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i.

Letter of Transmittal
Date: 25 January, 2010 To Mr. Junaid Khan Lecturer, School of Business North South University Dear Sir: I have completed my internship report on The Risk Assessment of Mutual Trust Bank Ltd. With your approval, I could conduct the internship program and access data which were crucial to the accomplishment of this report. Before I started writing this report I studied the operations of Foreign Exchange Branch of MTBL to the amplest at the same time helped the officials in their day to day operations. Meanwhile i gathered data from literally anywhere possible. Eventually by summating all my data I have managed to hold out the report at your good will. In this report, I have given full company details of MTBL. Also I have portrayed the 3 most important divisions of a commercial bank. Most elaborative effort is made for discussing the Foreign Exchange operations as I had been placed to work there. I have also given a list of operations which are dissimilar to the theories set for the bank. A SWOT analysis is provided to have a quick glance at the overall firm. The final chapter completely impersonates my research work which I have conducted to assess the risk associated with MTBL. For the ease of the readers I have given definitions of all technical terms, graphical analysis with detailed explanations of the findings. Lastly I have recommended based on the analysis and personal experience gained. I truly appreciate this assignment for it gave me the opportunity to further enhance my education with a practical understanding and make an extensive research on a financial firm. End of the day I earnest hope that this report helps the experts to research further on this topic and help build up a stronger Risk Management team which will protect our Banking Sector which is one of the very few developed and booming sectors of our country. Yours sincerely,

Rashida Shahabuddin 061 606 530 1

ii.

Acknowledgement

All gratitude and thanks to almighty ALLAH the gracious, the most merciful and beneficent who gave me courage to undertake and complete this task. It is due to HIS unending mercy that this work moved towards success. I am very much obliged to my ever caring and loving parents whose prayers have enabled me to reach this stage. I would thank my sister for arranging my Internship placement at MTBL. Most importantly I would like to thank Ashfaq Zaman, my fianc who believed in me. He solved many little clumsy problems without which this report would be incomplete like taking to Dhaka Stock Exchange where my parents would never let me go alone, borrow pen-drives from his friends, quarreled with my internet service provider at late nights as it went off every now and then. I am highly indebted to my supervisor Mr. Juanid Khan for trusting me to work on this topic. I knew him from the time I did other courses with him. Today at least I will not let go my opportunity to thank him not only for this course but the other courses I did with him as I might no more be able to thank him enough since this is my last course with him. Sir thanks for all your patience and for making us students work so comfortably with you. Especially I would thank you for being so nice over the phone even during the weirdest times like in your class hours and late evenings. The freedom you give us to open up and be creative is the best thing we appreciate. I prepared the report on the basis of my knowledge and experience gained from the finance courses and the internship program. I feel great pride and pleasure on the accomplishment of this report.

iii.

Executive Summary

CHAPTER 01 Introduction

1.1 Origin of the Report As a part of academic requirement of completing Bachelors of Business Administration (BBA), every student needs to under go an Internship program. Now you may ask what an Internship is. Well Internship is an agreement between a university and an organization that offers an opportunity for students like us to undertake a temporary work assignment in the organization which enables us to have a realistic exposure to job and organizational conditions. It is called an earn while you learn program of training. It helps us bridge up the gap between classroom learning and actual job conditions eventually preparing us for a prospective job. According to my experience an internship is a perfect blend of theoretical and practical knowledge. Although it is not a compulsory in many universities in the country, but in North South University it is a mandatory course for all. In fact it weighs 4 credits out of 124 for completion of BBA. It has to cover duration of at least 8 to 10 weeks under a supervisor assigned by the students perspective departments. This report is originated for the fulfillment of my internship program for which I have been placed in one of the best reputed private banks in the country-Mutual Trust Bank Ltd. I worked in the Foreign Exchange Division Dilkusha Branch for about 3 months starting from 6th October 2008 to 6th January 2009. And as assigned the report I came up with is about the Risk Assessment of Mutual Trust Bank Ltd. 1.2 Scope of the Report I always disliked the fact what my other fellow students did that they always chose studying the department they are assigned at, as their report topic, which according to me is the easiest way to get through as department information is all readily available in the company websites and there is nothing new to find out or research. Thus I have arranged my report in a way that the first part gives all the Company Details starting from its history to its recent products, services and likewise. In the second part I put information
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about the 3 most important divisions of a MTBL which are General Banking Division, Credit Division and finally the Foreign Exchange Division. The data about the Foreign Exchange division is presented in the most comprehensive manner as I was placed into it. Then the last part contains my ultimate report which may be very insignificant to great researchers but at least I have attempted to do something which requires some studying and investigating- The Risk Assessment of Mutual Trust Bank Ltd. 1.3 Limitation of the Report Mutual Trust Bank is one of the new generation banks of Bangladesh. There were innumerous topics to be researched and studied but that could not happen due to lack of time, information and other accessibilities. Data collection was the biggest pain ever. I could sense a little bit of fear factor in all employee levels regarding the sharing of data whereas I have not asked them any confidential data. In the company part all the departments could not be presented in an elaborative way. It is due to lack of accessibility and most of all the employees reluctance to talk about anything without a favor in return. I have used many useful ratios and graphs to present my analysis along financial statements of the past 3 years starting from 2006 to 2008. Again my study was limited to the data given by the organization only. No external factors could be measured which is highly critical to Risk Factors of any private banks of Bangladesh. Also there are many soft wares nowadays to assess bank risk factors but I was not literate of that either. So my study and conclusions are all based on the ratios and trends in financial data. The information obtained was directly used for analysis. They could not be checked or verified for 100% accuracy. I found out a mismatch of 200,000,000 in the cash flow statement of the year 2006. The net cash flow from the operating activities has been put to be as 2,159,292,446 and it is
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audited. However when I did it in my excel sheet it came to be 2,359,292,446. Therefore the discrepancies had to forgone too. 1.4 Methodology I have used both primary and secondary sources very thoroughly for information. I could manage the primary source while I worked there physically. Every now and then I tried to talk to different officials to find out relevant facts even in unofficial manners like in tea breaks and lunch breaks. And talking about secondary source I have used to the fullest extent possible. My readers, you will get that very evidence and gain confidence over my report if you just check the bibliography at the end of this report. Whatever data I received, I tried to recheck them from other different sources to confirm accuracy. For example I got MTBLs financial statements from their companys website and I rechecked them with the ones posted in the website of Dhaka Stock Exchange. Primary Sources: Practical experience and desk work. Personal observation and discussion with staff members Interview of different officials including the Deputy Managing Director of the bank.

Secondary Sources: Annual reports of MTBL of the years 2006, 2007 and 2008. CDs from Dhaka Stock Exchange A few Financial Institution and Risk Management related Text Books
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Financial articles in Newspaper Circulars published by Bangladesh Bank Other relevant data from the Internet.

CHAPTER 02 An Overview Of MUTUAL TRUST BANK LIMITED

2.1

An Overview of Mutual Trust Bank Limited

Mutual Trust Bank Ltd, a new generation private commercial bank strives to consolidate its position among the top banks in the country by offering competitive services and products. It was incorporated in Bangladesh in the year 1999 as a banking company under the Companies Act, 1994. All types of commercial banking services are provided by the bank within the stipulations laid down by the Bank Companies Act 1991and as directives received from Bangladesh Bank from time to time. The bank has now 44 branches and 10 SME (Small and Medium sized Enterprises) service centres. The Bank operates through its Head Office situated in the Motijheel area of Dhaka. They are also looking forward to eight more branches and five more SME service centres to be added by the end of this year. The bank carries out international operations through a global network of foreign correspondents banks. MTBL is also a member of SWIFT community as well. Their real time online banking facilities gave them a pioneer role among its competitors. The bank floated its shares in 2003 to the general public and was subsequently listed with Dhaka Stock Exchange Ltd and Chittagong Stock Exchange Ltd. As envisaged in the Memorandum of Association and as licensed by the Bangladesh Bank under the provisions of the Companies Act 1991, MTBL started its banking operations and entitled to carry out the following types of banking business: All types of Commercial Banking Activities including Money Market operations.
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Investment in Merchant Banking Activities. Investment in Company Activities. Financiers, Promoters, Capitalists etc. Financial Intermediary Services. Any related Financial Services.

2.2

Company History

It started its operations on 24 October 1999 with an authorized and paid up capital of Tk 1,000 million and Tk 200 million respectively. The capital is divided into ordinary shares of Tk 100 each. Soon in December 2000, the bank total equity and reserve funds grew to Tk 208.48 million and Tk 8.48 million respectively. The bank is a Bangladeshi joint venture company with equity participation from Advanced Chemical Industries Ltd., East West Properties Development Ltd. and Associated Builders Corporation Ltd. Previously the bank had its head office at Dhaka and started with only 4 branches. The total number of employees of the bank was 68. The management of the bank was vested in an 18-member board of directors, including representatives of the 3 sponsor firms. The managing director is its chief executive. Though at present the bank conducts all types of commercial banking activities including foreign exchange business and other financial services, during the first two years of operations, the bank's main focus was only on the delivery of personalized customer services and expansion of its clientele base. On 31 December 2000, the total deposits of the bank stood at Tk 1,673.63 million. The deposit-mix comprised short-term deposits, savings deposits, current deposits, fixed deposits, deposits under special schemes and other deposits. In 2000, the bank introduced two deposit products in the market namely,
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Save Every Day and Brick by Brick. These two schemes attracted huge pool of depositors into the new bank due to its special features. Total loans and advances of the bank stood at Tk 602.32 million on 31 December 2000. Trade finance was the main focus of lending but import and export finance as well as working capital finance for industrial units was also major lending areas. In its lending policy, the bank gave priority to the private sector and it is the same as yet. It introduced consumer credit facilities for the professionals, service holders, students, and teachers to help them improve their standard of life. However MTBL had no classified loan upto the end of 2000. During 2000, its foreign exchange business amounted to Tk 2,071.57 million, which comprised imports servicing (Tk 1,533.80 million), exports financing (Tk 507.34 million), and remittance facilities (Tk 30.43 million). The bank established correspondent relationships with 14 reputed banks at various foreign financial centers. A list is given below. (Table 2.2) In December 2000, the total assets of the bank were valued at Tk 2,444.79 million. Assets sprung from off-balance-sheet items were Tk 446.7 million which changed the total financial look of the firm. The bank earned a good amount of interest incomes through treasury functions and by timely placement of surplus funds in call money market. Investment of the bank other than loans and advances figured at Tk 125.10 million in 2000 and the whole amount was in government treasury bills. During 2000, the total operating income of the bank was Tk 178.20 million and its operating expenses were Tk 158.02 million which resulted in operating profits of Tk 20.18 million. 1% provision on the unclassified advances equivalent to Tk 6.19 million was made and Tk 5.60 million was retained as provision for taxation. The net profit after tax had been divided as follows. Tk 2.80 million was transferred to Statutory Reserves and the remaining Tk 5.59 million to General Reserves.
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The bank reached break even within only 67 days after it commenced business. (S M Mahfuzur Rahman, Financial Express)

2.3

Company Objective

The objective of the Mutual Trust Bank Limited is specific and targeted to its vision and to position itself in the mindset of the people as a bank with difference. And to bring its objectives to reality they have arranged to devote in the following issues. They are: 1. To mobilize the savings and channeling it out as loan or advance as the company approve. 2. To establish, maintain, carry on, transact and undertake all kinds of investment and financial business including underwriting, managing and distributing the issue of stocks, debentures, and other securities. 3. To finance the international trade both in import and export. 4. To carry on the foreign exchange business, including buying and selling of foreign currency, travelers cheques issuing, international credit card issuance etc. 5. To develop the standard of living of the limited income group by providing Consumer Credit. 6. To finance the industry, trade and commerce in both the conventional way and by offering customer friendly credit service. 7. To encourage the new entrepreneurs for investment and thus to develop the countrys industry sector and contribute to the economic development.

2.4 Mission
We aspire to be the most admired financial institution in the country, recognized as dynamic, innovative and client focused company that offers an array of products and services in the search of excellence and to create an impressive economic value.

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2.5 Vision
To be the bank of first choice by creating exceptional value for our client, investors and employees.

2.6 Structure of MTBL


The organization structure and corporate of Mutual Trust Bank Limited (MTBL) strongly reflects its determination to establish, uphold and gain a stronger footing as an organization which is customeroriented and transparent in its management. The Bank is being managed by highly professional people having wide experience in domestic and international Banking. The present Managing Director Mr. Anis A Khan has long experience in domestic and international Banking. The Bank has made significant process within a very short time due to its very competent Board of Directors, dynamic management and introduction of various customer friendly deposit and loan products. Board of Directors In Mutual Trust Bank Limited, the board of directors has been conceived as the sources of all power headed by its chairman. It is the legislative body of the bank board can delegate its power and authority to professionals, but can not delegate, relinquish or avoid their responsibilities. The board of directors of the bank consists of 13 members who are reputed business personalities and leading industrialists of the country.

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Hierarchy of the Board of Directors

CHAIRMAN

VICE CHAIRMAN

DIRECTORS

MANAGING DIRECTORS

COMPANY SECRETARY

Figure: 2.1: Hierarchy of the Board of Directors

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NAME OF THE DIRECTORS AND THEIR SHAREHOLDINGS AS ON DECEMBER 31, 2008

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2. 7 Types of Committees
Board Committees The Board of Directors who also decides on the composition of each committee determines the responsibilities of each committee. Executive Committees All routine matter beyond delegated powers of management are decided upon by or routed through the Executive Committee, subject to ratification by the Board of Directors. Policy Committee All mater relating to the principles, policies, rules, and regulation, ethics etc. for operation and management of the bank are recommended by the Committee to the Board of Directors. Management The management of the bank is vastly on a Board of Directors, for overall supervision and directions on policy matters by the board. The power of general supervision and control of the affairs of the bank is exercised by the president and managing director of the bank who is also the chief executive officer of MTBL. Above all, the bank will be manned and managed by a galaxy of talented professionals proficient in their individual fields and dedicated to the cause of the bank.

