CHAPTER-1

Introduction & Background of the Study

1.1 Origin of the Study 1

All businesses are concerned with earning profit through selling either a product or rendering service. A bank doesnt produce any tangible product to sell but does offer a variety of financial services to its customers. General banking is the starting point of all the banking operations. It is the department, which provides day to day services to its customers. Now a day, general banking, loans and advances and foreign trade plays a vital role in banking. The general banking consists of deposit, pay order, Term Deposit Account, FDR Accounts, The FDR block, STD account, Clearing house, Clearing activities of branches, Inward and Outward clearing, Endorsements, Outward Bill for Collection (OBC), Telegraphic Transfer (TT), IBCA, IBDA. The foreign exchange activities mainly consists export, import and other foreign remittance. There is a huge opportunity to invest the foreign remittance which also comes from the wage earners working abroad. The loans and advances mainly consists industrial credit, micro credit and commercial credit. Therefore, an Overall activity of BASIC BANK has an important role to play in the financial sector of Bangladesh. Consequently the study of overall activities of BASIC BANK in the context of Bangladeshs developing economy would help in the overall management of balance of payment of the country. 1.2 Objective of the Study To acquire knowledge and find the relationship between practical and theoretical background. To evaluate the financial performance of BASIC Bank Limited. To examine the operational procedure of BASIC Bank Limited. To examine various factors and techniques used in foreign exchange operations. To analyze the overall performance of foreign exchange operations of BASIC Bank Limited. To find the position of BASIC Bank Ltd. with regard to foreign exchange operations through a comparison with IBBL, Sonali Bank Ltd. & Agrani Bank ltd.

1.3 Scope of the Study 2

In Bangladesh the financial sector is one of the most established area. In the process of forming a good economic system, banks play a vital role. For this reason I have chosen BASIC BANK Ltd. to complete my Internship. There I worked for three months as an internee and were paced under general banking, loans and advances and foreign exchange department. Therefore this report will cover the above aspect of the work.

1.4 Methodology of the Study This report has been prepared on the basis of experience gathered during the period of internship. For preparing this report I have also got the information from annual report and website of the BASIC Bank Ltd.

Sources of data collection: 1.4.1 1.4.2 Primary Sources Face to face conversation with the respective officers and stuffs of the branch and head office. Practical work experience in the different desk of the department of the branch. Face to face conversation with clients visited the branch. Secondary Sources Daily diary (containing my activities of practical orientation in BASIC Bank Ltd.) Various publications on bank. Website of BASIC Bank Ltd. Website of Bangladesh Bank. Different procedure manual published by BASIC Bank Ltd.

1.5 Limitations Although I have tried to find out the relationship between our theoretical knowledge and practical implication, I have found some differences between what I learn in theory and what are practical. The report was completed under the following constraints Difficulty in gaining accesses to accounts of the bank. Without their own employee it is very much difficult to collect relevant data. The number of branches of BASIC Bank is limited. As such the cannt provide services to the people of rural areas. In some cases verifications of data were become tough. Unavailability of necessary documents. The bank has not any Debit and Credit card. The online service of this bank is very much limited. As the department specified a short span of time, sufficient time could not spend to make on in-depth study on such an important issue.

CHAPTER-2

Organizational profile of BASIC

2.1 Background Information Bangladesh Small industries and Commerce (BASIC) Bank Limited established as a banking company under the companies act 1913 and was incorporated under this act on the 2nd august 1988. The Bank launched its operation from the 21 st January 1989. It is governed by the Banking Companies act 1991. The Bank started as a joint venture enterprise of the BCC foundation with 70 percent share and the Government of Bangladesh (GOB) with the remaining 30 percent shares. The BCC foundation being nonfunctional following the closure of the BCCI, the Govt. of Bangladesh took over 100 percent ownership of the Bank on 4 thJune 1992. However, the Bank is not nationalized; it operates like a private Bank as before. BASIC is unique in its objective. It is a blend of development and commercial Banking functions. The memorandum and Articles of Association of the Bank stipulate that 50 percent of loanable funds require to be invested in small and cottage industries sector. As others commercial Banks, BASIC provides their clients full-fledged commercial Banking services including collecting of deposits. Short term trade finance, working capital finance in processing and manufacturing units and financing and facilitating international trade. 2.2 BASIC Bank at a Glance

Name Date of incorporation Date of inauguration operation Registered office

BASIC Bank Limited August 2, 1988 of January 21, 1989 Bana Shilpa Bhaban 73, Motijeel Commercial Area Dhaka-1000, Bangladesh. Sena Kalyan Bhaban(6th floor) 195, , Motijeel Commercial Area Dhaka-1000, Bangladesh.

Head Office

Logo Name of the chairman of the Mr. Sheikh Abdul Hai Bachhu Board Name of Managing Director Number of Branches Services provided Mr. AKM. Sajedur Rahman 32 Deposit scheme, Credit facility and foreign 6

Paid up capital Profit after

tax

exchange services Taka 1309.77 million and Taka 549.95 million Government of Bangladesh CASTLETM Member of SWIFT 22.68(2008) basicho@citechco.net www.basicbanklimited.com BKSIBDDH 15

provision Ownership Banking software used Technology used Earnings per share E-Mail Website SWIFT Number of Authorized Dealer 2.3 Corporate Strategy

Financing establishment of small units of industries and business and facilitates their growth. Small business sheet size composed of quality assets. Steady and sustainable growth. Loan sanction to small and medium recognized company. Serving better service to the customers. 2.4 organizational Goals 1. To undertake project promotion to identify profitable areas of investment. 2. To search for newer avenues for investment and develop new products to suit new needs. 3. To expansion of the bank and increase the coverage along the whole country. 4. To provide better service to the customer and lead as a better service provider bank in Bangladesh. 5. To establish linkage with other institutions which are engaged in financing micro enterprises. 6. To established linkage with other banks of Bangladesh and foreign banks.

2.5 Technology of BASIC The Board attaches grant importance on acquisition and use of appropriate information technology in the bank. Since inception the bank has continued its effort to meet the complex and dynamic needs of customers. BASIC bank has its own software developed

in 1991. Local area network (LAN) has been installed in Head office and 15 branches of the bank. Wide area network (WAN) has been set up between Head office and branches using X.28 leased line of BTTB. As continuous up gradation of technology its Gulshan branch, Dhaka, Zindabazar branch, Sylhet, Rangpur Branch, Rajshahi branch has become online few days ago. 2.6 Organizational Structure To achieve its organizational goal, the bank conducts its operation in accordance with the major policy guidelines laid down by the Board of Directors, the highest policy making body. The day to day operation off the bank is looked after by the management. 2.6.1 Board of Directors As stated earlier the Government holds 100 percent ownership of the Bank. All the Directors of the Board are appointed by the Government of Bangladesh. The secretary of the Ministry of Industries is the Chairman of the Bank. Other Directors of the Bank are senior Government and Central bank executives. The Managing Director is the ex official member of Board of Directors. There are at present 7 directors including the Managing Director. 2.6.2 Management The Managing Director is the head of Management. He is assisted by the General Manager and Departmental heads in the head office. The organizational structure of BASIC is quite different from other banks. It is much more vertically integrated as far as reporting to the chief executive is concerned. The branch in charge of the Bank report directly to the Managing Director and for functional purpose, to the head of the departments. Consequently, quick decision making in disposal of cases is ensured. BOARD OF DIRECTORS

MANAGING DIRECTORS

GM OPERATION

GM DEVELOPMENT

OFFICER IN CHARGE ACCOUNT

OFFICER IN CHARGE CREDIT

AGM INTERNA TIONAL

DGM INDUSTRIAL CREDIT

AGM ESTABLI SHMENT

AGM COMPUTER

DGM

ADMINIS TRATION

Figure: Organ gram of BASIC Bank Limited

2.7 Risk Management In banking business, no reward can be expected without risk. Management of BASIC Bank has established a formal program for managing the business risk faced by the bank. BASIC bank is very much cautious about its investment. Every loan proposal is placed under careful scrutiny before approval. Board of Directors approval is necessary for the proposal of large amount of loans. Internal audit team and recovery team exercise close monitoring on every loan transaction. Management regularly reviews the banks overall assets and liabilities structure and makes necessary changes in the mix asset/liabilities of balance sheet. The Bank also has a liquidity policy to ensure financing flexibility to cope with unexpected future cash demand. The Bank takes necessary action to avoid foreign exchange risk which is called as exposure.

2.8 Performance at a Glance This section deals with performance analysis of BASIC highlighting the certain aspect of BASIC through chart and the situation of spread, Burden and productivity indicator over the last 5 years.

