registration is not required for import of goods by Government departments, local authorities and statutory bodies, recognized educational institutions and hospitals. In addition, registration is not required for import of goods which do not involve remittance of foreign exchange. Items like medicines, reading materials etc.

can be imported without registration by the actual users within monetary limits and subject to usual conditions as prescribed in the Import Policy Order. L/C Application Form: L/C application form is a sort of an agreement between customer and the bank on the basis of which letter of credit is opened. This is a printed form bearing stamps of prescribed amount in accordance with Stamp Act in force. It stipulates the conditions governing the letter of credit, contains an undertaking by the customer to make funds available in his account with the bank when bills would be presented under credit. Section 4

Documentary Credit or Letter of Credit (L/C) Definition of L/C: A letter of credit (L/C) or documentary credit can be defined as a ‘Credit Contract’ whereby the buyer’s bank is committed (on behalf of the buyer) to place an agreed amount of money at the seller’s disposal under some agreed conditions. Since the agreed conditions include, amongst other things, the presentation of some specified documents, the letter of credit is called Documentary Letter of Credit. The Uniform Customs & Practices for Documentary Credit (UCPDC) published by International Chamber of Commerce (1993) Revision, publication No.

500 defines Documentary credit as follows: “Any arrangement, however named or described, whereby a bank (the “Issuing bank”) acting at the request and on the instructions of a customer (the “Applicant”) or on its own behalf, i. is to make a payment to or to the order of third party (the beneficiary), or is to accept and pay bills of exchange (Drafts) drawn by the Beneficiary, or ii. authorizes another bank to effect such payment, or to accept and pay such bills of exchange (Drafts), iii. authorizes another bank to negotiate, against stipulated document(s), provided that the terms and conditions are complied with.

Why an L/C: In international trade, because of distance involved, buyers and seller don’t know each other. It is difficult for them to appreciate each other’s integrity and credit worthiness, and beside this, it is also difficult to know various regulations prevailing in their respective countries regarding imports and exports. Thus the buyer wants to be assured of goods and seller wants to be assured of payments. Commercial banks, therefore, assure these things to happen simultaneously by opening letters of credit guaranteeing payments to seller and goods to buyer.

Parties to a Letter of Credit: There are a number of parties involved in a L/C and the right & obligations of the different parties also differ from each other. The involved parties are named