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2.8 Management Hierarchy

MANAGING DIRECTOR DEPUTY MANAGING DIRECTOR SENIOR EXECUTIVE VICE PRESIDENT EXECUTIVE VICE PRESIDENT SENIOR VICE PRESIDENT VICE PRESIDENT SENIOR ASSISTANT VICE PRESIDENT ASSISTANT VICE PRESIDENT SENIOR PRINCIPAL OFFICER PRINCIPAL OFFICER SENIOR EXECUTIVE OFFICER

SENIOR OFFICER OFFICER JUNIOR OFFICER ASSISTANT OFFICER

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Figure: 2.2: Management Hierarchy 2.9 Organogram of MTBL

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2.10 Arrays of Services of MTBL


Consumer Banking

We aim to satisfy all clients, regardless of how big or small they may be- this is the motto of consumer banking sectors officials of MTBL. Individuals are counseled on the best type of accounts suitable to them such as Current, Savings, Short Term Deposits, Fixed Deposits, Consumer Asset and Liability Products, etc. Apart from the conventional banking operations MTB strives to introduce an array of products and services and already launched a number of consumer banking products with the aim of popularizing consumer banking operations and offer higher return to its clients. The most popular schemes offered are: 1. Brick by Brick Savings Scheme 2. Monthly Benefit Plan 3. Save Everyday Plan 4. Childrens Education Plan 5. Consumer Credit Scheme 6. Best Invest Plan

Foreign Trade

MTBL is one of the best performers in the foreign trade sector in the past few years. It provides a wide range of banking services to all types of commercial concerns such as Import & Export Finance and Services, Investment Advice, Foreign Remittance and other specialized services as required. Although it is

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a private commercial Bank, they have a strong global network that helps them to undertake international trade smoothly and efficiently. Just a few of its features are listed below for each of the services. Later in this same chapter, these issues have been discussed in detail in regard to foreign exchange. 1. Import Business Mutual Trust Bank supports its customers by providing facilities throughout the import process to ensure smooth running of their business. The facilities are: a. Import Letter of Credit b. Post Import Financing (LIM, LTR etc) c. Import collection services & Shipping Guarantees 2. Export Business Mutual Trust Bank offers extra cover to its customers for the entire export process to speed up receipt of proceeds. The facilities are: a. Export Letters of Credit advising b. Pre-shipment Export Financing c. Export documents negotiation d. Letters of Credit confirmation 3. Remittance Mutual Trust Bank provides to its customers the following services:
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a. Inward/ Outward Remittance Services b. TT/ DD Issue c. DD/ Cheque collection d. Endorsements e. Travelers Cheque Issuance

Correspondent Banking

The objective of their correspondent banking operations is to strengthen their existing relationships with foreign banks and financial institutions around the globe as well as exploring new relationships. In addition to that, they provide assistance in marketing the products of the correspondent banks. At present MTBL is maintaining relationships with 30 (thirty) foreign correspondents and the number is growing everyday. Currently the bank has 18 (eighteen) NOSTRO A/Cs with large foreign banks abroad. The bank is also a "SWIFT" member and its Bank Identification Number or BIC is 'MTBL BDDH'. Remittance Services

Mutual Trust Bank maintains a strong network with the Exchange Houses worldwide for ensuring better remittance services for its customers. The Bank having a network of 30 branches has established remittance arrangements with a number of exchange houses to facilitate wage earners to remit their money to Bangladesh. The following is the list of exchange houses having arrangement with Mutual Trust Bank Ltd.

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Exchange House Name

Service Available

Presence

UAE Exchange Centre LLC

1. Taka Draft Arrangement 2.EFT Using XPIN Global

web:http://www.uaeexchange.com

3. TT Arrangement

Wall

Street

Exchange

Centre

LLC 1. TT Arrangement UAE

web:http://www.wallstreetcorp.com

Global Instant Cash Worldwide Ltd. 1. Taka Draft Arrangement Locations List

Al Ahalia Money Exchange Bureau

1. TT Arrangement 2. Taka Draft Arrangement

UAE

Route of Asia Money Exchange Ltd.

1. TT Arrangement

UK

Bangladesh Money Transfers (UK) Ltd.

1. TT Arrangement

UK

Instant Exchange UK Ltd.

1. TT Arrangement

UK

Moneylink UK Ltd. 1. TT Arrangement web: http://www.moneylinkuk.com/mtb UK

Trust Exchange Co. W.L.L.

1.

Taka

Draft

Arrangement

Qatar

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2. TT Arrangement

Table: 2.2: MTBLs Network of Exchange Houses Web The Internet has brought about a revolutionary change in the world leading to convergence of communication and computing technologies. In order to provide round the clock and up to date information on the Bank to the trade and business communities worldwide, the IT Team of Mutual Trust Bank Limited has developed a web for the Bank. It can be accessed under the domain name: www.mutualtrustbank.com.
It contains details of all MTBLs products and services. Also it has the audited financial statements of the firm.

SWIFT The Bank has become the member of SWIFT Alliance Access, a multi-branch secure financial messaging system provided by the Society for Worldwide Inter-bank Financial Telecommunication [SWIFT], Belgium. With the activation of the SWIFT system the Bank enjoys instant, low-cost, speedy and reliable connectivity for L/C transaction, fund transfers, message communication and other worldwide financial activities. Officials of MTBL says SWIFT has accelerated MTBLs performance almost 3 times.

2.11 Products of MTBL


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No. 1

Deposit Products Brick by Brick Savings Scheme

Loan Products Small Business Loan

Visa Cards Local Classic Credit Card

2 3 4 5 6

Monthly Benefit Plan Unique Savings Plan Festival Savings Plan Save Everyday Plan Education Plan

Home Loan Home Repair Loan Auto Loan Consumer Loan

Local Gold Credit Card Prepaid International Travel Money Card Prepaid Local Gift Card Visa Electron Debit Card

7 8 9 10

Double Saver Plan Triple Saver Plan Millionaire Plan Best Invest Plan

Table: 2.3: Products of MTBL

2.12 Branches
Mutual Trust Bank Limited is a fast growing commercial bank in our country. It has established a good operating network throughout the country. At present it has 44 Branches all around the country. Dhaka Division: 22 Branches Chittagong Division: 8 Branches Sylhet Division: 2 Branches

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Rajshahi Division: 2 Branches Other parts of the country: 10 Branches

2.13 Departments
It would be very difficult to control the system effectively, if the jobs are not organized considering their interrelationship and are not allocated in a particular department. If the departments are not fitted for the particular works there would be random situation and the performance of a particular department would not be measured. Mutual Trust Bank Limited has done this work very well. The following are MTBLs departments and their sub divisions. MDs Secretariat Board Division Internal Control & Compliance Division o ICC Audit Department o ICC Compliance Unit o ICC Monitoring Unit Human resource Division General Services Division o Security & Printing Stationery Financial Administration Division o Reconciliation Department o MIS Department
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Credit Division o CIB Department o Syndication Department o Credit Processing & Approval International Division o Correspondent Banking Dept. o Remittance Department o SWIFT Department Merchant Banking Division Card Division SME Division Treasury Department o Asset Liability Mgt. Department Banking Operations Department o Anti Money Laundering o Test Key Department Corporate Banking Department Credit Administration Department Credit Monitoring Cell Credit Recovery Cell ID Department Business Development& Marketing Public Relations Department Share Department Engineering Department
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Training Institute

Although there are innumerable departments specialized to perform different financial and nonfinancial jobs of the firm, mainly there are three divisions which carves up the entire organizations financial activities. They are: General Banking division, Foreign Exchange Division and lastly the Credit Division. I have tried to give a brief yet understandable description of the General Banking Division and the Credit Division. While the Foreign Exchange Division is discussed very much in details as I worked as an internee there. All these are comprised in the next chapter that is chapter number 3.

CHAPTER-03 GENERAL BANKING DIVISION CREDIT DIVISION


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& FOREIGN EXCHANGE DIVISION

3.1.0 GENERAL BANKING DIVISION


3.1.1 Introduction
General Banking is the starting point of all the banking operations. General Banking department aids in taking deposits and simultaneously provides some ancillaries services. It provides those customers who come frequently and those customers who come one time in banking for enjoying ancillary services. In some general banking activities, there is no relation between banker and customers who will take only one service form bank. On the other hand, there are some customers with whom bank is doing its business frequently. 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 cheques. It opens new accounts, demit funds, issue bank drafts and pay orders etc. Since bank is confined to provide the service everyday general banking is also known as retail banking. Listed below are the features available at MTBL.
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Customer Service Account Opening/Closing Remittance a) Payment Order Issue b) Demand Draft Issue/Collection c) T.T. Issue/Collection d) Endorsements e) IBC/OBC Collection

Deposit Department Locker Service Accounts Department a. Clearing. b. Transfer. c. Cash.

3.1.2 Types of Account


Current Deposit: o Interest Rate 0.00% Individual Account Joint Account Proprietor Ship Account Limited Company Account

Savings Deposits:
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o Interest Rate 6.25% Individual Account Joint Account Proprietor Ship Account Limited Company Account

Short Term Deposits: o Interest Rate 6.00% Individual Account Joint Account Proprietor Ship Account Limited Company Account

Fixed Deposits: o Its an Individual Account and any individual can open this account by providing valid personal details. Anytime withdrawal is not possible, a specific interest rate and maturity date is specified and agreed at the beginning of the term. The interest amount or the whole deposited amount can only be withdrawn at the end of the maturity. The duration and the rates of the deposits are as follows:

1 month and above but less than 3 months: 8.50% 3 months and above but less than 6 months: 11.00% 6 months and above but less than 12 months: 11.25% 12 months and above: 11.75%

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Festival Sanchay Prodalpa are: Eid-Ul-Azha Sanchaya Prokalpa: Interest Rate 10.00% Eid-Ul-Fitre Sanchaya Prokalpa: Interest Rate 10.00% Durga-Puja Sanchaya Prokalpa: Interest Rate 10.00% Buddha-Purnima Sanchaya Prokalpa: Interest Rate 10.00% Boro-Din Sanchaya Prokalpa: Interest Rate 10.00%

3.1.3 MTBL Consumer Banking Products

1. Brick by Brick Savings Scheme Monthly Installment Tk. 500/Tk. 1000/Tk. 2000/Tk. 5000/-* Tk.38800/Tk. 77600/Tk. 155200/Tk. 388000/Tk. 73000/Tk. 146000/Tk. 292000/Tk. 730000/Tk. 102000/Tk. 204000/Tk. 408000/Tk. 1020000/Brick By Brick 5 Years* 8 Years* 10 Years*

The maturity value is an indicative figure. Tax/Excise Duty is deducted as per govt. rules. 90% Loan Advantage can be taken on the deposited amount, in multiples of Tk. 5000 up to a limit of Tk. 100,000.
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2. MTB Monthly Benefit Plan

Deposit Amount

Income Amount for 3-year plan*

Income Amount for 5-year plan* Tk. 425/Tk. 850/Tk. 1275/Tk. 1700/Tk. 2125/Tk. 2550/Tk. 2975/Tk. 3400/Tk. 3825/Tk. 4250/Monthly Benefit Plan

Tk. 50,000/Tk. 100,000/Tk. 150,000/Tk. 200,000/Tk. 250,000/Tk. 300,000/Tk. 350,000/Tk. 400,000/Tk. 450,000/Tk. 500,000/-

Tk. 400/Tk. 800/Tk. 1200/Tk. 1600/Tk. 2000/Tk. 2400/Tk. 2800/Tk. 3200/Tk. 3600/Tk. 4000/-

The maturity value is an indicative figure. Tax/Excise Duty will be deducted as per govt. rules. 90% Loan Advantage is available on the deposited amount.

3. Save Everyday Plan

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The primary advantage of Save Everyday plan is that an individual is absolutely free to choose his/her own time for depositing money into this account. You can deposit daily, weekly or monthly. Although the transaction will have to be within the banks transaction hours. An attractive interest rate is offered which is accrued in the account on a daily basis. The initial deposit is Tk. 2500

4. MTB Education Plan

Monthly Installment Tk. 1000/-

4 Years* Tk. 59,200/-

7 Years* Tk. 122,000/-

9 Years* Tk. 175,000/-

Tk. 2000/-

Tk. 118,400/-

Tk. 244,000/-

Tk. 351,000/Education Plan

Tk. 4000/-

Tk. 177,600/-

Tk. 366,000/-

Tk. 526,000/-

Tk. 4000/-

Tk. 236,800/-

Tk. 488,000/-

Tk. 702,000/-

The maturity value is an indicative figure. Tax/Excise Duty s deducted as per govt. rules. 90% Loan Advantage can be enjoyed on the deposited amount. 5. Consumer Credit Scheme

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In order to make a significant contribution in the living standards of the people of medium and low income category, MTBL has introduced a scheme called "Consumer Credit Scheme". With a view to materialize the dreams of those who are unable to make one time investment from their own savings, one can now afford to buy necessary household equipments and thus improve the standard of living. Consumer Credit Scheme

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The collateral security is the minimum and the interest rates are one of the lowest in the market. All sorts of household durables like Television, Refrigerators, Computers, Air Conditioners, Video Cameras, Washing/ Drying Machines and Furniture are allowed under this scheme. One can buy Motorcycle too under this scheme. 6. Best Invest Best Invest plan helps you to build up a sizeable income in easy and affordable installments. This plan allows a person to own 5 times the initial invested amount. Best Invest offers two separate and convenient term deposit periods for 4 years and 6 years respectively.

Best Invest is available in units worth Tk.50,000/- each. The one who will invest Tk.10,000/- as down payment for purchasing 1 (one) unit and the Bank will provide loan for Tk.40,000/-. The customer also has the option to buy units in multiples of Tk. 50,000/- but maximum up to Tk. 1,00,00,000/- (one crore).