Progress at a glance From the Balance sheet(Million in TK) Authorized Capital Paid-up Capital Reserve & Surplus Shareholder's Equity Fixed Assets Total Assets Deposits Long-term Debt Loan & Advances Placement & Investment From the Income Statement (Million Taka) Gross Income Gross Expenditure Profit before Tax Profit after Tax Tax Paid (Cumulative) Others (Million Taka) Import Business Export Business Financial Ratios (Percentage) Capital Adequacy Ratio Capital Fund to Deposit Liabilities Liquid Assets to Deposit Liabilities Loan to Deposit Liabilities Earning Assets to Deposit Liabilities After Tax Return on Average Assets Net Profit to Gross Income Interest Magin Cover After Tax Return on Equity SMI/SSI Loan and Micro Credit to Total Loan Number of Branches Number of Employees

2008 2000 1309.77 1681.39 2982.6 228.36 46651.53 38368.23 1708.4 27269.13 15653.2

2007 2000 1247.4 1349.17 2596.58 196.11 38773.91 31947.98 1385.81 22263.35 13560.92

2006 2000 945 1294 2239 154.52 29417.09 24084.65 830.06 19000 8212.23

2005 2000 810 916.14 1726.14 135.78 27136.37 22325.58 937.51 15339.35 10236.82

2004 2000 675 816.23 1491.23 101.41 19436.57 15509.18 839.61 12000.15 6098.51

5,060.29 3526.18 1534.11 549.95 3538.09

3,549.51 2458.41 1091.1 282.96 2790.98

2,870.32 1,858.69 1011.62 554.14 2,245.16

2228.21 1,599.77 628.44 285.49 1,777.70

1,768.85 1,241.63 527.22 291.41 1,434.76

27,359.77 22,270.87

21,266.57 16,794.96

17,804.27 15,463.74

14,095 11,097

12,507.80 7,908.00

12.02 7.81 47.7 71.07 114.69 1.3 10.87 137.08 19.68 59.32 31 735

12.91 9.23 49.1 69.69 109.7 0.83 7.97 176.8 11.7 56.73 30 721

11.98 10.34 40.42 78.89 112.99 1.96 19.31 211.72 27.82 55.56 28 651

11.77 10.36 58.01 69.74 114.56 1.23 12.81 214.56 17.75 67 27 601

12.49 10.47 50.56 77.37 116.7 1.7 16.48 205.27 21.27 62.21 27 578

Source: Annual Report, 2008 BASIC Bank Ltd.

CHAPTER-3

10

General Banking Activities and Loans & Advances

3.1 General Banking Department General banking is the starting point of all the banking operations. It is the department which provides day to day services to the customers. Everyday it receives deposits from the customers and meets their demand for cash by honoring cheque. It opens new accounts, remit funds issue bank draft and pay orders etc. since bank is confined to provide the service everyday, general banking is also known as Retail Banking.

11

The following things done in this department: Accepting of deposits. Opening of account. Cheque book issue. Transfer of account. Closing of account. 3.1.1 Deposits Deposit is the main source of income of a bank. The amount of deposit doesnt belong to the bank. It belongs to the depositors but the deposited amount is at the command of the bank. A major portion of deposit of a bank has to be kept in cash to meet the demand of the depositors. Bank collects deposit through various accounts. Those accounts are: Savings Bank Account. Current Account. Term Deposit Account. BASIC Fortune. 3.1.2 Clearing There are various modes of transaction in a bank. Clearing is one of them. Other modes of transaction are cash and transfer. 3.1.2.1 Outward Clearing When parties of a branch place cheques and other instruments of other banks, the collection of these cheques and instrument through clearing process is known as outward clearing for that branch. 3.1.2.2 Inward Clearing When cheques of a branch come for collection through clearing process is known as inward clearing. 3.1.3 Outward Bill for Collection (OBC) Collection of cheques of a bank outside the clearing zone is known as (OBC).

12

System of OBC lodgment: Accepting the instrument with deposit receipt from the clients. Investigating the instrument and deposit receipt carefully, specially date of cheque, amount, account number, name, and sign of the depositor. 3.1.4 Pay Order The pay order is an instrument used as an alternative of physical cash. It has some special feature. Those are Its an order to pay the account mentioned on the pay order block. The issuing branch will make the payment. Pay order must be account pay.

3.1.5 Demand Draft Demand draft is most frequently used in case of remittance. DD is an unconditional order of the banks one branch to another branch to pay a certain amount of money to certain person or order on demand. 3.1.6 Telegraphic Transfer (T.T) Telegraphic transfer is a modern process of transferring money. In this process money is remitted through telex, telephone or mobile phone. The most important of a TT is its test number. If the test number of originating branch matches with responding branch only then TT payment happens. 2 types of TT are there: T.T. Incoming TT Outgoing

. 3.2 Activities of Loan Department

13

BASIC Bank's services are directed towards the entrepreneurs in the small industrial sector. It is mandatory for the Bank to invest 50% of its total income in the small industrial sector. The Bank offers the following types of loan: Industrial Credit. Commercial Credit. Micro Credit.

Figure: Combination of Deposits and Loans & Advances 3.3 Categories of Loans Continuous Loan- Cash Credit, Secured Overdraft. Demand Loan. Term Loan. Short Term Agriculture Loan and Micro Credit. Classified Loan. Loan will be classified as under: Substandard: If not paid within 6 months from the date of demand. Doubtful: Loans remain unpaid for the period 6 months and above but less then 12 months. Bad and lose: Loan remains unadjusted for 12 months and above.

14

CHAPTER-4

Terms used in Foreign Exchange Operations

15

Banks play a very important role in effecting Foreign Exchange Transaction of a country. Mainly transaction with overseas countries in respect of imports, exports and Foreign Remittance come under the preview of foreign exchange transactions. Banks are the vital sector by which such transactions are effected/settled. Central Bank records all sorts of foreign exchange transaction and therefore, transaction effected by the Banks and other authorized quarters are to be reported regularly (Daily, Fortnightly, Monthly, Quarterly, Yearly etc) to Bangladesh Bank by the foreign exchange department of every Banks. Foreign Exchange Department plays a vital role to earn the Banks maximum profit. This department is classified according to their activities. The foreign exchange department consists of three sections, these are as follows:

Import Export Remittance

4.1 Import Under the import policy of Bangladesh the Importer has get the valid Import Registration Certificate (IRC) from the Chief Controller of Import & Export (CCI&E). 4.1.1 Letter of credit It is the most important and commonly used in connection with foreign trade. Letter of Credit is an undertaking by a banker of the importer to the exporter, to the effect that the amount of the L/C will be duly paid. The banker on behalf of the importer issues the L/C in favor of the exporter (beneficiary) and forwards the same to the exporter to the effect that the bill drawn by him shall be duly accepted and paid. It creates confidence in the mind of the exporter so far as payment of the bill is concerned. It is also facilitate the exporter to get the benefit of discounting the bill before the date lf maturity. 4.1.2 Documentary credit Documentary credit is written undertaking given by a Bank ( Issuing Bank, Opening Bank ) to a seller ( Beneficiary, Exporter ) at the request and on the instruction of the Buyer ( Applicant, Importer ) to pay either at sight or at a determinable future date, a stated sum of money against stipulated documents and fulfillment of all the terms and condition in the D/C. It is the most suitable under the following circumstances : When the importer is not well known, the exporter selling on credit terms may have importers promise of payments backs by a buyer Banker.

16

 On the other hand, the importer may not wish to pay the exporter until it is reasonably certain that the merchandise has been shipped in the good condition. A D/C in this case, can satisfy both the exporter and the importer.

Documentary credit may be of three types-

Revocable credit Irrevocable credit Add confirmed credit

4.1.2.1 Revocable credit This type of credit can be cancelled or amended at any time by the issuing Bank without prior notice to the seller. It is not in use. 4.1.2.2 Irrevocable credit This type of credit cant be cancelled or amended by the issuing Bank without agreement of parties concerned thereto. All the credits issued in our country are of irrecoverable nature. 4.1.2.3 Add confirmed credit When a third Bank provides guarantee to the beneficiary to make payment, if issuing Bank fail to make payment, the L/C is called confirmed L/C. In case of a conformed L/C a third Bank adds their confirmation to the beneficiary, to make payment, in addition to that of issuing Bank. Confirmed L/C gives the beneficiary a double assurance of payment.

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Advantages and Disadvantages of Documentary Credit

IMPORTER

EXPORTER

DOCUMENTARY CREDIT Advantages Disadvantages * An importer can be assured the * Since Banks deals in document exporter has complied with certain only, Goods may not be the same steams and conditions as specified in as these specified in the credit. the D/C before payment. * Issuing Bank are obligated to * He can insist of shipment of goods pay even through the conditions of with in a certain time by stipulating a goods may be poor. latest shipment date. * D/C commission is relatively * He can have export advice from costly. his Banker as to the D/C terms. * Line of credit or application is * He can ask for financial assistance necessary before an importer can from his Banker such as T/R. open an D/C, this may cause extra inconvenience and is time * Protection offered by DCP500. consuming. * The risk of non payment is lower * It is comparatively costly. provided he complies with D/C terms and condition. * Sometimes, the terms and condition can not be fulfilled such * It is a safe method through which as unreasonable shipment date and to obtain prompt payment after expiry date, adding on D/C the shipment. clause of Restriction of a designated vessel to be informed * The exporter can have export by D/C amendment . advice from his Banker. * The goods are shipped before * The exporter also can seek receiving payment; So it is not financial assistance from his Banker 100% safe. before the buyer makes payment, such as negotiation of export Bills advance etc.