3.1.4 Schemes offered by MTBL


MTB Double Saver Plan:

Deposit Amount Tk. 10,000/-

Maturity Value after 6 Years* Tk. 20,000/36

Tk. 20,000/Tk. 50,000/Tk. 100,000/-

Tk. 40,000/Tk. 100,000/Tk. 200,000/-

Double Saver Plan

The maturity value is an indicative figure. Tax/Excise Duty will be deducted as per govt. rules. 90% Loan Advantage on deposited amount. MTB Triple Saver Plan:

Deposit Amount Tk. 10,000/Tk. 20,000/Tk. 50,000/Tk. 100,000/-

Maturity Value after 11 Years* Tk. 30,000/Tk. 60,000/Tk. 150,000/Tk. 300,000/Triple Saver Plan

* The maturity value is an indicative figure. Tax/Excise Duty will be deducted as per govt. rules. 90% Loan Advantage on deposited amount.

MTB Millionaire Plan:

Monthly Installment Tk. 10,125/Tk. 6800/Tk. 4850/Tk. 3600/6 8

Year

Maturity Value* Tk. 10,00,000/Tk. 10,00,000/ Tk. 10,00,000/ Tk. 10,00,000/


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10 12

Millionaire Plan

* The maturity value is an indicative figure. Tax/Excise Duty will be deducted as per govt. rules. 90% Loan Advantage on deposited amount.

MTB Unique Savings Plan:

Unique Savings Plan is any day, any amount savings plan. The specialty of this plan is that a customer can deposit any time and any amount. It offers the person to deposit any amount of his choice but not less than Tk.500 for /5 years. Its a high income plan with withdrawal facility once a month. The depositor can withdraw 50% of the deposited amount.

3.2.0 CREDIT DIVISION


3.2.1 Introduction
Banking business primarily involves accepting deposits from the public and investing or lending the same and thereby making profit out of it. However, lending money is not without risk and therefore banks make loans and advances to farmers, traders, businessmen and industrialist against either tangible (land, building, stock etc.) or intangible security. Even then, the banks run the risk of default in repayment. Therefore, the banks follow cautious measures while lending money to others. This core function of a bank is performed by the Credit Department of the bank. In this case, the relationship of bank and customer is that of the creditor and debtor.

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3.2.2 Credit (Loan and Advances)

The profit of a commercial bank depends primarily on the utilization of its fund. But Bank cannot lend its fund fully. As per Banking Company Act 1991 every banking company has to maintain a specified minimum (presently 16%) of the total of its demand and time liabilities in the form of cash and approved securities with Bangladesh Bank. This percentage or ratio is termed Statutory Liquid Ratio. Further every scheduled bank has to maintain with Bangladesh Bank an average daily balance, the amount of which has not to be less than a particular percentage (presently 4%) of the total of its demand and time liabilities. As such Commercial Bank generally goes for short-term finance although a small portion of its total deposit is invested as long term lending. Commercial banks allow different forms of advances which are discussed below.

3.2.3 Types of Credit Offered by MTBL


MTBL offers following types of Credit (loans and advances) to its customers. Cash Credit (Hypo): Cash Credit or continuing credits are those that form continuous debits and credits up to a limit and have an expiration date. A service charge is the interest charge normally made as a percentage of the value of purchases. These credits may be of the nature of pledged and /or hypothecated and banks should report these in separate heads incorporated under the main head cash credit. A detailed explanation of hypothecation is given below: Under this arrangement a credit is sanctioned against hypothecation of the raw materials or finished goods. The letter of hypothecation creates a charge against the goods in favor of the Bank but neither the ownership nor its possession is passed on to it; only a right or interest in the goods is created in favor of the
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Bank and the borrower binds himself to give possession of the goods to the bank when called upon to do so. When the possession is handed over, the charge is converted into pledge. This type of facility is generally given to the reputed borrowers of undoubted integrity. Cash Credit (Pledge): Under this arrangement a cash credit is sanctioned against pledge of goods or raw materials. By signing the letter of pledge, the borrower surrenders the physical possession of the goods under the Banks effective control as security for payment of Bank dues. The ownership of the goods, however, remains with the borrower. The pledge creates an implied lien in favor of the Bank on the underlying merchandise. In the event of failure of the borrower to honor his commitment the Bank can sell the goods for recovery of the advance. No collateral security is normally asked for grant of such credit. Loan against Trust Receipts (LTR): This is a loan facility up to a satisfactory limit to the traders / customers by a Bank against security of the value of the imported merchandise. Term Loan: A Bank advance for a specific period to be repaid with interest under fixed schedules. The term loans may be as follow: Short Term: Up to and including 12 months. Medium Term: More than 12 months up to and including 60 months. Long Term: More than 60 months. [This item includes lease financing] Lease Financing: An entrepreneur, under this Scheme, may avail of the lease facilities to procure industrial machinery (without having to purchase it by down payment) with easy repayment schedule. The clients also get special rebate in their income-tax payment under this scheme. Secured Overdrafts (SOD): It is a loan facility on a customers current account at a Bank, permitting him to overdraw up to a certain agreed limit for an agreed period. The terms of the loan are normally that: it is repayable on demand or at the expiration date of the agreement.
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Others: Any loan that does not fall in any of the above facilities is considered as other. Blocked / Segregated continuing credits (Pledge, Hypothecation or Overdraft) when re-scheduled by the Banks for payments over a number of periods should also be reported against the head other.

3.2.4 Procedure for Giving Advance


The potential borrower will have to submit an application to MTBL for loan by filling up of a specific Application form. After receiving the loan application form, MTBL sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit information Bureau) report. This report is usually collected if the loan amount exceeds Tk. 50 Lac. But MTBL usually collects this report if the loan amount exceeds Tk.1 Lac. The purpose of this report is to being informed that whether the borrower has taken loan from any other bank; if yes then whether these loans are classified or not. After receiving CIB report if the Bank thinks that the prospective borrower will be a good borrower, then the bank will scrutinize the documents. In this stage, the Bank will look whether the documents are properly filled up and signed. Then comes processing stage. In this stage, the Bank will prepare a proposal. This proposal contains following relevant information like Name of the Borrower, Nature of Limit, Purpose of Limit, Extent of Limit, Security, Margin, Rate of Interest, Repayment and Validity.

Branch incumbent (Dhanmondi Branch) has the discretionary power to sanction loan (SOD) up to Tk. 25 Lac against financial obligations by informing Head Office. But in that case, the Branch Manager has to give attention to the following matters:

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The interest rate of the loan must not be less than 4.5% and The borrower must maintain 10% margin.

Except this case, the branch has to send the proposal to the Head Office. Head Office will prepare a minute and submit it before the Executive Committee (EC). The minute has to be passed by EC. After passing the minute, it will be sent to Bangladesh Bank for approval in case of following: o If the proposed limit exceeds 15% of Banks equity; o If the proposed limit against cash collateral securities exceeds 25% of Banks equity.

After the sanction advice, Bank will collect necessary documents (charge documents). These documents are as stated below.

a) Joint Promissory Note b) Single Promissory Note c) Letter of Undertaking d) Loan Disbursement Letter a) Debit Figure Confirmation Sheet b) Letter of Continuity c) Letter of Authority d) Letter of Revival e) Right of Recall the Loan. f) Letter of Guarantee g) Letter of Indemnity h) Trust Receipt i) Hypothecation of Goods
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j)

Hypothecation of Vehicles

k) Counter Guarantee l) Letter of Lien

m) Letter of Lien in case of advance against FDR n) Letter of Lien And Authority for advances to third parties against Fixed Deposit/Call Deposit/Special Deposit or Margin or margin deposits. o) Letter of Authority to encase FDR p) Letter of Agreement for Packing Credit q) Letter of Guarantee for opening L/C r) Charges over Bonds or Certificates or shares etc. by third person, firm or company to secure specific and general liability. s) Memorandum of Deposit of Title Deeds t) Hypothecation of goods to secure a Demand Cash Credit Or Overdraft/Loan amount u) Guarantee by Third party

For withdrawing the loan amount, the customer creates a CD account and the loan is transferred to the CD A/C. Afterwards the customer can withdraw the money.

3.2.5 Lending Risk Analysis (LRA)


Lending Risk Analysis Lending Risk Analysis (LRA) is a technique by which the risk of the loan is calculated. Banker must analyze LRA when loan application is above 1 crore. This analysis is done by experienced people of Credit
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department in MTBL. It is a ranking whose total score is 140. Among this score, 120 is for Total Business Risk and 20 for Total Security Risk. The aspects that are analyzed in LRA are: Supplies risk, Sales risk, Performance risk, Resilience risk, Management ability, Level of Managerial teamwork, Management competent risk, Management integrity risk, Security control risk and lastly Security covers risk In case of business risk, if the score falls Between 13-19, then-------Poor risk Between 20-26, then -----Acceptable risk Between 27-34, then-----Marginal risk Over 34, then ------------- Good risk. In case of security risk, if the score falls Between 0 to 10 then ------------Poor risk Between 10 to 14, then -------- Acceptable risk Between 14 to 20, then --------Marginal risk Over 20, then---------------------Good risk.

3.2.6 Securities
MTBL charges the following two types of security: 1. Primary security 2. Collateral security.

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3.2.7 Modes of Charging Security


Common methods of charging security: Lien Assignment Set off Pledge Hypothecation Mortgage

3.2.8 Nature of security and Way of charging


Nature of security Way of charging

Cash, Cash collateral and Documents of title to Lien, Assignment goods Moveable stock of raw materials, finished goods, merchandise. Immovable property Intangible assets (Goodwill) Simple/legal/registered and equitable mortgage Execution of personal guarantee and Letter of Trust Receipt. Pledge, Hypothecation

Table: 3.1: Nature of Security and Way of Changing

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3.2.9 Credit Monitoring, Follow-up and Supervision


MTBL Officer checks on the following points time to time to assure the quality and pay back of the loan. 1. The borrowers behavior of turnover 2. The information regarding the profitability, liquidity, cash flow situation and trend in sales in maintaining various ratios. The review and classification of credit facility first starts at the Credit Department of the Branch headed with the Branch Manager and then finally ends in credit division of the Head office.

3.2.10 Loan Classification


Type of classification General Provision on unclassified loans and advances. Small enterprise financing for good loan. Special Mention Account. Provision on substandard loans and advances. Provision on doubtful loans and advances. Provision on bad/loss loans and advances. Rate of provision 1% 2% 5% 20% 50% 100%

Table: 3.2: Loan Classification

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3.2.11 Classification Criteria


1. Overdue (OD) 2. Required Payment (RP) 3. Limit Overdrawn (LD) 4. Legal Action (LA) 5. Qualitative Judgment (QJ)

3.2.12 Guarantee
MTBL offers three types of Guarantee, which are as follows: Tender or Bid Bond Guarantee Performance Guarantee Advanced payment guarantee (APG)

3.3.0 FOREIGN EXCHANGE DIVISION


3.3.1 Introduction
Foreign Exchange Department is an important one in MTBL Dilkusha Branch that deals with import, export, and foreign remittance and post import financing. Through this is an ancillary service provided by the Bank, The Bank is purchasing primary security by giving loan in form of loan against imported merchandise (LIM), and loan against trust receipt (LTR). Bank branch should be Authorized Dealer with the approval of Bangladesh Bank to run foreign exchange business. This department is playing an important role in
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enhancing export earning, which aids economic growth and, in turn, will be helpful for economic development. On the other hand, it also helps to meet those goods and services, which are more demandable and not adequate in our country.

3.3.2 The Major Tasks of Foreign Trade Department


The Functions of Foreign Trade department mainly covers the following areas: Import Export Remittance

3.3.3 Components of Foreign Trade


L/C (Letter of Credit) is a very important issue of foreign exchange management because without L/C import and export cannot be possible. Importer and Exporter do not know each other. For this reason settlement of payment cannot be possible without the arrangement of Bank particularly in foreign trade. Therefore Import/Export becomes impossible if L/C cannot be made through Bank. Therefore L/C is a very important issue in foreign trade. L/C (Letter of Credit): L/C is a guarantee of a bank (Issuing Bank) on behalf of the importer in a trade in favor of the exporter to pay a certain sum of money under some specific terms and conditions. The L/C is a negotiable instrument (A form of documentary credit) that carries a promise of payment with the fulfillment of certain conditions. An L/C can be used in foreign trade as well as for local payments. We can divide L/Cs into two broad categories. Those are: Revocable L/C: The terms and conditions of L/C can be changed at any time without the consent of or notice of the beneficiary. In case of seller (Beneficiary) revocable credit
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involves risk. A revocable credit may be amended or cancelled by the issuing bank prior notice to the beneficiary. On the other hand revocable credit gives the buyer maximum flexibility. This kind of L/C does not exist in our country thus it is also not available in MTBL. Irrevocable L/C: In this type of L/C the terms and conditions cannot be changed. This kind of L/C exists in Bangladesh. It is a definite undertaking of the issuing Bank, provided that the stipulated documents are presented to the nominated Bank. Once this commitment has been entered into, the bank cannot disown its responsibility without the agreement of the beneficiary. A unilateral amendment or cancellation, as in the case of a revocable credit is not possible in case of irrevocable, unconfirmed credit. Since under the documentary credit a debt relationship exists only between the issuing bank and beneficiary, it is advisable to assess the issuing banks standing as well as the sovereign and transfer risk of the country involved. In an L/C cycle, the following are the common parties: Importer: The party that imports goods also knows as applicant, buyer or a consignee. Exporter: The party that sells or exports goods, also known as seller, beneficiary Issuing Bank: The Importers bank that issues the L/C. It is also called L/C opening Bank.

Advising Bank: The responsibility of this Bank is to authenticate the issuing Bank. Sometimes it happens that the issuing bank does not have a branch in the exporters country. In this sort of cases one bank authenticates the foreign bank and confirms the transaction provided that the Issuing bank has a BKE (Bilateral Key Exchange) arrangement with the advising bank. Correspondent bank (usually in the exporter's country) of an issuing bank (usually in the importer's country) that receives a letter of credit (L/C) from the issuing bank for authenticating it and informing ('advising') the exporter (the L/C's beneficiary) that a L/C has been opened by the
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importer in the exporter's favor. The advising bank usually also takes on other roles in the transaction, such as (1)confirming the letter of credit (playing the role of the 'confirming bank'), (2) accepting a bill of exchange by endorsing it (becoming the 'accepting bank') and/or, (3)paying the exporter on presentation of documents(becoming the 'paying bank' or 'negotiating bank'). It is also called adviser bank or nominated bank. Negotiating Bank: The bank that the Exporter after receiving the L/C negotiates it along with other documents for receiving the proceeds from the issuing bank. Add Confirming Bank: Being suspicious about the payment, sometimes the exporter may ask for confirmation of the payment from a bank of his own country a bank giving such confirmation is called confirming bank that takes a confirmation charge from the issuing bank. Reimbursement Bank: This is the bank that the L/C issuing bank maintains its nostro account with (definition stated above). Upon instruction from the Issuing Bank, the reimbursement bank makes transfer of funds to the negotiating bank. Types of documentary credits according to payment methods: Sight Payment: The payment is made as soon as documents shown to the issuing Bank and payment received from importer. Instruction is given to reimbursing bank to give payment. Deferred Payment: The payment of this kind of L/C is made after 30, 60, 90, 120 or 180 days soon as documents shown to the issuing Bank. The credit with deferred payment differs only slightly in its effect on the beneficiary from the credit with time draft. It is also called USANCE L/C. Special types of Documentary Letter of credit: Revolving Credit: A Revolving credit is one where under the terms and conditions thereof the amount of the credit is renewed or reinstated with out specific amendment to the credit being
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needed. It can revolve in relation to time or value. But credit that revolves in relation to value is not in common use. It is an arrangement which permits a purchaser to charge purchases against an account every month, provided the balance does not exceed a predetermined credit limit. Monthly payments must be made on the account. Back to Back Credit: Another special type of L/C is issued in Bangladesh that is called Back-to-Back (B to B) L/C where the applicant opens an L/C against another export L/C. Arrangement in which one irrevocable L/C serves as the collateral for another; the advising bank of the first L/C becomes the issuing bank of the second L/C. In contrast to a 'transferable letter of credit,' permission of the ultimate buyer (the applicant or account party of the first L/C) or that of the issuing bank is not required in a back-to-back L/C. It is used mainly by middlemen (intermediaries) to hide the identity of the actual supplier or manufacturer. It is also called counter credit or reciprocal letter of credit.

Import section deals with L/C opening and post import financing i.e. LIM & LTR. Now the procedure from opening L/C to disbursement against L/C is given below.

3.4.0 IMPORT SECTION


3.4.1 Application for Opening L/C
At first, an importer will request its banker to open L/C in favor of the buyer along with the following documents. 1. An application 2. Indent or Performa Invoice 3. Import Registration Certificate (IRC)
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4. Taxpayer Identification Number (TIN) 5. Insurance cover note with money receipt 6. A bank account in MTBL 7. Membership of chamber of commerce Indent or Performa invoice Indent or Performa invoice is the sale contract between seller and buyer in import-export business. There is slight difference between indent and Performa invoice. The sales contract, which is direct correspondence between importer and exporter, is called Performa invoice. There is no intermediary between them. On the other hand, there may be an agent of exporter in importers country. In this regard, if the sale contract is occurred between the agent of exporter and importer then it is called indent.

3.4.2 Delivered Forms by Banker to Importer


After scrutinizing above-mentioned documents carefully, officer delivers the following forms to be filled up by importer and the banker should check the following: The forms are: Import Merchandised Permit Form (IMP). L/C Application Form (L/CAF). L/C Authorization Form (L/CAF). Whether the goods to be imported is permissible or not. Whether the goods to be imported is demandable or not.

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3.4.3 Preparation of L/C by Banker


Banks officer prepares L/C when above mentioned forms are to be submitted by customer or importer. Before preparing L/C SIBL officer scrutinizes the application in the following manner. The terms and conditions of the L/C must be complied with UCPDC 500 and Exchange Control & Import Trade Regulation. Eligibility of the goods to be imported. The L/C must not be opened in favor of the importer rather to the exporter. Radioactivity report in case of food item.

Survey reports or certificate in case of old machinery is required. Bank of the importer is called L/C Issuing Bank. Then issuing bank inform its corresponding bank, called Advising Bank or Confirming Bank located in exporters country to advice and the credit forward to the exporter and simultaneously officer makes L/C opening vouchers. DESK WORK: One debit voucher to be passed. Corresponding credit voucher to be passed (Margin, commission, postage, stamp, F.F.C. and others). Liability voucher to be passed.

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3.4.4 Accounting treatment of an L/C

L/C Applicants A/C or Customers A/C Margin A/C Commission A/C Postage A/C Stamp A/C F.FC. (foreign corresponding charge) A/C Telex charge A/C

Dr. Cr. Cr. Cr. Cr. Cr. Cr.

Other A/C

Cr.

Customers liability A/C Bankers liability A/C

Dr. Cr.

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3.4.5 Forwarding Documentary Credit by Advising or Confirming Bank


There are usually two banks involved in a documentary credit operation. The issuing bank in the buyers country and the 2nd bank, the advising bank, is usually a bank in the sellers country. The issuing bank asks another bank to advise or confirm the credit. If the 2nd bank is simply advice or credit, it will mention that when it forwards the credit to seller, such a bank is under no commitment or obligation to pay the seller. If the advising bank is also confirming the credit, this mentions that the confirming bank, regardless of any other consideration, must pay accept or negotiate without recourse to seller. Then the bank is confirming bank.

ADVISING BANK/ CONFIRMING BANK

SENDING DOCUMENTARY CREDIT

EXPORTER/ SELLER

3.4.6 Submission of Necessary Documents by Exporter to the Negotiating Bank


As soon as the seller / exporter receives the credit and is satisfied that he can meet its terms and conditions, he is in position to load the goods and dispatch them. The seller then sends the documents evidencing the shipment to the bank.

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Exporter will submit those documents in accordance with the terms and conditions as mentioned in L/C. Generally the documents observed by me in the foreign exchange department were: Bill of exchange Commercial invoice Proforma Invoice Bill of lading Certificate of origin Packing list Clean report of finding (CRF) Weight list Insurance cover note Pre-shipment certificate

While exporting more sensitive goods, more documents are to be submitted by the exporter to the bank. The types of documents are also determined by the countries involved in the trade considering some countries are in restrictions of exporting or importing certain goods to another. SOME DEFINITIONS Bill of Exchange According to the section 05, Negotiable Instruments (NI) Actunconditional order signed by the maker, directing a certain person to pay on or to the order of a certain person or to the bearer of the instrument. It may be either at sight or certain day sight. At sight means making payment whenever documents will reach in the issuing bank.
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Commercial Invoice Commercial Invoice issued by exporter is the accounting document by which the seller charges the goods to buyer.

Bill of lading A bill of lading is a document usually stipulated in a credit when exporter dispatches the goods. It is an evidence of a contract of carriage, is a receipt for the goods and is a document of title to goods. It also constitutes a document that is or may be, needed to support an insurance claim.

3.4.7 The Documents sent to the Issuing Bank through the Negotiating Bank
The negotiating bank carefully checks the documents provided by the exporter against the credit, and if the documents meet all the requirement of the credit, the bank will pay, accept, or negotiate in accordance with the terms and conditions of the credit. Then the bank sends the documents to the L/C opening bank.

3.4.8 Making the Payment of Foreign Bill through the Reimbursing Bank

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The L/C issuing bank getting the documents checks immediately and if they are in proper order and meet the credit requirements, it will arrange to make payment against L/C through reimbursement bank and will send the importer the document arrival notice. But if there is any discrepancy in the documents, the L/C isssuing bank sends message to the negotiating bank to rectify it by undertaking all its risks and responsibilities. They also charge a discrepency fee for this. MTBLs charge for discrepency varies based on the types of it.

3.4.9 Post-Import Financing


If there is no cash available in importers hand, he can request the bank to grant loan against the documents for the purpose of post import finance. There are two following forms of post import finance available in MTBL. LIM (Loan against imported merchandise). LTR (Loan against trust receipt). On the arrival of goods and lodgment of import documents, importer may request the bank for clearance of goods from the port (custom) and keep the same to bank godown. Proper sanction from the authority is to be obatained before clearance of consignment. For giving these types of loan, officer makes loan proposal and sends it to H/O for approval. After getting approval from H/O, bank grants loan in the form of either LTR or LIM.

3.4.10 Accounting treatnent of Sanctioning a loan against L/C


LIM/LTR creation:

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LTR/LIM (Importer) A/C PAD A/C

Dr. Cr.

After payment of the loan or delivery of goods: Partys A/C LTR/LIM A/C Interest A/C Dr. Cr. Cr.

By and large, it is mentioned herewith that bank only deals with the documents, not with goods & services in case of foreign exchange business. Payment for goods exported from Bangladesh should be received through an Authorized Dealer in freely convertible foreign currency or in Bangladesh Taka from a Non-Resident Account.

3.5.0 EXPORT SECTION


3.5.1 Parties involved in an Export L/C Transaction
L/C Issuing Bank Importer L/C Advising Bank Exporter
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Confirming Bank (If any) Negotiating Bank The paying/Reimbursing

Export L/C: Export L/Cs is issued by a foreign bank favoring Bangladeshi exports through our banks having correspondent relationship with them.

3.5.2 Services provided against Export L/C


A) Advising of export L/C The advising bank getting the import L/C sent by the issuing bank located abroad will advise the L/C to the beneficiary without any engagement or responsibly on their part. It will see the following only: I. Authenticity of L/C (Test agreed in case of Telex L/C and signature verified in case (air mail L/C). II. Merchandise specified in the L/C is permissible and clauses incorporated in the L/C are not against countrys regulations.

B) Add Confirmation of Export L/C Bank may add additional confirmation to export L/C where there is specific instruction from the L/ C issuing bank to do so. Additional confirmation of L/C gives the seller a double assurance of payment. Banks requirement of adding confirmation: I. Issuing Bank should be a reputed bank. II. Credit line/Arrangement with the L/C issuing bank.
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III. L/C clause are to be acceptable to confirming bank IV. Approval from the competent authority for adding confirmation of export L/C. V. Confirmation charges are to be recovered as per rules.

C) Negotiating of Export L/C Documents/papers to be submitted by exporter to bank for negotiation/collection against export L/C. the exporter submit the documents to bank as per requirement of bank. List of export documents is as follows:

I. Export L/C II. EXP Form III. Bill of exchange IV. Invoice V. Bill of Lading VI. Packing List VII. Certificate of Origin VIII. Inspection Certificate IX. Insurance Document X. Weight List XI. Any other documents as per L/C

Bank must scrutinize all the documents stipulated in the credit with reasonable care to ascertain whether they confirm with the terms and conditions or not. If the documents are drawn strictly in terms of the credit, the bank may negotiate and pay the value of export bill to the exporter at:
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OD buying rate (Sight Draft) USANCE rate (For DA Bill) Appropriate rate for DP Bill

Accounting treatment After adjustment of pre-shipment credit:

FBP (foreign bill purchased) A/C Partys A/C

Dr. Cr.

3.5.3 Realization of Export Proceeds


On receipt of credit of the export bill from the foreign correspondent, banks realize the bill at specified rate and following vouchers are passed. H/O (ID) --------------Dr. FBP A/C----------------Cr. Income A/C on exchange earning ------Cr. COLLECTION DOCUMENTS Export documents not covered by and L/C documents not drawn in terms of the credit are accepted on collection basis with the shipper authority at their documents are forwarded through foreign correspondents
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to the drawee for payment or acceptance. After realization of the bills on collection, export is paid appropriate rate after adjustment of liabilities on his account (if any)

Voucher to be passed: Lodgment (Accepted for sending on collection): FBPL A/C FBPC A/C Dr. Cr.

Realization: (Reverse of Contra Voucher): FDPC A/C FBPL A/C H/O (ID) A/C Partys A/C Dr. Cr. Dr. Cr.

Income on com/charge

Cr.

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3.5.5 Export Financing


Financing of export credits is made in two stages: 1. Pre-shipment Financing/ Packing Credit : Packing credit is short-term advance granted by a bank to an exporter against valid export L/C contract for the purpose of purchase of materials or finished goods or manufacturing, processing, packing, transporting up to ware house/ port of shipment etc, of exportable goods for export. Voucher to be passed: packing Credit-------Dr. exporters A/C--------Cr.

Adjustment: FBP/FDBC-----------------A/C Packing credit----------Cr. Income A/C interest on PC----------Cr. 2. Post-shipment financing/ Back-to-Back L/C: Back-to-back L/C means one credit backs another credit. It is new credit in favor of another beneficiary. Sometimes beneficiary/seller of a credit himself is unable to supply goods specified in the L/C and required to purchase from another supplier by opening second credit.

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Besides, the normal formalities and requirements (for L/C opening) the following formalities and documents are also required for opening back-to-back L/C: 1) Master L/C 2) Valid bonded warehouse license 3) Quota allocation for quota items 4) ERC in addition to IRC 5) Indemnity/undertaking 6) No objection from previous banker (if any) 7) Factory inspection certificate 8) BGMEA Membership

Vouchers and accounting treatments are the same normal L/C opening except margin. In this case, no margin is taken by the bank. After lodgment, maturity date of the import bill is intimated to foreign bank as per L/C terms. The documents are delivered to the order of opener duty indorsed for clearance of goods from custom authority. Goods are cleaned through approved clearing and forwarding agent of the bank. Vouchers to be passed: Bankers liability for L/C------Dr. Customers liability for L/C------Cr. Reversal of contra Lodgment: Customers liability on IFBC L/C------Dr Partys A/C ---------Dr. Income A/C Bank charges-----Cr. (if any)
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3.5.6 Payment of Import bills


Payment of Import bills is at maturity from the relative export proceeds repatriated. The required foreign exchange for payment of import bills is kept in a separate account, out of repatriate proceeds of relative export. Party wise and export L/C- wise funds are kept in FBPAR (foreign Bills Awaiting Remittance) account from export proceeds for payment of bills at maturity.

3.5.7 Types of Accounts maintained by Exporters and Importers

LORO ACCOUNT: Loro account means their account with you . Account maintained by third party is known as Loro Account. This account may be either in foreign currency or home currency.