18

Procedure of documentary credit:

Advising/ Confirming Bank Seller Issuing Bank

Details of the diagram a) The buyer & the seller conclude a sales contract providing for payment by

19

documentary credit. b) The buyer instructs his / her bank i.e. issuing bank to issue a credit in favor of the seller i.e. beneficiary. c) The issuing bank asks another bank, usually in the country of the seller, to advice or confirms the credit. d) The advising or confirming bank informs the seller that the credit has been issued. e) As early as possible the seller receives the credit & is satisfied that he / she can meet its terms and conditions, he / she is in a position to load the goods and dispatch them. f) The seller then sends the documents evidencing the shipment to the bank where the credit is available in bank. This may be the issuing bank, or the confirming bank, or any bank named in the credit as the paying, accepting or negotiating bank, or it may be the advising bank or any bank willing to negotiate under the credit. g) The bank checks the documents against the credit. If the documents met the requirements of the credit, the bank will pay, accept, or negotiate according to the terms of the credit. In case of a credit available by negotiation, the issuing bank or the confirming bank will negotiate without recourse. Any other bank including the advising bank if it has not confirmed the credit, may negotiate, same for payment. h) The bank if other than the issuing bank sends the documents to the issuing bank i) The issuing bank checks the documents and if they meet the credit requirements, either Effects payment in according with the terms of the credit, either to the seller if he / she have sent the documents directly to the issuing bank or to the bank that has made funds available to him in anticipation. Or Reimburses in the pre-agreed manner the confirming bank or any bank that has paid, accepted or negotiated under the credit.

j) When the documents have been checked by the issuing bank and found to meet the credit requirements, they are released to the buyer upon payment of the amount due, or upon other terms agreed between him / her & the issuing bank. k) The buyer sends the transport document to the carrier who will then proceed to

20

deliver the goods. 4.1.3 Import Financing The post import finance extends the import credit in the following forms: PAD (Payment against documents) LTR (Loan against trust receipt) LIM (Loan against imported merchandise)

4.2 Export Under the export policy of Bangladesh, the exporter has to get the valid export registration certificate (ERC) from chief controller of export & import (CCI&E). The ERC is required to renew every year. The ERC number is to be incorporated on export Form & other paper connected with exports. 4.2.1 Receiving the letter of credit After getting contract for sale, exporter should ask the buyer for L/C clearly starting terms & condition of export & payment.

4.2.2 Procuring the materials: After knowing that the L/C has opened in his favor, the next step for the exporter is to set about the task of procuring or manufacturing the contracted merchandise. If the exporter has to procure the raw materials from another supplier (local or abroad) he has to open Back-to-Back L/C. 4.2.3 Back-to-Back L/C Back-to-Back L/C is one type of L/C, which is opened against lien on a valid export L/C. It is opened for inland & abroad as well. Bank will supply the following papers/documents for opening a Back-to-Back L/C. L/C application form LCA form IMP form Charge document papers

21

The above papers must be completed, filled & signed by the party thereto. The party will submit the entire filled document along with application in printed form of the designated Bank which is also an agreement between application & the Bank. 4.2.4 Export Financing An export is who exports the goods to another customer whether in domestic country or in abroad. In exporting the stipulated goods he may require financing. So export financing may be required at two stages. Pre shipment credit Post shipment credit 4.2.4.1 Pre shipment credit Pre shipment credit is the credit, which is given to finance the export activities of an exporter for the actual shipment of goods. The purpose of each credit is to meet the working capital needs from the procuring of raw materials to the transportation of goods for the export the foreign country. Before sanctioning of that credit the Bank takes into consideration the credit worthiness, export performance of the exporters together worthiness all other information required for sanctioning the credit in accordance with the existing rules & regulations. 4.2.4.2 Post shipment credit There is a time gap between export of the goods and realization of the proceeds. So exporter may require finance in that period to continue his business. So Bank may finance against export documents ensuring the following:

Export documents comply with the credit terms Partys past performance is satisfactory Any other security in case of exporting under contract

4.3 Foreign Remittance

22

Foreign remittance means remittance of foreign currencies from one place/person to another place/person. In broad sense, foreign remittance includes all sale and purchase of foreign currencies on account of Import Export, Travel and other purposes. However, especially foreign remittance means sale & purpose of foreign currencies for the purposes other than export and import. BASIC Bank Limited performs the remittance function with different countries. It maintains the foreign remittance in the following form:

Foreign Demand Draft Inward Outward

4.3.1 Foreign Demand Draft (FDD) A foreign demand draft is a negotiable instrument issued by a Bank drawn on other Bank with another country the instruction to pay a certain amount to the beneficiary on demand. Remittance through demand draft may be inward or outward. 4.3.2 Inward Remittance Inward remittance refers to the extent where the bank makes payment to the client against foreign demand draft. Bank will make payment to the client by verifying the, test number, and signature of the authorized officer. 4.3.3 Outward Remittance It refers to the extent where by the bank issues foreign demand draft. The bank charges TK.300 per Demand Draft. Two forms are used for Outward Remittance of foreign currency such as: IMP Form: All outward remittance on account of Imports is done by from IMP. TM Form: For all other outward remittance from TM is used.

23

CHAPTER-5

Foreign Exchange Operations

5.1 Introduction

24

The foreign exchange has played a vital role in the last decade or so on guiding the purchase and Sale of goods, services and raw materials globally. Every country has certain natural advantages and disadvantages in producing certain commodities while they have some natural disadvantage as well in other areas .As a result , we find that some countries need to import certain commodities while others need to export their surpluses .Foreign trade brings the fruits of the earth to the homes of the humblest among the countries .These transactions are the basis upon which international trade is made .As more than one currency is involved in foreign trade , it gives rise to exchange of currencies , which is known as Foreign Exchange .The term Foreign exchange has three principal meanings . Firstly , it is a term used referring to the currencies of other countries on terms of any single one currency .To a Bangladeshi , Dollar , Pound Sterling , etc. are foreign currencies and as such foreign exchanges. Secondly, the term also commonly refers to some instruments used in international trade, such as bill of exchanges, drafts, travelers cheques and other means of international remittance. Thirdly, the term foreign exchange is also quite often referred to the balance is foreign currencies held by a country.

In the fiscal year 2008 Bangladesh economy was confronted with serious challenge, among others, the impact of divesting floods, the excessive price hike of oil and some other importable in the international market, in addition to the termination of the multi fiber arrangement. To cope with these challenges, the government and the Bangladesh Bank adopted a series of policies to enhance the resilience of the economy, while maintaining macro economic stability. These polices significantly contributed toward maintaining real Growth Rate of Bank 5 percent in the fiscal year 2008.

BASIC Bank's expertise in International Banking has a record of in-house growth over more than one decade. With limited network of branches at home and also a few correspondent banks worldwide it is handling the export-import business including homebound remittances. Foreign trade finance So far the bank has established correspondence relationships with as many as 22 foreign banks in order to facilitate foreign trade. The Bank handled total export business of Taka 22270.87 million and import business of Taka 27359.77 million in 25

2008. The Banks export and import business grew by 32.6 percent and 28.65 percent respectively. Major items of exports were ready made knit & woven garments, sweater, jute products, leather and leather goods, handicrafts etc. Items of import included mainly industrial raw materials, garments accessories, and capital machinery, raw cotton, electronic consumer goods, chemicals, tyres and tubes, reconditioned vehicles, bicycle spare parts, food items such as rice, wheat, garlic, onion, sugar, chilly and other essential commodities. 5.2 Export Finance In case of export business finance is perceived as one of the important elements. It is linked to nearly all the stages of conversion cycle- procurement of raw materials, processing of goods, packing storage, transportation to the port, shipment to the buyer, assembling of shipping documents & finally, collection of payments. The term Export Finance should therefore mean moneys needed by an exporting farm at each stage of the conversion cycles.

5.2.1 Export financing sectors of BASIC Bank Limited Export financing can play a vital role in the development process of Bangladesh. With earning on export we can meet our import bills. The export trade is always encouraged because the major portion of foreign exchange earning is derived from export. Because of shortage of adequate capital exporters have to come in contact with commercial bank and financial institution to get finance from them. BASIC bank Limited as a state-owned scheduled bank provides certain facilities to the exporters to boost up export earnings. The traditional & non-traditional sectors in which BASIC Bank Limited provides export-financing facilities are as follows: Ready Made Garments in all sorts. Jute manufactures Jute - raw & meshta Fish & Prawns. Hides, Skins & Leather. Tea Fertilizer etc. 5.2.2 Export financing system of BASIC Bank Limited

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Bangladesh as a developing country depends mainly on foreign exchange earning for its development activities. The major portion of foreign exchange earnings is derived from export obviously, to boost export, government provide certain incentives to the exporters namely: Export Financing Development Financing Export Credit Guarantee Scheme Export performance benefits Duty draw back Rebate on duty & tax Income tax rebate Insurance premium rebate Conditional cash subsidy to Garments Industry , vegetables, handicrafts etc. 5.2.3 Pre-shipment financing of Foreign Exchange The classes of pre-shipment financing extended to the exporters by the BASIC Bank Limited are as follows: 5.2.3.1 Export Cash Credit Pledge This facility is allowed for a short period. Under this credit the exportable goods are kept under the effective control of bank either at exporter's go down or bank own go down. In either of the cases, the bank engage full time security to observe over the goods & the movement the goods are done under the supervision of the bank who maintain its proper records through go down storage, challan, delivery order, go down register etc. 5.2.3.2 Export Cash Credit - Hypothecation This advance is allowed for a short period or 3 to 6 months mainly to purchase raw materials or for procurement of exportable goods. So virtually the goods are kept under the control of the exporter but by creating charge on the goods at the time of disbursing credit. The bank has the right to take possession of the goods. The exporter will submit stock report to the bank usually on monthly basis & the bank will verify them.