NOSTRO ACCOUNT: Nostro Account means Our account with you:. The account that a home bank maintains with a foreign bank is known as Nostro account. For example, Dhaka Banks US Dollar account maintained with City Bank NA New York, USA is NOSTRO Account of Dhaka Bank.

VOSTRO ACCOUNT:
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Vostro Account means your account with us. The account maintained by a foreign bank is known as vostro account. We can term nostro account when referred to its account holder (foreign bank) by home bank as vostro account. For example, State Bank of Indias taka account maintained with Dhaka Bank is a vostro account of Dhaka Bank.

3.6.0 Foreign Remittance


Foreign remittance means purchase and sale of freely convertible foreign currencies as admissible under Exchange Control Regulations of the country. Purchase of foreign currencies constitutes inward foreign remittance and sale of foreign currencies constitutes outward foreign remittance. So we see that there are two types of Foreign Remittance: Foreign Inward Remittance Foreign Outward Remittance MTBL has established remittance arrangements with a number of exchange houses to facilitate wage earners to remit their money to Bangladesh. This bank has already been in operation with UAE Exchange Centre LLC, Wall Street Exchange LLC, Trust Exchange, Route Asia Exchange, Instant Cash and Bangladesh Money Transfer. MTBL have obtained permission from Bangladesh Bank to start operation with Al Saad Exchange, First Solution Exchange, Al Ahalia Exchange Bureau and Federal Exchange. The bank maintains correspondence with other 16 Exchange House which are Al Fadaral Exchange, National Exchange, City Exchange, Future Exchange, Al Ghurair Exchange, Habib Exchange, Al Ansari Exchange, Emirates India International Exchange, Instant Exchange, Oman UAE Exchange, Modern Exchange, Purusuttam Kanji Exchange, Musandam Exchange, Lasidas Tharia Exchange, Oman United Exchange and ICICI Bank. The extensive branch network of these Exchange Houses has been largely helping Bangladeshi expatriates working in the UAE, UK, Qatar, and Oman to transfer their funds speedily and efficiently through online network. MTBLs total foreign remittance volume was Tk. 2,671.53 million in 2006.
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MTBL is exploring further avenues of remittance from other countries such as Saudi Arabia, Malaysia, USA and Italy in the near future.

3.6.1 Types of Foreign Remittance Facilities


The Foreign Remittance department of MTBL Dilkusha Branch is equipped with a number of foreign remittance facilities. Following are the types of foreign remittance facilities offered by MTBL Dilkusha Branch. Issuance of Foreign Demand Draft (F.D.D) Issuance of travelers Cheques (T.C) Issuance of foreign T.T (Telegraphic Transfer) Disbursement of the cash of incoming F.T.T. Collection of F.D.D.

3.6.2 Foreign Demand Draft


MTBL issues the Foreign Demand Draft for the charges for TOEFL, SAT, GMAT, registration fee, membership fee and also for the application or processing fee for the student who are interested to study abroad. SIBL opens Student Files to issue Foreign Demand Draft following the permission of Bangladesh Bank. MTBL Dilkusha Branch has more than 200 Student Files. Before issuance of FDD, MTBL asks the students to fill up the TM Form; which contains the following particulars----o Name of the student o Full address of the student
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o Amount of FDD in Foreign Currency o Purpose of Remittance o Address of the Institution to which the FDD will be favored o Country receiving payment o Passport no. of the student with date of issue o Signature of the student

The TM Form is sent to Bangladesh Bank with photocopies of the Passport of the student and the FDD issued.

Commission for issuance of FDD @ Tk.500. Commission for Cancellation of FDD @ Tk.500.

The foreign bank/exchange company on local bank usually issues foreign Demand Draft. It is an order to pay a certain sum to a certain person or as his instruction, issued by the bank on its overseas branch or on its correspondent bank. The demand draft is handed over to the purchaser who sends it to the beneficiary. The beneficiary obtains payment on presentation to the bank on which the draft is drawn. Encashment of FDD may take place in two ways1) Purchase, 2) Sending for collection. Purchase: The following criteria must be fulfilled:

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a) Firstly, the party applies for a Foreign Bill Purchase (FBP) to limit the facility, which is approved by the Head Office authority for a certain period. b) The local banks will entertain valued clients with this facility. c) The party will give an undertaking regarding adjustment of FBP liabilities which is offered to him in case of non-realization of proceeds (FDD). d) It is necessary that all relevant charge documents (D.P. Note, Personal Guarantee etc.) be collected from the party.

The following vouchers are passed after it is posted in the FBP register: Dr. - FBP (at the spot buying rate) Cr.-Income A/C Commission others Cr. - Income A/C Postage The FDD is sent to the American Express Bank, Dhaka for collection along with a R.L. It is drawn on a foreign bank in abroad otherwise it is sent to the respective bank on which the FDD is drawn after giving endorsement on the backside of the FDD.

After realizing the proceeds, the following vouchers are passedDr. MTBL G/A Cr. FBP (liability adjusted) Cr. Income A/C (Exchange Gain)

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Sending for Collection It is posted in the Foreign Bills for Collection. The following functional activities are undertaken for a FBC: i. ii. It is posted in the FBC register. FBC No. Is assigned to the FDD. Then it is sent for collection to the branch of the bank on which it is drawn. If it is drawn on a foreign bank in abroad, it is sent to the AMEX. Dhaka along with a R.L. and liability voucher. a. Dr- FBR b. Cr- FBC iii. After receiving credit advice the following vouchers are passed.

Dr- MTBL, General A/C, ID (at spot buying T.T. clean rate) Cr- Party A/C Cr- Income A/C postage Cr- Income A/C Commission

And liability voucher is reversed. Dr- FBC Cr- FBR

3.6.3 Travelers Cheque (purchase):


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The payment to the customer is made instantly by debiting foreign bill purchased account. As soon as collecting bank abroad informs the bank about the realization of the travelers cheques, the bank branch debit that particular foreign bank account and adjust the foreign bill purchased account. The branch takes following steps chronologically as follows: The signature of the party is taken on the T.C. and verified with that of his passport signature to make sure that the particular T.C. belongs to the person. The T.C. is allotted with a FBP No. and entry is passed into the FBP register. After that on the back of the T.C. the endorsement payees A/C credited is written along with the FBP No.

And the following vouchers are passed: Dr. FBP A/C. @ T.C. buying) Cr. Income A/C commission (others) @ taka 0.25 per dollar) Cr. Income A/C Postage @ Tk 50/-) Cr. Partys A/C Then a schedule is prepared in four sets. First three copies are forwarded with the T.C. to the foreign bank and the fourth copy is kept in the FBP lodgment file along with a copy of T.C. When the branch gets the credit advice against the proceeds from the NOSTRO A/C with which the transaction took place, they adjust the FBP liability by passing the following vouchers:

Dr. MTBL General A/C H.O (ready buying rate)

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Cr. FBP (liability adjusted) Cr. Income A/C (Exchange gains). Procedure for TC (outward): For traveling purpose each person has a yearly foreign currency quota as follows: Particulars For outside SAARC countries For SAARC Countries By road By air In cash $300 $300 $700 In TC $2700 $300 $300 Total $3000 $600 $1000

The yearly quotas are mutually exclusive to each other. But for the F.C.A/C hold a special advantage is prevailing there and that is the person can get TC for any amount as much as his FC A/C balance permits.

First, the party will fill up the form (purchase agreement) and sign it. Again he will sign the T/M form. After that the banker will endorse the partys passport and ticket declaring the amount of foreign currency issued in cash and in the form of TC. Then the following vouchers are passed:

Dr. Cash or party A/C Cr. MTBL General A/C. (@ TC selling)


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Cr. Income A/C (Commission) (Here 1% of total Taka amount is realized for issuance of TC) Cr. Income A/C (Miscellaneous @Tk. 100/- per passport)

Then, entry is made in the TC issue register. Original copy of the purchase agreement, photocopy of the ticket and passport are kept with the T/M form and the purchase agreement copy along with the TC, passport and ticket are handed over to the party after getting his received signature in the TC issuing register. For TC sale the Accounting procedure is as follows a. Dr. CD A/C or cash Cr. FC Fund Purchase A/C (at actual rate) Cr. Income A/C (Commisson). b. Dr. FC Fund A/C (Notional rate) Cr. MTBL General A/C (H.O) For TC settlement authorized AMEX, N.Y., U.S.A. debits the branchs A/C along with purchase agreement.

3.7.0 DISSIMILARITIES BETWEEN THEORIES AND PRACTICES

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Theoretically there are three types of L/Cs-revocable, irrevocable and confirming L/C. But in the context of Bangladesh, banks are opening only irrevocable L/C in favor of exporter on the behalf of importers/buyers.

Banks are advising/ forwarding only L/C provided by the bank of importer, but not giving confirmation against the L/C. Hence it is true that there may be confirming bank involved in export import business theoretically, it is not seen in my bank where I have done my practical orientation.

There is no provision or laws against taking discrepancy charges in L/C. Practically this charge is well-accepted in banking word in fact it is one of the biggest sources of income for the banks.

In case of Loan against imported merchandise, on the arrival of goods and lodgment of import documents, importer may request the bank for clearance of goods from the port and keep them to bank godown. But in case of sanction of LIM no goods are kept in bank godown.

3.8.0 SWOT ANALYSIS OF MTBL


Strengths: MTBL has a group of giant clients who are extremely loyal and regular customer of MTBL. Every month this group earns a substantial amount for MTBL in course of their business transaction. This income can be called as fixed income of the firm.
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The employee-customer inter-relationship is very strong and this is why customers are reluctant to switch to other banks.

Employee to employee relationship is very friendly and cooperating thus making the total work environment a place of harmony.

The Board of Directors of MTBL is very well established and recognized around the country. Because of this its shareholders can rely on this bank thinking it is less risky one.

They have well equipped risk assessment team who has very strong forecasting ability which is why MTBL did not suffer from losses like other banks during the world recession followed with the downfall of garments industry of Bangladesh.

MTBL recently went through collaboration with DBBL for accessing its ATM facility. As we all know that DBBL has the widest network of ATM in our country. Thus a MTBL customer can use DBBLs ATM booth for depositing or withdrawing money.

They have numerous attractive deposit schemes which attract a lot of new customers. They provide comparatively good remunerations and scope of promotions to all its employees who encourage and motivate its people to be loyal and productive towards the company. Also due to this reason they are reluctant to switch off to other firms.

Weaknesses: The inconsistency if the IT infrastructure at MTBL hampers the smooth flow of banking service to the customers. Their focus towards growth is insufficient. They are not aggressive enough to compete with other such banks.

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Theoretically, any person can purchase pay order, demand draft and telex transfer by depositing money and commission. However, the person who wants to purchase these should have account in the bank branch. These will discourage customers to transact with bank.

There is a rule to deposit at least an amount of money in case of opening an account. But it is not strictly followed. Sometimes more money is asked from a new customer who discourages him to open an account in the bank. I think the amount should be fixed at a level that is not altered from customer to customer.

When a client try to open an A/C he must have to need an introducer, sometimes it may create a problem for the client as he might not have an introducer.

In case of depreciation only the straight-line is to be followed, but there are other methods of charging depreciation, such as-double decline, sum year-digit methods etc are used as method of depreciation. These are not followed by MTBL except the straight line method.

Interest rates for different types of loan and advances vary to different customers. A prospective customer is allowed to take credit facilities at a lower interest rate. Again, the interest is charged at a higher rate to a customer who is not so prospective.

Opportunities: The economy of Bangladesh has again started accelerating gradually. There is good prospect of foreign investment in the country which MTBL must attempt to get hold of. Also our money market is expanding.

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New export products are at demand like pharmaceuticals products, leather and jute products. Therefore there is a good probability that if MTBL can get hold of these clients, it will earn for them a good amount of foreign currency.

More new branches can be introduced in areas which are in the process of development like Mongla port and the South Western region.

Government has relaxed a little bit for commercial banks about giving entrepreneurship loans and consumer loans to upgrade the economy which in other words is a good income source for any bank.

Threats: Their source of earnings is extremely concentrated to a certain group of clients which I have placed as one of their Strengths too. This group contains a few garments and jute exporters. It is definitely like one of their fixed incomes but if any sorts of downswing in these companies occur, MTBL might be severely affected. MTBL as I also mentioned earlier, lags a little behind in terms of financial services and embracing of new technologies whereas other multinational banks and private banks upgrades their facilities endlessly to provide their customers with extensive services. There might be a frequent switch-offs of employees due to lack of human resource policies at MTBL as it does not have a well equipped human resource team. Other financial institutions promptness in embracing newer technologies might make MTBL seem technologically challenged as they are very reluctant in entering anything new. All the weaknesses listed above together can make the firms goodwill value fall compared to other commercial banks and thus lowering the price of their share in the market.

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3.9.0 EVENTS AT MTBL


While I worked in MTBL for 3 months, I learnt that financial firms do not only deal with money all the time. Bank officials have to do a lot more than just receiving and lending money. They always strive to provide the society beyond their financial services. At the same time, by performing these activities they earn profit as well as goodwill. Also it acts as one of their promotional activities since these are highlighted in all kinds of newspapers, magazines, news programs and last but not the least in their official website. So below I have listed some events of MTBL which have gained grand importance for their institution. Here, by Events I have mainly referred to special agreements that the bank has made, the opening of new branches, CSR (Corporate Social Responsibilities) activities and likewise. However I could not be fortunate enough to attend all these events except for only one which was MTBLs 10 th Annual Anniversary. The events are listed by their dates starting with the earliest to the latest.

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1. Mutual Trust Bank Limited (MTB) opened its seventh brokerage house at Dhanmondi on Monday, October 19, 2009. MTB Director Yasmeen Haque inaugurated the brokerage house. Also present at the inaugural ceremony was MTB Managing Director and Chief Executive Officer (CEO) Anis A Khan along with capital market investors, business personalities, dignitaries and senior officials of the bank. The objective of this as stated in the Financial Express newspaper is, the MTB is bringing its brokerage house services nearer to the doorsteps of capital market investors across the country and ensuring superior services so that they find it easy to trade in capital market instruments through the bank. The new brokerage house has been equipped with the latest technology and all other convenient facilities will be delivered through quality customer services, the MTB managing director said. He affirmed that MTB would play a key role in the country's capital market and contribute to creating a healthy investment climate for growth of the country's economy.

2. On Saturday October 24, 2009 MTBL had its 10th Annual Anniversary. One this day in 1999, the bank started its journey at the initiative of leading and highly reputable business personalities of the country. MTB has drawn up an elaborate programme including various corporate social responsibilities (CSR) events, to be held over one year starting from the first day of their 10 th year Saturday, ending on October 23, 2010 to mark the 10th founding anniversary of the bank. Their CSR events started through voluntary blood donation programmes in Dhaka and Chittagong on this day. MTB officials from different branches and offices across the country took part in the programme. Blood collected from the programme would be dedicated to save lives of severely ill patients. It was a very extraordinary idea of MTBL to celebrate its anniversary in the dedication of the society. This topic got so much response that it came in the front page of many newspapers
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like Financial Express and The Daily Ittefaq. I was present in the Dilkusha Foreign Exchange Branch and the official said that they are proud to be a part of this organization. 3. Mutual Trust Bank Ltd got the license for offshore banking as on Thursday December 4, 2009 and will take part in financing Biman Bangladesh Airlines for purchasing aircraft under a syndicated loan arrangement, the managing director of the bank said. "We hope to disburse the loan within the shortest possible time. Now we will start working on primary tasks to take part in the syndicated loan arrangement led by Eastern Bank Ltd," said Anis A Khan. "We will complete the initial preparations, including fixing the ratio of the loan amount and the interest rate within this month," he added. He was speaking at a scholarship giving ceremony styled 'Inspiring the Nation's Future Leaders' jointly organised by Mutual Trust Bank and Dhaka University Alumni Association (DUAA) on the university campus. "Of the total amount of $117 million to finance Biman, we are planning to increase our loan up to $25 million from our offshore banking unit," Khan said, adding that the bank is likely to give the loan at 5-6 percent interest rate. He also said the bank is set to finance local export-based industries under offshore banking and the companies will have to repay in foreign currencies. The bank started the scholarship programme in 2008 and awarded scholarships to 34 students yesterday from different departments of the university, who got Tk 2,500 each. Dr Atiur Rahman, Bangladesh Bank governor, Samson H Chowdhury, chairman of Mutual Trust Bank, and Syed Manzur Elahi, chairman of DUAA, were also present at the ceremony. 4. The weeklong Mutual Trust Bank-The Daily Star Debate Competition was held on Monday December 7, 2009 in Dhaka. Important officials like the Deputy Commissioner (DC) Farid Uddin Ahmad, Resident Editor of the Prothom Alo poet Abul Momen and Mutual Trust Bank Senior Vice President Md Nazrul Islam were present on the occasion. Drishty, a cultural organization, had organized the competition featuring 17th Inter-School Debate,
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2nd Children Debate and 6th Inter-University Debate in association with Equity Properties Management Limited. ATN Bangla and Radio Foorti were the media partners of the competition. The participating schools at the school level debate were Chittagong Government High School, Dr Khastagir Govt Girls' High School, Nasirabad Govt High School, Ispahani Public School and College, BM School and College, BAF Shaheen College, Chittagong Collegiate School, Government Muslim High School, St Placid's High School, Kapashgola City Corporation Girls' High School, Aparanacharan City Corporation Girls' High School, Imaratunnesa City Corporation Girls' High school, Krishnachura Girls' High School, City Government Girls' High School, Agrabad Govt Girls' High School and Silver Bells Girls' High School. Debaters from eleven institutions, including Chittagong University (CU), Dhaka University (DU), Jahangirnagar University (JU), Rajshahi University (RU), North South University (NSU), Premier University, Chittagong University of Science and Technology (CUET), International Islamic University of Chittagong (IIUC), University of Science and Technology, Chittagong (USTC) and Chittagong Maa O Shishu Hospital Medical College participated at the inter-varsity debate competition.

5. Mutual Trust Bank Ltd. (MTB) participated in the 2 day long SME Financing Fair on Tuesday and Wednesday December 8th and 9th 2009, held at a local hotel in Dhaka. The Fair was jointly organized by DCCI and SME Foundation. MTB became one of the major sponsors of the event. MTB is committed to contributing to the growth of the SME sector, and is a significant player in the economic development of our nation. The MTB stalls at the Fair provided service and product information, customer briefing and instant loan processing for Small and Medium entrepreneurs. MTB has an array of SME products with MTB Krishi, MTB Byabsha and MTB Bhagyabati being appreciated by the SME, Women and agricultural entrepreneurs. MTB also signed two agreements for project financing with two small
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entrepreneurs Monowara Begum for her 'tulshi' tea project and Farmer Moyaz Uddin for producing bio-gas for his agricultural farm, during the inauguration ceremony of the fair in the presence of the Honorable Prime Minister.

6. On day December 22, 2009 Mutual Trust Bank Ltd (MTB) opened its 44th Branch at Alankar Mor in Chittagong, the commercial capital of Bangladesh. MTB Brokerage's Agrabad Branch was also relocated in new and expanded premises at Akhtaruzzaman Centre 21-22, Agrabad C/A, Chittagong. Both the branches were formally inaugurated by MTB Founding Chairman Syed Manzur Elahi on that day at simple ceremonies held at the respective branch premises. MTB Managing Director & CEO Anis A. Khan, Sufi Mizanur Rahman, Chairman of PHP Group, M A Malek, editor of Dainik Azadi, Taslim Uddin Chowdhury, editor of Dainik Purbakon were also present. A large number of customers, elite, journalists and dignitaries attended the function. MTB Founding Chairman Syed Manzur Elahi, in his address, said that MTB valued its customers most highly, and was making continuous endeavors to provide them with modern technology driven products and services. He also said that MTB was improving its capabilities to turn into an institution with professionalism in a true sense and to this direction MTB board would provide all sorts of support to the management team. MTB Managing Director & CEO Anis A. Khan, in his speech, said that Mutual Trust Bank would like to spread banking facilities and brokerage services to every nook and corner of the country to serve the common people. He informed that MTB would open branches in all important business areas and agricultural centers throughout the country, which would pave the way for the country's balanced economic development between urban and rural areas. 7. MTBL has recently signed a participation agreement with Bangladesh Bank (BB) on refinancing of sustainable energy projects. Samson H. Chowdhury, MTB Chairman, launched the new MTB product at a simple ceremony held on December 29, 2009 at the Corporate Head Office of the
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bank by handing over the first loan sanction letter favouring Resource Development Foundation (RDF) to its Executive Director Golam Mostafa. BB Governor Dr Atiur Rahman and Deputy Governor Md Nazrul Huda and MTBL Deputy Managing Director Ahsan-uz Zaman were present at the signing ceremony. Mutual Trust Bank Limited (MTB) launched MTB Green Energy Loan, a new loan product for sustainable energy generation. MTB Founding Chairman Syed Manzur Elahi along with other Directors was also present on the occasion. Anis A. Khan, Managing Director & CEO of the bank and Mohammad Iqbal, Head of SME Banking were also present. Under this loan scheme, MTB will be granting loans to the customers wishing to set up Solar PV (photovoltaic) System for household and irrigation, Solar PV Assembly Plant, Bio-gas Plant, Effluent Treatment Plant (ETP) or any other feasible renewable energy generation plants. The product will supplement the government's efforts to meet the power and energy crisis of the country and protect the environment from the adverse effects of the climate change.

8. On the 1st of January 2010, as a week long event Mutual Trust Bank Limited (MTB) has started distributing blankets to the severely cold affected less advantaged people. On the first day they covered the area of Sapahar in the district of Naogaon. Md. Hashem Chowdhury and Md. Ahsanuz Zaman, MTB Deputy Managing Directors, distributed blankets to the people at a gathering held at the Shapahar Bidda Niketon ground of Shapahar, Naogaon. MTB DMDs, in their speech, said that MTB had always been by the side of the common and less advantaged people of the society in catastrophes of flood, cyclone, cold waves or any other national crisis and blanket distribution is a part of these programs. They also said that MTB launched loan products for the poor farmers and SME customers and had plans to introduce more banking products and CSR programs for the poor segment of the society and through these activities MTB would like to be the bank of choice of the people of the country.

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9. MTB Founding Chairman Syed Manzur Elahi launched the calendar for the year 2010 at a simple ceremony held on January 3, 2010 at a local hotel in Dhaka. MTB Managing Director & CEO Anis A. Khan, Managing Director of Expressions Ltd. Ramendu Majumdar were also present. Senior Officials of Mutual Trust Bank, Journalists of print and electronic media, city elite attended the function. Syed Manzur Elahi, in his address, said that MTB was keenly interested in contributing to the social development of the country and as part of this program MTB selected climate change as the subject matter of this years calendar. Anis A. Khan, in his speech, said that MTB would play a key role in positive change of the society through various programs in the times ahead. Under the deal, MTBL will get refinancing facility from the BB for onward lending to its customers for setting up solar energy projects, bio-gas and effluent treatment plants.

10. During the beginning of this year although the date is not specified, Mr. A. E. A. Muhaimen Managing Director and CEO of Brac Bank and Mr. Anis A Khan, MD & CEO of Mutual trust Bank are seen on an MoU signing. Mutual Trust Bank, through this agreement, joined ELDORADO-an automated Remittance and Payment system led by Brac Bank. MTB already was a member of SWIFT which accelerated their foreign trade. By joining ELDORADO, the officials said their objective is to increase remittance service exclusively as the numbers of expatriates are at a peak.

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CHAPTER 04
RISK ASSESSMENT OF MTBL

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4.1 Introduction
With the emergence of time, everything has changed into a new sophisticated version and along with that made our lives more complex and difficult. Every day our market is growing, technology is alleviating and the products and services we use are also enriching. No wonder there is a mushroom of private banks in our country at this moment. Before going through this internship program, I used to have a rear feeling thatexcept a few, all these banks are surely facing great difficulties to survive in such a poor economy like ours. However my idea really changed after having practical experience of 3 months first time in a bank. I found it really challenging-the way these banks are flourishing in spite of the fact that there are so many competitors and moreover a struggling economy. Therefore I could not resist my curiosity to find out how they managed such a prominent existence carrying so many risks in shoulder. The last chapter that is chapter 3 is the project part of my internship report and as you may already have guessed, it deals with the risk analysis of MTBL. In this section, as the title already implies, I have showcased the most widely used financial indicators to measure both the quality and quantity of MTBLs performance. It centers on the most important dimensions of performance especially focusing on the banks risk associated with it. (All the analysis has been done on the basis of my accessibility to company data).

4.2 Background of Banking in Bangladesh


The history of banking sector of Bangladesh is not new rather it started from the very moment of independence. The banking system at independence consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks. Virtually all banking services were concentrated in urban areas. The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank
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and renamed it the Bangladesh Bank. The central bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the official foreign exchange reserves. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. (News Bangladesh, The Economy of Bangladesh: The Banking System, 2008, Para 1)

4.3 Current Status of Banking Sector of Bangladesh


As we all must have seen that the banking system of our country has grown very prominent. They are striving to reach people at every corner of the country and is available almost anywhere these days. Remarkably the private banks are one of the highest growth sectors of the country at this moment. The number of banks in all now stands at 49 in Bangladesh. Out of the 49 banks, four are Nationalized Commercial Banks (NCBs), 28 local private commercial banks, 12 foreign banks and the rest five are Development Financial Institutions (DFIs). However, regardless of all these facts, risks associated with this banking sector are many. Bangladesh being a developing country has innumerous risks, especially financial risks are inescapable. Although banks earn high yields, and trade finance in the emerging markets like ours offers some of the highest returns available in conventional banking, there are many drawbacks too. Balancing risk and reward is critical to maintaining profits and reputations in an emerging market like in Bangladesh.

4.4 Commercial Banks- The Risk Takers


Commercial banks are in the category of one of the riskiest businesses. In the process of providing financial services, they assume various kinds of financial risks. Over the last decade our understanding of
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the place of commercial banks within the financial sector has improved substantially. We, the general public seek the services of these financial institutions because of their ability to provide market knowledge, transaction efficiency and funding capability. In performing these roles they generally act as a principal in the transaction. And to do this they use their own balance sheet that is their assets and other funds to facilitate the transaction and most importantly to absorb risk associated with it. However there are also risky activities which do not have direct implication to the banks balance sheet. These activities include agency and advisory activities. For example: trust and investment management; private and public placement or facilitating contracts; underwriting; the packaging, securitizing, distributing and servicing of loans in the relevant areas. Thus we understand from here that a good amount of risk lies out of the banks balance sheet. Nevertheless, the overwhelming majority of risks facing the banking firm are in their on-balancesheet businesses.

4.5 Why Banks Endeavor Risks?


Why do banks endeavor risks? Because it is about peoples money and since you are dealing with other peoples (stakeholders) money, government is always on the scene to intervene. This is how all the risks are originated. Every single bit of information has to be exposed in public and thus you are reliable of all mistakes. Therefore in simpler words banks are always in a risk of making mistakes of peoples money for which they will be held reliable. After all, financial institutions are simply businesses, organized to maximize the value of the shareholders wealth invested in the firm at an acceptable level of risk. The objectives of maximum or at least satisfactory profitability with a level of risk acceptable to the institutions owners, is not easy to achieve, as recent institutions failure around the globe suggest. Banking is a risk business; one mistake can wipe out a years profits or more. Why are financial institutions under such heavy scrutiny today? As already mentioned above, the key reason is that banks and other financial institutions rely heavily upon the open market to raise the funds
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they need by selling stocks, bonds and likewise. Entry into the open market to raise money means that a financial firms financial statements will be gone over with a fine tooth comb by stock and bond market investors, credit rating agencies, regulators, and scores of other people and institutions. (Rose & Hudgins, 2009-2010, pp. 163-164)

4.6 Extent of Risks Being Absorbed


Not all sorts of risks banks have to absorb. In a developing country like Bangladesh there are uncountable types of risk factors. However, these commercial banks only need to worry about the risks contained in the banks principal activities that is-those involving its own balance sheet and its basic business of lending and borrowing, are not all borne by the bank itself. In many instances the institution will eliminate or mitigate the financial risk associated with a transaction by proper business practices or in other words it will shift the risk to other parties through a combination of pricing and product design. Thus they only take risks at firm level and solve them as efficiently as possible. However the extent of risk can be broadly divided in two categories which are Systematic Risk and Unsystematic Risk. Systematic Risk: This risk is also called Market Related Risk or Non-diversifiable Risk. These type of risks cannot be eliminated no matter how much perfect a financial firm or its management is. However a firm can be advantageous if it takes precautious measures, the extent of loss will be less compared to other firms. Unsystematic Risk: This risk is also called Firm-specific or Company-unique Risk or Diversifiable Risk. These types of risks can be reduced or eliminated altogether if the firm has a good posture at all aspects.