27

Documents & Security to be obtained Export registration certificates (ERC) Bank usually charge documents to be signed by exporter or his / her duly authorized agent. Confirmed irrevocable export letter of credit or firm contract made by the buyer with the exporter. Insurance coverage Collateral securities. 5.2.3.3 Packing Credit This facility is generally extended when the goods become ready for shipment for a very short period usually from the date of dispatch of the stock from the go down up to the date of actual shipment of the goods that is for the transit period of shipment for further purchase of raw materials or procurement of exportable goods by exporter. 5.2.3.4 Back to back letter of credit Pre-shipment facilities are also credited in the form of back- to-back letter of credit. When the beneficiary of an export letter of credit is not the actual manufacturer or producer of exportable goods mentioned in the relative export letter of credit as securities with his / her banker for procurement of exportable goods to enable him /her to execute the export letter of credit and such letter of credit is called inland back to back letter of credit. 5.2.4 Post- shipment financing of Foreign Exchange Post shipment financing refers to the credit facilities extended to the exporters by BASIC Bank Ltd after actual shipment of the goods against export documents. BASIC Bank Ltd generally finance the exporters at post shipment stage after verifying the credit worthiness and export performances of the exporters as well as the reputation and financial soundness of the foreign buyers provided the shipping documents are drawn strictly in accordance with letter of credit terms and in accordance with foreign exchange regulation in force.

Post shipment financing is extended to the exporters by the following terms

Negotiation of export documents under letter of credit. Purchase of askance bills drawn on D. A. basis.
28

 Providing loan against export bills tendered

collection.

Discounting of export bills.

5.2.4.1 Negotiation of export documents under letter of credit Most important and widely used method of financing export at post-shipment stage is negotiation of export documents. After the shipment of the goods the exporter generally submits the following documents to the bank for negotiation: Bill of exchange. Bill of lading or air way bill. Commercial invoice - eight copies within these four original copies. Custom invoice of importer's country. Certificate of origin-original copy. Packing list - eight copies within these four original copies. Weight certificate. Declaration of shipment to the insurance company. Pre-shipment inspection certificate.(CFR-Clean Reports of Findings) Quality control certificate when required. Acknowledgement letter indicating received sample / approval letter. Frightful letter. Any other document if called for letter of credit. 5.2.4.2 Purchase of uses bills drawn on D.A. basis Sometimes export letter of credit stipulates payment at 30 to 40 months; the period is called askance period. The bills drawn under this letter of credit is termed as askance bill. On presentation of documents foreign buyers give written acceptance on the bill of exchange to pay after the askance period. In dealing such documents the banker must take proper pre-caution to realize the proceeds in time.

5.2.4.3 Providing loan against export bills tendered for collection Export bills are sending abroad generally by banks on collection basis in the following cases:

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a. Export bills not drawn under letter of credit. b. Bills drawn under letter of credit but contains. Against the above collection documents bank may allow loans keeping substantial margin on the basis of banker customer relationship with the exporter. While handling such documents the banker must remain vigilant to refer the exporter proceed with a view to adjust the credit so extended. 5.2.4.4 Discounting of export bills When the export bills are not drawn under letter of credit or the goods send on consignment basis, the exporter may approach the bank for discounting the export bills on commission basis. Bank generally does not accept such proposal excepting on exceptional cases. If the exporters have very good credit worthiness and previous good export performance and foreign buyers have also good report & good reputation for past transaction. 5.2.5 Export Form The customer, now issued by the authorized dealers, must declare all export of which the requirement of declaration of exchange control manual of Bangladesh Bank applies on the Export Forms. Disposal of Export Forms: Origin: From custom authority to Bangladesh Bank after shipment of goods. Duplicate: From negotiating Bank to Bangladesh Bank after negotiation. Triplicate: from negotiating bank to Bangladesh Bank after realization of the proceedsof the export bill. Quadruplicate: Retained by the negotiating Bank as office copy. 5.2.6 Scrutiny of Export Document After the shipment of goods the exporters submit export documents to authorized dealer for negotiation of the same. As bankers deal with documents only, not with commodity they are required to be very much careful about the genuineness and correctness of the documents evidencing shipment of the respective commodities. The bankers are to ascertain that the documents are strictly as per the terms of letter of credit. Before negotiation of the export bill, the bankers are to scrutinize and examine each & every document with great care. Negligence in the part of the bankers may result in nonrepatriation or delay in realization of proceeds as incorrect documents may put the importers abroad into unnecessary troubles. The scrutiny procedure is as follows: 5.2.6.1 Scrutiny of Draft or Draft of Exchange 30

 The draft should be drawn by the party indicated as the beneficiary of the
credit i.e. the exporter; drawee must be in accordance with the terms of the credit.

The tenor and amount of the draft be in conformity with the credit terms. The bill of exchange should be properly stamped if necessary with the
requisite value and the cost must be recovered from the drawers unless it is provided otherwise in the letter of credit.

The draft or bill must bear the correct date and must be drawn or endorsed to
the order of the bank. 5.2.6.2 Scrutiny of invoice The physical description of the goods i.e. price, quantity, quality, markings etc. in the invoice must correspond with the specifications in the credit. If the credit stipulates a consular invoice, the requisite invoice should be furnished. All copies must be signed and certified as correct shipper. If the credit stipulate for any other particulars to be stated in the cable etc. unless specifically authorized under the credit. 5.2.6.3 Scrutiny of shipping bill The bill of lading should be a full set clean on board ocean bill of lading, unless the credit stipulates otherwise. 'Received for shipment' bills of lading must not be accepted unless permitted by the credit. It must agree with the invoice as regards quantity and description of goods as well as in respect of ports of shipment and destination. The bill of lading must also indicate where it is 'freight paid' (C & F, CIF) or freight payable at destination (FOB transaction). Transshipment and port shipment clauses in the shipping bill should be in accordance with credit terms and the provisions of the uniform custom and invoice these must complied with. It should not include charges such as postage;

31

practice. Credit frequently stipulates for shipment not letter than a specified date. Bill of lading must be examined to ensure that these are dated not later than the date mentioned. Must be properly signed by or behalf of the carries, must be properly stamped and must be endorsed, expect when the relative credit stipulate for bill of lading to order of a named firm. Dock shipment not permitted unless specifically authorized and covers by insurance. Bill of lading must not be a stale one. 5.2.6.4 Scrutiny of Insurance Where insurance is to be effected by the beneficiary for GIF consignment, the policy accompanying the documents should be examined to ensure: That the insurance covers the merchandise for the value stipulated in the credit. That the document is of the class stipulated in the credit. That the insurance documents describe the merchandise covered and mention the name of the carrying steamer. In case where 'on board' bill of lading are not presented the following clause or words of similar indent must follow the name of the steamer' and / or 'following steamer'. That all risk stipulate in the credit is properly covered in the insurance documents. When the credit stipulates that 'all risk' are be covered, it is not sufficient that various risks are mentioned but a clause to the credit that 'all risk' are covered, is required. That the policy is in the name of the bank and the importer. That the party designed in the documents to perform such act properly countersigns the insurance document. That the insurance document complies with the conditions of the letter of credit is in negotiable form that it is endorsed by the party to when the loss payable, unless the credit stipulates that the insurance must be issued 'loss

32

payable to a specified party in the country of destination'. That the date appearing on the insurance document is not later than the date appearing on the bill of lading. That the insurance document covers transshipment when the bill of lading indicates that transshipment would take place. That the insurance claims are payable at the port of destination, that insurance certificate / policy acknowledges the payment of the premium. 5.2.6.5 Scrutiny of other documents The other documents i.e. certificate of origin, packing list, weight / measurement certificate, inspection certificate, survey report, quality control certificate etc. should be issued or signed by the proper authorized and description of 'export - order' given in these documents not be in contradiction to the credit terms. 5.2.7 Risk of Export Financing While there are many advantages to exporting it is not without risk. In deed there are often factors present in international market, which make foreign exchange substantially more risky than domestic ones, including the credit risk of non-payment or nonacceptance of the merchandise by the buyer. For international sales, these risks are far more pronounced than they are domestically. For these reasons BASIC Bank Ltd also accompanied with elements of uncertainty some which are as follows: 5.2.7.1 Commercial risk Insolvency of overseas buyer, which result in non-realization of export proceeds. Failure of the buyer to retire credit already accepted by him / her in case of askance bill within stipulated period. Willful negligence of the importer to accept of pay bill or to accept goods for no fault of the exporter.

5.2.7.2 Political risk Sudden out break of war revolution or civil disobedience in buyer's country. Imposition of restrictions on remittance on any government action in the buyer's 33

country which may block or delay payment. Imposition of trade embargo or blockade against any country. New import restriction on the buyer or cancellation of the license. Additional handling transport or insurance charges due to interruption or diversion of voyage, which cannot be recovered from buyer. Bankrupt or closure of a bank or stoppage of operation of a bank may hamper repatriation of exports proceeds of letters of credit opened by such a bank. Any other cause of loss occurring outside the exporter's country beyond the control of importer or exporter. 5.2.7.3 Informational risk Often credit information on the importer is not available or at best sketchy because buyers and sellers live in different socio-economic & political environment. It is much harder to judge the financial strength, reputation, integrity of a buyer who is thousands of miles away and belongs to a different culture. Moreover, many importers may have good reputation in their own environment based on local value system; they may - never the less engage in some surprising business practices when judged by a different set of standard. 5.2.7.4 Pre-shipment export credit risk Pre-shipment export credit risk involves the following additional risks: There may be diversion of fund because of low interest rate. Uncertainties relating to non-availability of new materials may hamper processing of exportable products. The exporter may not be able to make shipment within the stipulated time due to power failure, strike, natural calamites etc. The materials under back-to-back letter of credit may not reach well in time to allow the exporter to process goods within the expiry date of original export letter of credit. 5.3 Import Finance All over the world there is no country, which can meet its requirements from its own sources. Some imports raw materials, some finished goods & some food products or other commodities. As it is in export & import are invariably conducted through commercial banks. BASIC Bank Limited is engaged to extend the facilities to the importers. 34

5.3.1 Import financing sectors of BASIC Bank Ltd BASIC Bank Limited is one of the financers of import business in our country. In extend credit, grant and other facilities BASIC Bank Ltd finance to the following sectors: Machinery & transport equipment. Petroleum & petroleum products Textile, yarn, fabrics, article & related products Chemicals Bicycle parts Iron & steels Cereal & cereal preparations Dairy products & eggs Other including loans & grants. 5.3.2 Import financing system of BASIC Bank Limited Registration of import Income tax registration certificate Partnership deed in the cases of partnership concern Certificate of registration with the register of joint stock companies Articles & Memorandum of association in the case of limited companies. Nationality certificate & Bank certificate Ownership documents in place of business Trade license from the relevant authority. Survey clearance from the relevant authority Other documents prescribed in the import policy.

5.3.3 Import Procedure

35

Imports & Exports (control) Act 1950 regulates the import & export trade of the country. There are a number of formalities, which on 'importer has to fulfill before import goods. The importer follows the following steps: The buyer & the seller conclude a sales contract provided for payment by documentary credit. The buyer instructs his / her bank i.e. issuing bank to issue a credit in favor of the seller i.e. beneficiary. The issuing bank asks another bank usually in the country of the seller, the advice or confirms the credit. The advising or confirming bank informs the seller that the credit has been issued. As soon as the seller receives the credit and is satisfied that he / she can meet its terms & conditions, he/she are in a position to load the goods & dispatch them. The seller then sends the documents evidencing the shipment to the bank where the credit is available i.e. the nominated bank. This may be the issuing bank, or the confirming bank, bank named in the credit as the paying, accepting or negotiating bank. The bank if other than the issuing bank, sends the documents to the issuing bank, The issuing bank checks the documents and if they meet the credit requirement either Affect payment in accordance with the terms of the credit either to the seller if s/he has sent the documents directly to the issuing bank or to the bank that has made funds available to him/her in anticipation. Or Reimburses in the pre-agreed manner the confirming bank or any bank that has paid, accepted or negotiated under the credit. The bank checks the documents against the credit. If the documents meet the requirements of the credit, the bank then pay, accept or negotiate accordingly to, terms of credit. In case of a credit available by negotiation, issuing bank or the confirming bank will negotiate with recourse; another bank including the advising bank has not confirmed the credit, which negotiates will with recourse. 36

When the documents have been checked by the issuing bank and found to meet the credit requirements, they are released to the buyer upon payment of the amount due or upon other terms agreed between importer & the issuing bank. The buyer sends transport documents to the carrier who will then proceed to deliver the goods.

5.3.4 Import Scrutiny The import bills consist of the following documents & the order of their scrutiny should be as below: Forwarding schedule of negotiating bank. Bill of exchange. Commercial Invoice (Before shipment). Bill of lading Insurance cover note Certificate of origin Packing List PSI Report (CRF- Clean Report of findings) Pro-forma Invoice (After shipment) 5.3.5 Import Bills Retirement

a) Banker will prepare & pass retirement vouchers. b) Importer will deposit the claim amount. c) Certifying Invoices. d) Passing & prepare the vouchers. e) Entry in the register. f) Endorsement in the Bill of Exchange and Transport documents i.e. Bill of Lading; A. W.B.; T.R. etc. 37

g) Accounting treatment of voucher passing: i. ii. iii. iv. Party's A/C ..............................Dr. Margin on import A/C. ................Dr. PAD A/C.Cr. I.A. Interest & other charges A/C.......Cr.

h) At the end of the total procedure, taking the retirement of import bills or clearing certificate from the bank, the importer will clear the goods from the port through the clearing & forwarding agent. i) On the other hand, completing the above all steps the issuing bank will prepare "foreign exchange transaction schedule" and send one copy to international division of Head Office and another one copy to reconciliation. 5.3.6 Risk of Import Financing In international trade transaction takes place between buyers and sellers living in different socio-economic and political environments. There may be abrupt changes in socio-economic or political situation in the buyer's country or in the seller's country. Even the exchange value of currencies of the two countries had gone so much down that they were not acceptable or exchangeable in international market. More over the importer or the exporter may not be able to comply with the terms of credit for some reasons. Therefore, risk inherent in all credits. The bank has to consider following risk in financing the import procedure:5.3.6.1 Commercial risk Violation of the requirement of letter of credit authorization or letter of credit: Shipment effected before authentication of the letter of credit authorization from by the nominated bank and registration with the Bangladesh bank, whenever necessary and before opening of letter of credit or after expiry of the validity of the letter of credit authorization or letter of credit shall be treated as import in contravention of this order. Letter of credit authorization obtained in the basis of false or incorrect particulars or by adopting any fraudulent means shall be treated as invalid and void. Import against indent and Performa invoice: Letter of credit may be opened against and indent issued by a local registered indenter or against a Performa invoice issued by a foreign manufacturer or seller or supplier.

5.3.6.2 Political risk

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In addition to the credit and commercial risk we have outlined, international transaction such as import financing take on the whole new dimensions of political risk. They are as follows: Sudden outbreak of war, revolution, coups or civil disobedience in the seller's country. Imposition of restriction on remittance. Imposition of trade embargo. Additional handing transport or issuance charges due to interruption or diversion of voyage, which can't be recovered from the buyer.

New import restriction on the buyer or cancellation of the license.

5.3.6.3 Informational risk There may be informational risk inherent in import financing on the importer because of shortage of required information. So it is much harder to judge the financial strength, reputation and integrity of a seller or buyer who is thousands of miles away and belongs to a different culture. 5.4 Foreign Remittance Remittance is the sending of money etc. to a distance. Foreign remittance is the sums of foreign currency to a distance from one place another place i.e. country to country. The person who is the receiver of the remittance is remittee. The person who is the sender of the remittance is remitter or remiitor. There are two types of foreign remittance, which are as below: Foreign inward remittance.

Foreign outward remittance.

5.4.1Foreign Inward Remittances The remittance of freely convertible foreign currencies which BASIC Bank Ltd Foreign Exchange Section is receiving from abroad against which the authorized dealers making payment in local currency to the beneficiaries may be termed as foreign inward remittance. 5.4.1.1 Mode of inward remittances The term inward remittances includes not only remittances by TT., MT., Drafts etc. but also purchases of bills, purchases of drafts under travelers letter of credit and purchases of travelers cheques. Foreign currency notes against which payment is made to the beneficiary also a part of inward remittances. Thus the following are the Mode of inward remittances: TT: Telegraphic Transfer.

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MT.: Mail Transfer. FD: Foreign Drafts. TC: Travelers Cheque. Foreign currency notes.

5.4.1.2 Purpose of inward remittance The purpose of remittance is of various reasons. Such as:

For family maintenance. Realization of exports proceeds. Gift. Donation. Export brokers commission.

About Form-C": The authorized dealer should obtain 'Form - C' from the beneficiary to know the purpose of the remittances in all cases and they are to submit the "Form - C' to Bangladesh Bank along with the monthly returns where the proceeds of the remittances is TK. 5000/= & above.'Form - C' is a prescribed declaration form & this 'Form -C' is to be filled up and signed by the beneficiary himself. 5.4.1.3 Cancellation of inward remittance In the event of any inward remittance which has already been reported to the Bangladesh Bank being subsequently cancelled, either in full or in part because of non-availability of beneficiary. Authorized dealers must report the cancellation of the inward remittance as an outward remittance of "Form-T/M". Required documents are:

The date of return in which the inward remittance was reported. The name & address of the beneficiary. The amount of the purchase as effected. Reasons for cancellation.