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For each of the types of risk listed below, is mentioned whether it is a systematic risk or an unsystematic risk.

4.7 Types of Risks Associated with Commercial Banks


What do we mean by the word perform when it comes to financial firms? In this case performance refers to how adequately a financial firm meets the needs of its stockholders (owners), employees, depositors and creditors, and other borrowing customers. At the same time financial firms must find a way to keep government regulators satisfied that their operating policies, loans and investments are sound, protecting the public interest. Therefore a financial firm is fully entitled to all these responsibilities thus involving a lot of risks. Risk to a manager of a bank or a financial institution means the perceived uncertainty associated with a particular event. For example, will the customer renew his or her loan? Will deposits and other sources of funds grow next month? Will the financial firms stock price rise and its earnings increase? Are interest rates going to rise or fall next week? Each of these forms of risk can threaten a financial firms day-to-day performance and its solvency and long run survival. The types of risks are: A. Credit risk B. Liquidity risk C. Market risk D. Operational (Transactional) risk E. Legal and Compliance Risk F. Reputation risk G. Strategic risk
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H. Capital risk I. Other risk

To measure the extent of these risks I have used several ratios which are illustrated below with values and graphs (where applicable). Also an excel spreadsheet is provided for detailed computations of the ratios. The spreadsheet also contains the financial statements of MTBL of the 3 years from 2006 to 2008, on which I have done the analysis.

A. Credit Risk
The probability that some of a financial firms assets, especially its loans will decline in value and perhaps become worthless is known as credit risk. In simple words It is a risk that a borrower will not pay a loan as called for in the original loan agreement, and may eventually default on the obligation. Credit risk is one of the primary risks in bank lending, in addition to Interest Rate Risk.(Answers.com, Banking Dictionary, 2010). Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit- either the principal or interest or both. Most financial firms (lenders) employ their own models (credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies and rates. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through the setting of credit limits. Some products also require security, most commonly in the form of property.

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Compared to other banks, MTBL does not have too much a record of Default loans, which implies they have a well equipped management team and good handling power on loans. Further statistical detail is given in the later part. The following are four of the most widely used indicators of credit risk and I have used them to demonstrate a clear view of the Credit Risk of MTBL. The ratio of nonperforming assets to total loans and leases The ratio of net charge-offs of loans to total loans and leases The ratio of the annual provision for loans losses to total loans and leases or to equity capital The ratio of allowance for loan losses to total loans and leases or to equity capital The ratio of nonperforming assets to equity capital The ratio of total loans to total deposits

Nonperforming assets are income generating assets, including loans that are past due for 90 days or more. In other words they can be called doubtful loans in the sense that they are not written off and there is still hope of getting it back. Charge offs, on the other hand are loans that have been declared worthless and written off the lenders books which we mostly know as bad loans or loan losses. If some of these loans ultimately generate income, the amounts recovered are deducted from gross charge-offs to yield net charge-offs. As these ratios rise, exposure to credit risk grows, and failure of a lending institution may be just around the corner. The final two credit risk indicator ratios reveal the extent to which a lender is preparing for loan losses by building up its loan-loss reserves (the allowance for loan losses) through annual charges against current income (the provision for loan losses). The last ratio of total loans to total deposits is a very popular and long standing credit risk measure. It is an alarming situation if this ratio grows because loans are usually among the riskiest of all assets for depository institutions and therefore deposits must be carefully protected. A rise in bad loans or declining market values of otherwise good loans relative to the amount of deposits creates greater depositor risk.

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0.12 0.1 0.08 Allowance for loan losses 0.06 0.04 0.02 0 2006 2007 2008 Annual Provision Net charge offs Non-performing assets

Exhibit: 4.1: Credit Risk I

Total loans to total deposits


1.4 1.2 1 0.8 0.6 0.4 0.2 0 2006 2007 2008 Total loans to total deposits

Exhibit: 4.2: Credit Risk II

Explanation:

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Non performing assets are doubtful loans and net charge-offs are bad loans. These factors increased by a certain amount every 3 years based on both total loans and leases and also to the total equity. As we can see in Exhibit: 4.1: Credit Risk I, these two items are negligible in 2006 and rose a little bit in 2007. In 2008, net charge-offs rose significantly while non-performing assets rose at a low constant rate. Thus credit risk of MTBL has risen in the following years. Along with that the bank has also prepared itself adequately. It has increased its annual provision for doubtful loans and allowance for loan losses in all the three years. The last indicator which is total loans to total deposits (Exhibit: 4.2: Credit Risk II) has also risen consecutively in the following year which is also something to be aware of. Loans are a banks most profitable assets at the same time it is the riskiest one; thus if majority of the loans turn out to be bad loans, MTBL will loose all its hold. However this ratio also indicates banks profitability since its assets (loans) is more than its liabilities (customers deposits), provided that all the loans are matured and achieved successfully.

B. Liquidity Risk
Banks having insufficient cash to meet customers cash withdrawals, loan demands and other cash needs is referred as Liquidity risk. Faced with liquidity risk a financial institution may be forced to borrow emergency funds at excessive cost to cover its immediate cash needs, reducing its earnings. However very few financial firms ever actually run out of cash because of the ease with which liquid funds can be borrowed from other institutions. I have used four ratios to measure the exposure of MTBLs Liquidity risk. Cash and Cash Equivalents to Total Assets Purchased funds to Total Assets Balance held at other Banks and Financial Institutions to Total Assets Cash Assets and Government securities to Total Assets
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Cash and Cash Equivalents include ready cash and quickest accessible assets like Cash in hand (including foreign currency), cash with Bangladesh Bank and its Agent Banks. Also balances in other financial institutions inside and outside Bangladesh are considered to be comparatively liquid assets as they can be withdrawn if necessary yet banks do not usually do this. Purchased funds comprise of Eurodollars or other currencies bought, government securities, large CDs, Repurchase Agreements and Commercial Paper. (Rose & Hudgins, 2009-2010, p. 178). Lastly it includes Money at call or short notice. It includes funds lent to discount houses, money brokers, the stock exchange, bullion brokers, corporate customers, and increasingly to other banks. At call money is repayable on demand whereas short notice money implies that notice of repayment of up to 14 days will be given. After cash, money at call and short notice are the banks' most liquid assets. They are usually interest-earning secured loans but their importance lies in providing the banks with an opportunity to use their surplus funds and to adjust their cash and liquidity requirements. All of the above items are done as a ratio of total assets of the bank. The more the ratio is, more liquid is the bank. However too much liquidity is also not preferable as it means there is a lot of idle cash which could be invested elsewhere and earn a substantial amount of interest.

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0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2006 2007 2008 Cash&equivalents Purchased funds Balance at other banks Cash Assets&govt.securities

Exhibit: 4.3: Liquidity Risk I

Explanation: Cash and cash equivalents fell a little in every year but it did not increase the liquidity risk of MTBL much as the other liquid assets had offset the impact. Purchased funds are highest as we see in the graph in 2006 and again in 2008. It is comparatively very low in 2007 because if you just go through the financial statement of MTBL or the ratios I have calculated, you will find that it faced a big downfall in its profitability in this year and thus it sold out a lot of their investments to meet up the target.

C. Market Risk
In market-oriented economies which we have in Bangladesh, the market values of assets, liabilities and net worth of financial service providers are constantly in a state of flux due to uncertainties concerning market
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rates or prices. Market risk is mainly determined by two other risks which are Price Risk and Interest Rate Risk. Price risk The risk that the value of a security or portfolio of securities will decline in the future is known to be as Price risk. Especially sensitive to these market value movements are bond portfolios and stockholders equity (net worth), which can dive suddenly as market prices move against a financial firm. Here the important indicators are: Book value of assets to market value of those same assets Book value of Equity capital to its market value Book value of Bonds to its market value

Explanation: This ratio could not be derived due to lack of accessibility of information. All the assets are presented at the market value of the respective years. Neither the book value is mentioned anywhere nor there is enough data to calculate it ourselves. Their depreciation method which is straight line and the rate at which they depreciate each different category of assets are given in note # 2.6, however I could not find out when exactly they bought which asset and thus did not know how much depreciation to add back to find out the book value. It is because there is no list provided of how many new assets are bought at each year and how much they had previously and for what duration. What I could do is make a rough estimation of the book value based on the market value, but since there is a concept of time value of money, this estimation process would be very inaccurate. Nevertheless we all understand that Price risk factor affects all firms of all categories no matter how precautious they are. It is because Price is a Market Risk factor which falls under the category of Unsystematic risk and thus it is un diversifiable. Moreover with an increasing inflation rates (consumer

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price) like 7, 7.2 and 9.1 in 2006, 2007 and 2008 respectively (Index Mundi, Bangladesh-Inflation Rate, 2008), we understand that the Price risk did exist in the firm. Interest Rate Risk The impact of changing interest rates on a financial institutions margin of profit is called Interest rate risk. Rising interest rates can greatly diminish the profit of a financial institution if the structure of the firms assets and liabilities is such that interest expense on borrowed money increases more rapidly than interest revenues on loans and security investments. The most important measures are as follows. The ratio of interest-sensitive assets to interest sensitive liabilities The ratio of uninsured deposits to total deposits

When Interest sensitive assets exceed interest sensitive liabilities in a particular maturity range, a financial firm is vulnerable to losses from falling interest rates. In contrast, when rate-sensitive liabilities exceed ratesensitive assets, losses are likely to be incurred if market interest rate rises. In a depository institution like banks, where uninsured deposits are usually government and corporate deposits that exceed the amount covered by insurance and are usually so highly sensitive to changing interest rates that they will be withdrawn if yields offered by competitors rise even slightly higher. As I have gone through the notes of the financial statements, I have not found any such uninsured deposits or like wise. Thus this ratio can be state as 0 which means there is no risk of uninsured deposits at all.

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Interest sensitive assets to interest sensitive liabilities


1.04 1.03 1.02 1.01 1 2006 2007 2008 Interest sensitive assets to interest sensitive liabilities

Exhibit: 4.4: Market Risk I Explanation: As I have calculated of MTBL, the ratio went down with quite an extent from 2006 to 2007 and again went up in 2008. As we can see above (Exhibit: 4.4: Market Risk I). It implies that in the year 2006, interest sensitive assets were many compared to interest sensitive liabilities. In 2007 the interest sensitive assets did not raise much but the interest sensitive liabilities rose significantly thus making the overall ratio very low. In 2008 the ratio again rose but did not exceed the limit of 2006. Therefore it can be said that although the ratio fluctuated vigorously over the three years, MTBL reduced its exposure to interest rate risk. With more volatile market interest rates in recent years, bankers have developed several new ways to defend their earnings margins against interest rate changes, including interest rate swaps, options, and financial future contracts. MTBL also have arranged these procedures to prevent losses from interest rate fluctuation.

D. Operational (Transactional) Risk

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Operational risk refers to uncertainty regarding a financial firms earnings due to failure in computer systems, errors, misconduct by employees, floods, strikes and similar events. The broad group of actions in this risk definition often decreases earnings due to unexpected operating expenses. Especially in Bangladesh it is the most common phenomenon. All the banks both government and private use the computerized system along with heavy paper works too. As from my own experience in MTBL I have seen the computer systems involve a patchwork of old programs, requiring employee intervention to reconcile and create reports. Also the software system which MTBL uses named to be as Flora Systems fails quite often mostly during day time putting a halt in all sorts of transactions. All these together make MTBLs operational risk high thus making its earning low. Although I have seen this physically, I could not put the extent of loss into numbers as it needs very thorough and detailed information of everyday transaction which I did not have access to.

E. Legal and Compliance Risk


Legal or compliance risk creates variability in earnings resulting from actions taken by the legal system. Unenforceable contracts, lawsuits or adverse judgments reduce a financial firms earnings by increasing its expenses. For example, if a depository institution fails to hold adequate capital; costly corrective actions must be taken to avoid its closure. Fortunately MTBL neither had this sort of records during the time I worked there, nor in its history of past ten years.

F. Reputation Risk

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Reputation risk is the uncertainty associated with public opinion. Negative publicity, whether true or not, can affect a firms earnings by dissuading customers from using the services of the institution, just as positive publicity may serve to promote a firms products and services. I would say MTBL has a moderate amount of risk in this factor as it is neither too reputed nor too badly reputed. As I believe the true nature of a financial firms business requires maintaining the confidence of its customers and creditors, MTBL lacks a little bit at least in the foreign exchange branch in which I have worked; although I am unaware of the other branches. They have a few customers who are their only loyal and regular clients. New customers are hardly seen at MTBL which I think is a big pull back for them. Other commercial banks like Dutch Bangla Bank, Prime Bank, Brac Bank and a few others have a good extent of reputation to attract new chunks of customers, which brings them a whole lot of deposits. According to my limited point of view I think this factor is immensely pulling back MTBL growth potentiality.