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5.4.1.4 Reporting to Bangladesh Bank On the last working day of each month the transaction during the month to be reported to Bangladesh Bank through the following schedule:

Schedule -J-l / 0-3 for TK. 5000 & above. Inward remittance voucher-1/04 for below TK. 5000.

5.4.2 Foreign Outward Remittances The remittance in foreign currency which is being made from our country to abroad is known as foreign outward remittance. 5.4.2.1 Mode of outward remittance Thus the following are the Mode of outward remittances:

TT. Telegraphic Transfer. MT: Mail Transfer. FD: Foreign Drafts. PO: Payment Order TC: Travelers Cheque. Foreign currency notes.

Approval of Bangladesh Bank Bangladesh Bank provides permission or approval for outward remittances to the applicants who are to lodge an application for the purpose on the following prescribed forms with an authorized dealer who forwarded the same to Bangladesh Bank for approval: The IMP form (cover remittances for imports).

Form T/M (Traveling & Miscellaneous).

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CHAPTER-6

Foreign Exchange Risk Management

42

6.1 Introduction to Foreign Exchange Exposure Exposure is risk out of exchange rate changes. The degree to which a participants in the foreign exchange market is affected by exchange rate changes. The possibility of such risk is much higher for the business that is engage in International Business Activities. In measuring the exposure two approaches are followed: Accounting Approach Economic Approach Accounting Approach It is also term as balance sheet approach in which the balance sheet items are divided into current asset and liabilities and to point out which items would be affected by exchange rate changes and which item would not be affected. Economic Approach It forecasted on the impact of exchange rate changes on the future cash flows on the firm I.e. the extent to which the present value of the firm would be affected by a given changes in exchange rate. There are three types of Foreign Exchange Exposure which are given below: Economic Exposure Transaction Exposure Translation Exposure Conceptual comparison among Economic, Transaction and Translation Exposure are given below Movement of time when exchange rate changes Operating Exposure Changes in expected cash flows arising because of an unexpected changes in exchange rate. Transaction Exposure Impact of setting outstanding obligations entered into before changes in exchange rates but to be settled after changes in Exchange rate.

Translation Exposure Changes in consolidated financial Statements causes by a changes in Exchange rate

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6.2 Economic Exposure It measures the changes the value of the firm that from changes in future operating cash flow cause by unexpected changes in exchange rate. 6.2.1 Causes of Economic Exposure If there are a deviation for the purchasing power parity i,e the real exchange rate changed. Exchange rate change cause relating price change. If the Govt. imposed tax on nominal profit rather than on real profit. Some cash flows are fixed in nominal terms.

6.2.2 Managing Economic Exposure # Diversity Operations: Making shift in sources of raw-materials, components, finished product. If spare capacity exist in one location production run can be landed in another location to minimize exchange risk. # Diversity in Financing source: The Firm can enjoy the benefit of International Fishers through affecting diversifying financing sources from different market if interest rate differential, do not equal except change exchange rate, the firm can take the advantage of lower cost of capital. 6.3 Transaction Exposure Transaction exposure measures the change in the value of outstanding financial obligations period to exchange rate change. If measures the gains or losses arises from the settlement of financial obligations in foreign transaction. 6.3.1 Causes of Transaction Exposure # Purchase or sell on credit whose price is stated in foreign currency. 44

# Borrowing or lending funds and payment is made in foreign currency. # Being a party to an unperformed foreign exchange contract. 6.3.2 Managing Transaction Exposure # Contractual Technique Hedging in foreign market, money market, future market and option market. # Operating Strategy Using leads and laps in payment terms and setting reinvoicing centre. # Swap Agreement A foreign exchange Swap is an agreement between two parties to exchange a given amount of one currency for another and, after a period of time, to a give back the original amounts Swapped. 6.4 Translation Exposure Translation Exposure arises from reporting and consul rating and to converting the results of foreign subsidiaries from local currency to home currency. 6.4.1 Methods of Translation Exposure a. Current and non-current Method: Under these method, the balance sheet items are divided into current asset and liabilities and non-current asset and liabilities. Current asset and liabilities are translated at current exchange rate and non-current asset and liabilities are translated as Historic rate. Income statement is translated at the average exchange rate except for those Revenue and expenses associated with noncurrent asset and liabilities. b. Monetary and non-monetary Methods: Asset and liabilities are divided into monetary asset and liabilities and nonmonetary asset and liabilities. Monetary asset and liabilities are translated at current exchange rate and non-monetary asset and liabilities would be translated as Historic rate. Income and expenses are translated into monetary asset and liabilities would be translated into average exchange rate. Income and expenses are related into monetary asset and liabilities would be translated into Historic rate. c. Temporal Method: The temporal method is a modifying version of monetary asset and liabilities method. The only difference between Temporal and monetary and nonmonetary method is that the Inventory will be translated at fixed rate but it would be translated at current rate if the Inventory has been shown in the Balance Sheet at the LIFO Method. d. Current rate Method: The method utilize, all the items are translated at current exchange rate.

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6.4.2 Managing Translation Exposure a. Balance Sheet Hedged: Balance sheet hedge calls for having equal amount of exposed foreign currency asset and liabilities on the firms consolidated Balance Sheet. If these can be achieved for each foreign currency, Net transaction exposure would be zero. A change in exchange rate will change the value of exposed asset in equal but opposite direction. In opposite direction to change the value expose liabilities.

b. Contractual Hedged: Contractual hedge is a complete speculating operation and for it is not highly recommended as a means of managing exposure but even then some firms use these techniques through practicing in the option and future market. 6.5 Ways followed by BASIC Bank to control Transaction Exposure and Exchange Risk 1. BASIC tries to solve transaction exposure by ways of foreign Bank settlement. The treasury department of BASIC focuses on the money market hedging while handling foreign exchange risk arising out of foreign exchange transaction. The treasury department is entrusted with managing the Foreign Currency Denominate assets and its risk through involvement in money market. Treasury, at first convert the Foreign Currency and square its position neutral. As a result BASIC has placed the foreign currency in call money market. 2. Deposit of the money market hedge being followed, BASIC used to undertake the following two methods of hedging the FC denominated assets: Forward market hedge: Based on clients instruction and their own requirement BASIC uses forward rate to hedge their position. Swap: A foreign Exchange Swap is an agreement between two parties to exchange a given amount of one currency for another and, after a period of time, to give back the original amounts swapped.

BASIC provides the above provisions of hedging facilities to its clients in order to avoid foreign exchange risk.

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CHAPTER-7

Performance Evaluation of Foreign Exchange Business

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7.1 Export & Import business of BASIC Bank Limited With limited network of branches at home and also a few correspondent banks worldwide it is handling the export-import business including homebound remittances. The following graph shows year-wise export-import business of BASIC Bank Limited. Though both export and import are increasing day-by-day, imports exceed exports which ultimately drastically hit the countrys negative Balance of Trade. Year 2004 2005 2006 2007 2008 Export(Million Taka) 7,908.00 11,097.23 15,463.74 16,794.96 22,270.87 Import(Million Taka) 12,507.80 14,094.96 17,804.27 21,266.57 27,359.77

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Figure: Export & Import Business

7.2 Export
During FY 2008-09, Total Export receipts of Bangladesh increased by US$1454.39 million or 10.31%. Total amount of export receipts stands to US$15565.19 million as compared to US$14110.80 million during FY 2007-08.

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Source: www.bangladeshbank.com During this year BASIC Bank also achieved substantial growth in export receipts. BASIC Bank handled total export business of tk. 22270.87 million in 2008 & grew by 32.6% where as IBBL, Sonali, Agrani handled total export business of tk. 93920,80976,46013 million tk. & grew by 19.26%,7.97%, (41.6%) respectively. BASIC Banks total amount of export is not so much like other bank but the growth is 32.6% which is highest than other banks growth. Year 2006 2007 2008 IBBL 51,133.00 78,748.00 93,920.00 Sonali 70,906.00 75,000.00 80,976.00 Agrani 51713.00 78748.00 46013.00 Basic 15,463.74 16,794.96 22270.87

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7.3 Import During FY 2008-09, total import payments of Bangladesh increased by US$878.10 million or 4.06 %. Total amount of import payments stands to US$22507.10 million compared to US$21629.00 million during FY 2007-08.

Source: www.bangladeshbank.com BASIC Bank also achieved substantial growth in import during the year. BASIC Bank handled total import business of tk. 27360 million in 2008 & import business grew by 51

28.65% where as import of IBBL, Sonali, Agrani bank are tk. 168329,161730,123988 million & grew by 22.8% ,111.42% & 9.15% respectively. BASIC Banks import amount is not too much like other bank but the growth of import is 28.65% which is highest among others except Sonali bank. Year 2006 2007 2008 IBBL 96,870.00 137,086.00 168,329.00 Sonali 67,760.00 76,496.00 161,730.00 Agrani 115924 113596 123988 Basic 17,804.00 21,267.00 27360.00

7.4 Remittance

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In December, 2008, remittance stood lower at US$886.40 million against US$919.10 million of November, 2008. However, this was higher by US$65.69 million against US$820.71 million of December, 2008.

Source: www.bangladeshbank.com

Remittance of BASIC Bank is tk. 62189 million in 2008 & grew by 36.42% where as IBBL, Sonali, Agrani bank remittance are tk. 136706, 91374, 52119 million & grew by 62.47%,(7.19%), 22.20 % respectively. IBBL Bank Remittance & growth is higher than other banks where as Sonali bank reduced than previous year. BASIC Banks remittance growth is more than the Agrani Bank by 14.22%. IBBL, Sonali, Agrani ,Basic Banks three years analysis are described below with table & chart

Year 2006 2007 2008

IBBL 53,819.00 84,143.00 136,706.00

Sonali 94,324.00 98,450.00 91,374.00

Agrani 46907 42650 52119

Basic 25,125.00 45,586.00 62189.00

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Figure: BASIC Bank position in Remittance business 7.5 Evaluation of Item-wise income generating avenues of Foreign Exchange Business The following table shows year-wise performance of foreign exchange operations consisting item-wised income generating avenues. All the figures show positive growth which generally signals foreign exchange business as a profitable business in Bangladesh. Within all the income avenues, income from exchange gain shows highest figure in taka value. Growth rate here was 48.92%. Income from Letter of Credit and Letter of Guarantee were the second and the third largest among the income avenues respectively. Particulars Foreign bill Purchased Local bill Purchased Letter of Guarantee Letter of Credit Bills for Collection Acceptance Export bill Miscellaneous
Total (A) Exchange gain (B)

2004 460,581 3,833,860 14,160,897 66,555,289 2,846,448 5,195,369 442,527 1,353,563 102,579,282 129,977,023

2005 360,461 4,485,557 21,397,44 5 75,284,688 4,078,047 7,048,89 8 538,91 2 2,387,148 123,283,45 0 114,610,82 6

2006 654,329 8,646,784 23,360,37 0 96,433,989 8,747,327 8,747,32 7 599,69 4 3,312,449 157,649,76 4 149,640,43 6

2007 628,965 9,041,451 39,869,62 1 106,869,56 1 8691916 10,792,89 7 570,41 5 6,491,052 191,235,95 9 222,845,22 1

2008 1118585 7791613 38310375 14623097 1 15230622 14049618 1629488 5422296 23848252 4 25070409 2

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Total (A)+(B)

232,556,305

237,894,27 6

307,290,20 0

414,081,17 9

48918661 6

Table: Income from foreign exchange business of BASIC Bank limited 7.5.1 Revenues earnings through Foreign Bill Purchase Year 2004 2005 2006 2007 2008 Income from Foreign bill Purchased Tk. 460,581 Tk. 360,461 Tk. 654,329 Tk. 628,965 Tk.1118585

Figure: Revenue from Foreign bill purchased 7.5.2 Local Bill Purchased Year 2004 2005 2006 2007 2008 Income from Local bill Purchased Tk. 3,833,860 Tk. 4,485,557 Tk. 8,646,784 Tk. 9,041,451 Tk. 7,791,613

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Figure: Income from Local bill purchased 7.5.3 Letter Of Credit Year 2004 2005 2006 2007 2008 Income from Letter of Credit Tk. 66,555,289 Tk. 75,284,688 Tk. 96,433,989 Tk.106,869,561 Tk. 146,230,971

Figure: Income from Letter of Credit 56

7.5.4 Export Bill Year 2004 2005 2006 2007 2008 Export bill Tk. 442,527 Tk. 538,912 Tk. 599,694 Tk. 570,415 Tk. 1,629,488

Figure: Income from Export bill

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CHAPTER 8

Findings of the Study

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The findings obtained from the Study of Foreign Exchange operations of BASIC Bank Limited are follows:

As a state-owned scheduled bank, BASIC Bank Ltd. is playing an important role toward the growth and economic development of Bangladesh. The bank has been providing off-line computerized banking service to all its customers since its inception. To accelerate the speedy & accurate account ledger maintained & to make available all potential international banking products, the bank has already started implementing centralized on-line banking system. Already 17 branches of the bank providing on-line services.

To meet the challenges in the banking industry & to help employees to adapt the
changes & new working condition, training is essential but no such training center has yet been established in BASIC Bank. Moreover, training is given to employees is not adequate. There are three types of modes of foreign exchange market, which are: Export Finance, Import Finance & Foreign Remittance. Foreign Exchange section of BASIC Bank Limited Gulshan Branch does import & export operations out of abovementioned foreign exchange activities vastly. With limited network of branches at home, volume of export-import business including homebound remittances is increased day-by-day. The Banks financing of import business increased from taka 21266.57 million in 2007 to Taka 27,359.77 million in 2008 registering growth of 28.65 percent. On the other hand, banks export finance increased to Taka 22,270.87 million in 2008 compared to Taka 16,795 million 2007 , a growth of 32.6 %. Comparing these figures with the overall export and import business of Bangladesh, BASICs performance looks healthy.

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Basic bank year-wise performance of foreign exchange operations consisting item-wised income generating avenues. All the figures show positive growth which generally signals foreign exchange business as a profitable business in Bangladesh. Within all the income avenues, income from exchange gain shows highest figure 250,704,092 in taka value & growth rate was 48.92%. Income from Letter of Credit and Letter of Guarantee were the second and the third largest among the income avenues which are 146,230,971 & 38,310,375 respectively. Besides, SWIFT is being used in some Branches and the head office of the bank for trade finance-related operations like documentary credit, documentary collections, fund transfer, guarantee, etc. with optimum security. For Bangladesh Banks exchange control purpose, online L/C monitoring systems is performed daily by inputting details of L/C information with the following Applicant & Beneficiarys name & address Foreign currency amount Date of issue of & expiry L/C and place of L/C H.S code & Description of goods (Quantity, per unit price, total amount) Letter of Credit Authorization form (LCAF) number and date Origin of the goods & name of the Pre Shipment Inspection (PSI) company Basic bank provide assistance in relation with foreign exchange to the small scale industries entrepreneur. Small entrepreneur has not to keep higher margin regarding opening a L/C. As a result, their services are diversified in to the small scale portfolios. The officers are very helpful to the business man. Some of our business men do not know exactly the procedures of opening L/C. The officers of Basic Bank help them properly to execute their business. In foreign exchange department it is required to communicate with foreign banks and International Division of Basic Bank frequently and quickly. To make the process easily modern communication media for example e-mail, Fax, Internet etc. should be used. But the bank has not so much practice of using these media Modern technical equipment such as computer is not sufficient in foreign exchange department. As a result the exchange process makes delay and it is also complicated. To accelerate the speedy & accurate information for analyzing foreign exchange business there is a lack of effective database system.

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Documentation & filing process of foreign exchange operation is not so easier. it waste valuable time along with not cost effective. . Letter of Credit (L/C) opening system for the importer is not so much easier. For processing of L/C document, it requires huge amount of time & money as well.

CHAPTER 9

Conclusions & Recommendations

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9.1 Conclusions
The Banking arena in recent time is one of the most competitive business fields in Bangladesh. As Bangladesh is a developing country, a strong banking sector can change the socio economic structure of the country. So we can say, the whole economy of the country in linked up with its banking system. There are 54 banks in Bangladesh in which 38 are indigenous commercial Banks. BASIC Bank Ltd. is a state-owned scheduled Bank as well as a potential and promising bank in the banking sector in Bangladesh. As desired, its functions and activities in the economy are being aligned with the objectives set by the Government of Bangladesh since its inception. This bank performs hundreds of important activities both for the public and for the government as a whole. It has an outstanding bearing to thrive our business sector. It has strong performance on General Banking, Loans & Advances, Industrial credit and foreign Exchange. By using limited technology and having limited of branches at home it is increasing the volume of exportimport business including homebound remittances. The effective and efficient Foreign Exchange Business of the Bank helps in the continuous growth and progress of national economy. By comparing the overall foreign exchange performance of BASIC Bank with 3 other Banks( IBBL, Sonali and Agrani), taking foreign exchange performance of Bangladesh (during FY 2008-09) as a standard, it can be easily said that, Foreign Exchange performance of BASIC sounds good. So, through the foreign exchange operations and all other banking activities, BASIC Bank Limited is, no doubt, playing a vital role not only in the micro economic sector but also in macro economic sector of Bangladesh. I hope, the successful walkway of BASIC Bank Limited will remain continuous for a long time and become a role model in the banking sector in our country.

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9.2 Recommendations As an internee of BASIC Bank Ltd, I have some recommendations which are: The Bank should develop an effective database needed for analyzing Foreign Exchange Business. Adequate training is essential for the efficient foreign trade management. Letter of Credit (L/C) opening system for the exporter should be easier. The Branch should move to the fully automated banking system. For customer's convenience, Management of BASIC Bank Ltd. needs to focus on branch expansion policy and should provide more personnel to deliver faster services to the customers.

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Comparative Profit & Loss Account ( in million tk.)