G.Strategic Risk
Variations in earnings due to adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes are parts of what is called Strategic risk. This risk category can be characterized as the human element in making bad long-range management decisions that reflect poor timing, lack of foresight, lack of persistence, and lack of determination to be successful.(Rose & Hudgins, 2009-2010, p. 180) With my limited knowledge and experience I could not find any wrong decisions made by the officials rather I would say they have a very strong foresight of specific industry trends. No to wonder as you will find out later in this report that they could very well figure out the downfall of garments industry and accordingly they inclined more towards jute. Eventually they did not face any loss due to recession and other international factors which most of the other banks are still suffering.
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H. Capital Risk
The impact of all the risks stated above can affect a financial firms long run survival, often referred to as its capital risk. Actually capital risk is all those risks which drag a firm to the limit of insolvency or ultimate failure. For example, if a bank takes on excessive amount of bad loans or if a large portion of its security portfolio declines in market value, generating serious capital losses when sold, then its equity capital account, which is designed to absorb such losses, may be overwhelmed. If investors and depositors become aware of the problem and begin to withdraw their funds, regulators may have no choice but to declare the institution insolvent and close its doors. Measuring the capital risk is far more extensive job to be done by me but what I did is I have used four ratios which will give not the exact but at least an approximation of the extent of capital risk involved. The ratio of stock price per share to annual earnings per share. The ratio of equity capital (net worth) to total assets. The ratio of purchased funds to total liabilities. The ratio of equity capital to risk assets.

If the ratio of stock price per share to annual earnings per share falls it indicates that investors have lost belief and thinks that the firm is undercapitalized relative to the risks it has taken on. This is when investors sell the shares immediately keeping in mind the risk involved and eventually the equity stops growing. A decline in the second ratio which is equity capital (net worth) to total assets indicates that the bank do not have enough assets for example loans and investments to earn a good return for its shareholders. The ratio of purchased funds to total liabilities. Purchased funds usually include uninsured deposits and borrowings in the money market from bank and non-bank corporations and from governmental units that fall due within one year.
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The last ratio of Equity capital to risk assets reflects how well the current level of a financial institutions capital covers potential losses from those assets most likely to decline in value. Risk assets mainly consist of loans and securities and exclude cash, plant and equipment, and miscellaneous assets. Some authorities also exclude holdings of short-term government securities from risk assets because the market values of these securities tend to be stable and also there is always a ready resale market for them.

Stock price per share to EPS


25 20 15 10 5 0 2006 2007 2008 Stock price per share to EPS

Exhibit: 4.5: Capital Risk I Explanation: In Exhibit: 4.5 we see that the stock price per share to earnings per share stroke up highly in 2007 and remained almost constant also in 2008. While trying to figure out the reason I found that in 2006 the stock price was moderate neither too high nor too low but EPS in this year was very high. This factor boost up the stock price next year which is in 2007 but the EPS fell back and remained almost constant over the two year that is 2007 and 2008. Therefore we can say this particular capital risk factor is low for MTBL.

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Equity capital to Total Assets


0.076 0.074 0.072 0.07 0.068 0.066 0.064 0.062 0.06 0.058 2006 2007 2008

Equity capital to Total Assets

Exhibit: 4.6: Capital Risk II Explanation: This figure looks shocking and this is an alarming situation too since the firms equity is declining drastically. It implies that the firm has assets but they are not earning enough for its stockholders. The risk of MTBL can be sensed high for this scenario.

Purchased funds to Total Equity


0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2006 2007 2008

Purchased funds to Total Equity

Exhibit: 4.7: Capital Risk III Explanation:

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Equity capital to Risk Assets


12 11.5 11 10.5 10 9.5 9 2006 2007 2008 Equity capital to Risk Assets

Exhibit: 4.8: Capital Risk IV Explanation: Although the value fell in 2007 and did not increase much in 2008, we can see that MTBLs equity capital is sufficient to cover its risk assets if any mishaps take place in future. However they should still increase its equity capital little more to cover other risk factors. Risk level here can be stated as moderate over here.

I. Ratios to Measure Management Performance


Operating Efficiency Ratio: In a financial institution a greater efficiency in operations is desired to attain maximum profit. This usually means reducing operating expenses and increasing the firms employee productivity through the use of automated equipments and improved employee training.

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Employee Productivity Ratio: this measures the amount of net income per employee. The less it is means that a greater amount is spend for the employees.

Earnings spread: The spread measures the effectiveness of a financial firms intermediation function in borrowing and lending money and also the intensity of competition in the firms market area. Greater competition tends to squeeze the difference between average assets yields and average liability cost.

J. Other Risk Factors


In a country like Bangladesh risks are many as I have mentioned many times. Risks like Inflation risk, Currency or Exchange rate risk, Political risk and Crime risk can also greatly affect a firms profit adversely. Though they are among the external market forces, they have immense impact on any banks profitability. A few of the risks and their influence are listed below. Inflation Risk The possibility that the value of assets or income will decrease

as inflation shrinks the purchasing power of a currency. Inflation causes money to decrease in value at some rate, and does so whether the money is invested or not. Thus it erodes the actual value of a banks income. A rise in inflation negatively affects a banks asset returns, lending capacity and profitability. Several economists have found that countries with high inflation rates have inefficiently small banking sectors and equity markets. (Sandra, 2006, p. 4). Although it is not true in case of this country since Bangladesh has grown quite strong in the commercial banking sector. At present the inflation rate of Bangladesh is 8.9% according to the statistics given by Bangladesh Bank, which is quite high compared to other developing countries. Not only MTBL, every financial firm has got an exposure to this risk.
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Currency or Exchange Rate Risk- Currency risk is a form of risk that arises from the

change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. (Hedge- An investment made in order to reduce the risk of adverse price movements in a security, by taking an offsetting position in a related security, such as an option or a short sale). MTBL is most exposed to this risk as you already must have observed in the liquidity risk section that they invested the most in purchased funds which includes purchase of foreign currencies like US dollars and GBPs. Also from my personal experience I have seen that their major transactions are export and import oriented which again involves a lot of exchange rate risk. i. Transaction risk is the risk that exchange rates will change unfavorably over time. It can be hedged against using forward currency contracts ii. Translation risk is an accounting risk, proportional to the amount of assets held in foreign currencies. Changes in the exchange rate over time will render a report inaccurate, and so assets are usually balanced by borrowings in that currency.

Political Risk- Broadly, political risk refers to the complications businesses and governments may face as a result of what are commonly referred to as political decisionsor any political change that alters the expected outcome and value of a given economic action by changing the probability of achieving business objectives. There are both macro- and micro-level political risks.

i. Macro-level political risks have similar impacts across all foreign actors in a given location. While these are included in country risk analysis, it would be incorrect to equate macro-level
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political risk analysis with country risk as country risk only looks at national-level risks and also includes financial and economic risks. ii. Micro-level risks focus on sector, firm, or project specific risks. Crime Risk since Bangladesh has embraced automated banking system, financial crime

risk seemed to get a rise. It is associated with default, fraud, embezzlement, theft and illegal acts. Iindividuals and organized crime groups have historically targeted financial institutions to obtain account information and funds by exploiting vulnerabilities through a variety of fraudulent schemes. The value of customer information has been recognized by organized crime for many years with theft and or compromise of customer sensitive information increasing at an alarming rate. In these sorts of cases the financial firm may also be financially liable for losses incurred by a third party as a result of breaches of your data security which result in losses by other organizations. It also happens that failures in the systems and controls leads to criminally derived funds being transacted through your firm could result in criminal prosecution or regulatory sanctions on both the firm and individual employees including board members. Moreover it destroys the reputation of the firm. Financial Crime occurs from two sources. i. ii. External- this is done by crime groups Internal- it is done solely by employees or by a combination of both employees and the organized crime which is the most dangerous.

(All the results of the ratios have been rounded to 3 digits for the ease of understanding. The unmodified numbers are provided in the excel sheet of this report for reference)

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K. Key Profitability Ratios:


1. Return on Equity Capital (ROE): it is a measure of the rate of return flowing to shareholders. It approximates the net benefit that the stockholders have received from investing their capital in the financial firm that is by placing their funds at risk in the hope of earning a suitable profit. MTBLs ROE came to be as 0.251, 0.103, and 0.123 for the years 2006, 2007 and 2008 respectively.

0.3 0.25 0.2 0.15 0.1 0.05 0

Return on Equity (ROE)

Series 1

2006

2007

2008

Exhibit: 4.9: Return on Equity Explanation: the data and the graph both shows that Return on Equity in 2006 was quite high compared to the other two years. In 2007, we can see a big downfall of return and then again it rose a little bit in 2008. 2. Return on Assets (ROA): Return on Assets is primarily an indicator of managerial efficiency which indicates how capable management has been in converting assets into net earnings. MTBLs ROA for 2006, 2007 and 2008 are as follows: 0.018, 0.007 and 0.008 respectively.

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Return on Assets (ROA)


0.02 0.015 0.01 0.005 0 2006 2007 2008 Series 1

Exhibit: 4.10: Return on Assets Explanation: Here also we see a common trend that is ROA is high in 2006, then a drop in 2007 followed by a slight increase again in 2008. Decline in ROA implies poor performance of financial firms and in regard to that investors might drop out MTBL stock from their portfolio basket. 3. Break-down of ROA: I have broken down RAO into 3 important factors for better understanding the scenario. They are: Net Profit Margin- reflects effectiveness of expense management (cost control) and service pricing policies. Financial institutions can increase their earnings and the returns to their stockholders by successfully controlling their expenses and maximizing revenues. Asset Utilization- reflects portfolio management policies, especially the mix and yield on assets. By carefully allocating assets to the highest yielding loans and investments while avoiding excessive risks, management can raise the average yield on assets. Equity Multiplier- reflects leverage or financing policies or the sources chosen to fund the financial institution that is debt or equity. The measure shows how many dollars/taka of assets must be supported by each dollar/taka of equity (owners capital) and how much of the firms financial resources, therefore must rest on debt.

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18 16 14 12 Net Profit Margin 10 8 6 4 2 0 2006 2007 2008 Asset Utilization Equity Multiplier 13.641 15.742 15.692

Exhibit: 4.11: Break-down of ROA Explanation: The figure here is very unclear since all the three factors could not be portrayed. Although Net profit margin and Asset Utilization seem to be insignificant here but in reality they do have effect on overall RAO. In the following years net profit margin is declining which means MTBLs operating expenditures is increasing implying that operating efficiency is declining. Asset utilization fell in 2007 and again rose in 2008. Equity Multiplier has the highest value among all the components of ROA. Unlike all the other components it rose in 2007 and dropped a little in 2008. It implies MTBL assets

4. Debt Equity Ratio:

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Debt Equity Ratio


15 14.5 14 13.5 13 12.5 12 11.5 2006 2007 2008

Debt Equity Ratio

Exhibit: 4.12: Debt Equity Ratio Explanation:

5. Debt Ratio:

Debt Ratio
0.938 0.936 0.934 0.932 0.93 0.928 0.926 0.924 0.922 2006 2007 2008

Debt Ratio

Exhibit: 4.13: Debt Ratio

Explanation:

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6. Net Interest Margin:

Net Interest Margin


0.04 0.035 0.03 0.025 0.02 0.015 0.01 0.005 0 2006 2007 2008

Net Interest Margin

Exhibit: 4.14: Net Interest Margin Explanation: It shows that interest revenues in average earn quite good for MTBL every year even though it fluctuated over the years. In other words it can be said that their assets bring in good amount of interest revenues for the firm.

7. Net Non Interest Margin:

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0 -0.002 -0.004 -0.006

Net Non Interest Margin


2006 2007 2008

Net Non Interest -0.008 -0.01 -0.012

Exhibit: 4.15: Net Non-Interest Margin Explanation: All the values are negative as we can see. It means that revenues other than interest revenues are not at all sufficient to cover the non interest expenses of the firm. Sometimes it happens that some firms earn a lot as interest income but all gets spent out to cover the non interest expenditure and the profit can not be realized.

8. Net Operating Margin:

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Net Operating Margin


0.06 0.05 0.04 0.03 0.02 0.01 0 2006 2007 2008 Net Operating Margin

Exhibit: 4.16: Net Operating Margin Explanation: At an average we see that net operating margin is good for MTBL but the decline in value in 2007 means decline in operating efficiency. If operating expenditure can be lessened operating revenues would be maximized, ultimately rising the net operating margin. 9. Earnings per Share:

Earnings Per Share


0.6 0.5 0.4 0.3 0.2 0.1 0 2006 2007 2008 Earnings Per Share

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Exhibit: 4.17: Earnings per Share Explanation: Any downward trend in Earnings per Share (EPS) of any financial firm implies negative issues about that particular firm. EPS declining means overall performance of the firm over the year was not good enough thus could not provide its shareholders with a better return. This is when stockholders loose trust and sell out their stocks making the overall companys equity go down. MTBL is not giving as to what it used to give previously.

10. Interval Measure:

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Reference:
1. Rose, Peter S, & Hudgins, Sylvia C. (2009-2010). Bank Management & Financial Services. New York, NY: McGraw-Hill

2. Answers.com: Banking Dictionary. (2010). Retrieved November 24, 2009 from Website: http://www.answers.com/topic/credit-risk

3. Pianalto, Sandra. (2006, September 15). Inflation, Inflation Expectations and Monetary Policy. Retrieved January 10, 2010 from Federal Reserve Bank of Cleveland Website:
http://www.clevelandfed.org/research/Commentary/2006/0915.pdf

4. News Bangladesh, Economy of Bangladesh: The Banking System, ( 2008, Oct 25). Retrieved December 7,
2009 from News Bangladesh Website: http://www.bengaliwiki.com/page/The+Banking+System

5. Index Mundi, Bangladesh - Inflation rate (consumer prices) (%), (2008, January 1). Retrieved January 30, 2010 from Index Mundi website: http://www.indexmundi.com/g/g.aspx?c=bg&v=71

Bibliography:
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1. www.mutualtrustbank.com/ 2. Rose, Peter S, & Hudgins, Sylvia C. (2009-2010). Bank Management & Financial Services. New York, NY: McGraw-Hill 3. Keown, Arthur J, Martin, John D, Petty, J William & JR, David F. Scott. (2006-2007). Financial Management: Principles and Applications. New Jersey: Pearson Prentice Hall 4. www.thefinancialexpress-bd.com/ 5. http://www.bangladeshbank.org.bd/ 6. www.dsebd.org/

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