64

2002

2003

2004

2005

2006

2007

2008

Interest Income Interest on deposit and borrowings Net interest income Commission, exchange and brokerage Other operating income Total operating income Salaries, Allowances etc Depreciation and other noncash expenses Other operating expenses Total operating expenses Profit before provision Provision for loan & Advances Profit before tax Provision for tax Net income Earning per share (Taka)

998.73 599.25 399.48 164.82 36.13 691.41 117.96 23.47 67.65 209.08 482.33 47.82 434.51 182.97 251.54 83.85

1219.39 692.08 527.30 181.27 38.79 866.44 142.93 23.74 83.38 250.05 616.39 60.72 553.67 317.28 236.39 52.53

1355.59 816.98 538.60 232.56 48.36 951.87 152.40 26.42 83.82 262.45 689.22 160.00 527.22 235.74 291.74 43.18

1781.04 983.98 797.05 237.89 46.73 1244.22 226.46 33.37 111.65 371.48 872.73 242.30 628.43 342.94 285.49 35.25

2278.54 1315.86 962.68 307.29 58.74 1554.45 292.20 43.17 39.23 462.44 1092.01 80.39 1011.62 467.46 291.74 58.64

2866.57 1928.47 938.10 414.08 62.38 1621.05 331.18 44.83 44.79 529.94 1091.10 232.87 808.14 545.83 282.96 21.60

3829.43 2708.91 1120.51 489.18 67.61 2351.39 548.93 52.94 53.44 817.27 1534.11 233.94 1250.89 747.10 549.95 41.99

Comparative Profit & Loss Account ( in percent)

02/01 Interest Income Commission, exchange and brokerage Other operating income Total operating income Salaries, Allowances etc Depreciation and other noncash expenses Other operating expenses Total operating expenses Profit before provision Provision for loan and Advances Profit before tax Provision for tax Net income 27.04 7.43 30.24 17.98 16.88 25.97 (2.35) 10.10 21.76 19.55 22.01 28.44 17.72

03/02 22.09 9.98 24.19 20.75 21.17 9.43 19.60 17.36 27.78 31.16 27.43 73.38 (6.00)

04/03 11.17 28.29 24.67 9.86 6.63 11.29 0.53 4.96 11.82 163.50 (4.78) (25.70) 23.41

05/04 31.38 2.29 (3.37) 30.71 48.60 26.31 33.20 41.54 26.63 51.44 19.20 45.47 (2.14)

06/05 27.93 29.17 25.70 24.93 29.02 29.36 (64.86) 24.48 25.12 (66.82) 60.97 36.30 2.18

07/06 25.80 34.75 61.96 4.28 13.34 28.35 14.17 14.59 (.08) 244.03 (20.11) 16.76 (2.14)

08/07 33.58 18.13 8.38 45.05 65.74 18.09 19.31 54.21 40.60 .45 94.35 36.87 65 94.35

Comparative Balance Sheet (in million tk.)

. Property and Assets Cash Balance with other banks and financial Institutions Money at call and short notice Investment Government Others . Loans and advances Loans ,cash credit, overdrafts etc. Bills discounted and Purchased ... 2003 2004 2005 2006 2007 2008

741.36 1035.30 1134.50 1522.87 2125.01 2641.00 2378.50 3765.55 4126.27 4191.36 6937.53 8485.18 100.00 80.00 1570.00 750.00 1320.00 1480.00

1831.31 2198.95 4486.54 3241.86 5271.30 5598.82 52.10 54.00 54.00 29.00 32.00 89.00 1883.41 2252.96 4540.55 3270.86 5303.30 5687.82 11293.2 13759.0 17075.5 20047.9 24344.73 5 5 9 2 706.88 1580.29 1924.40 2215.42 2924.39 15339.3 5 135.78 289.91 27136.3 18999.9 9 154.52 498.74 29388.3 22263.3 27269.12 4 196.10 228.36 579.14 764.29 38724.5 46651.53

8633.71 648.48 9282.19

12000.1 4 Fixed Assets 73.48 101.40 Other Assets 307.33 201.18 Total Assets 14766.3 19436.5 Capital and Liabilities Liabilities Borrowings from other banking 690.95 839.61 companies, agents etc . Bills Payable 92.94 148.89 Deposit and other Accounts Current Accounts and 1398.11 1651.35 contingency accounts etc. Saving Bank 581.69 724.80 deposits Fixed deposits 9193.80 12984.1

937.51 179.75

830.06 1385.81 1708.40 239.25 290.75 328.49

1890.61 2370.44 2867.19 2544.51

793.43 1007.79 886.30

955.50

19461.7 20467.1 27903.7 34539.72

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1 8 6 2 11173.6 15509.1 22325.5 23845.3 31657.2 . 38039.73 0 7 8 9 1 Other Liabilities 1609.05 1596.50 2147.13 2263.37 2843.53 3592.29 13566.5 17945.2 25410.2 27178.0 36177.3 Total Liabilities 43668.93 4 9 3 7 0 Capital/ Shareholders' equity Paid up Capital 450.00 675.00 810.00 945.00 1247.40 1309.77 Statutory 450.00 555.44 681.13 883.45 1045.08 1295.26 Reserve Other Reserves 40.00 40.00 40.00 40.00 40.00 40.00 Surplus in Profit and 319.28 220.82 195.00 129.47 370.54 304.51 Loss Account Total Shareholders' 1249.28 1491.26 1726.13 1052.92 2596.58 2982.59 equity Total capital and 14766.3 19436.5 27136.3 28230.9 38773.9 46651.53 liabilities 2 6 7 9 0

Comparative Balance Sheet (in percent)

. Property and Assets Cash Balance with other banks and financial Institutions Money at call and short notice Investment Government Others ... Loans and advances Loans ,cash credit, overdrafts etc. Bills discounted and Purchased 2003 5.02 16.10 2004 5.33 19.37 2005 4.18 15.21 2006 5.33 19.37 2007 5.48 17.89 2008 5.66 18.18

0.68 12.40 0.35 12.75

0.41 11.31 0.28 11.59

5.79 16.53 0.20 16.73

0.41 11.31 0.28 11.59

3.40 13.59 0.08 13.67

3.17 11.99 0.19 12.18

55.96 5.16

58.47 4.39

58.10 3.64

50.70 5.82

51.70 5.71

52.18 6.26

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. 61.11 Fixed Assets 0.58 Other Assets 1.27 Total Assets 100.00 Capital and Liabilities Liabilities Borrowings from other banking 5.19 companies, agents etc. Bills Payable 0.96 Deposit and other Accounts Current Accounts and 12.22 contingency accounts etc. Saving Bank 3.91 deposits Fixed deposits 59.86 . 76.00 Other Liabilities 10.05 Total Liabilities 92.22 Capital/ Shareholders' equity Paid up Capital 2.30 Statutory 2.97 Reserve Other Reserves 1.34 Surplus in Profit and Loss Account Total Shareholders' 7.77 equity Total capital and 100.00 liabilities

62.86 0.50 2.08 100.00

61.74 0.52 1.04 100.00

56.51 0.50 1.07 100.00

57.41 1.50 1.49 100.00

58.44 0.48 1.64 100.00

4.68 0.63

4.32 0.77

3.45 0.66

3.82 0.80

3.91 0.75

9.74

8.50

6.97

7.92

5.82

3.94 62.26 75.67 10.90 91.87 3.04 3.04 0.027

3.73 66.80 79.03 8.21 92.33 3.47 2.86 0.21 1.14

2.92 71.72 82.72 7.91 93.64 2.98 2.51 0.15 0.72 6.36 100.00

2.44 77.12 87.48 7.85 93.30 3.21 2.69 0.10 0.33 6.69 100.00

2.18 79.09 87.09 8.22 93.60 2.80 2.77 0.08 0.65 6.39 100.00

8.12 100.00

7.67 100.00

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Ali, S. A, (May 2005), Foreign Exchange & Risk Management, 1st Edition, Mowla Brothers, Dhaka. Ali , S.A. (1995), Foreign Exchange and Finance of Foreign Trade , 1st Edition, Lita Academics, Dhaka. Choudhury, T. A., An Overview of Banks and Their Services , Reading Materials on Theory and Practice of Banking, Bangladesh Institute of Bank Management, Dhaka. Daniels, J.D., Radebaugh.L.H. et al (2006) International Business Environments and Operations 11th Edition, Upper Saddle River: Pearson Prentice Hall, New Jersey. Dewett, K.K. (2006), Modern Economic Theory, 22nd Edition, S Chand & Company, New Delhi, Griffin, R.G. & Pustay, M.W.(2005), International Business, 4th Edition, Pearson Prentice Hall, New Jersey. Gulshan, S.S.& Kapoor, G.K. (1994) Banking Law and Practice, S Chand & Company, New Delhi. Sen, A. K., & Mitra, J. K. (2004-05), Commercial Law and Industrial Law, 24th Edition, The World Press Private Ltd., Kolkata. Siropolis, N.(2008) Entrepreneurship and Small Business Management, 6th Edition, All India Publishers & Distributors, Chennai.

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Annual Report: BASIC Bank Limited, 2008, 2007, 2006, 2005 & 2004. Annual Report: Bangladesh Bank- 2008 & 2007. Annual report: Exim Bank Ltd., Islami Bank Bangladesh Limited, Sonali Bank Ltd. 2008 Various Official Records of BASIC Bank Limited. http://www.basicbanklimited.com http://www.bangladeshbank.com http://www.sonalibank.com.bd http://www.agranibank.org http://www.islamibankbd.com

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