Professional Documents
Culture Documents
Law & Practice of Banking
Law & Practice of Banking
May 2009
1 Write short notes on the following:
I. Bank rate
The bank rate is the rate of interest at which BB re-discounts the first class bills of exchange from
commercial banks. Whenever BB wants to reduce credit, the bank rate is raised and whenever the
volume of bank credit is to be expanded the bank rate is lowered. This is because by change in the bank
rate. BB seeks to influence the cost of bank credit.
The efficacy of bank rate policy depends, to a greater extent, on its power to influence the market rates.
There is no organized money market in our country and thereby the market rates seldom respond to
bank rate changes. The absence of any kind of conventional relationship between the central bank and
other components of the money market further adds to the ineffectiveness of the bank rate policy.
II. Demated securities
Demate means Conversion of physical securities into electronic form-the move from physical certificates
to electronic book keeping. Actual stock certificates are slowly being removed and retired from
circulation in exchange for electronic recording. With the age of computers and the Depository Trust
Company, securities no longer need to be in certificate form. They can be registered and transferred
electronically.
Participants:
– Investors
– CDBL[central depository Bangladesh ltd.]
– The Depository Participants
– The Issuing Company
III. Riskweighted assets
Risk-weighted asset is a bank's assets weighted according to credit risk. Some assets, such as
debentures, are assigned a higher risk than others, such as cash or government securities/bonds. Since
different types of assets have different risk profiles, weighing assets based on the level of risk associated
with them primarily adjusts for assets that are less risky by allowing banks to "discount" lower-risk
assets.
This sort of asset calculation is used in determining the capital requirement or Capital
Adequacy Ratio (CAR) for a financial institution, and is regulated by the Local Central Banks or other
National financial regulators. The specifics of CAR calculation vary from country to country, but general
approaches tend to be similar for countries that apply the Basel Accords. In the most basic application,
government debt is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for
purposes of calculating the CAR.
IV. Treasury bill
Treasury Bills issued by the government as an important tool of raising public finance and up to 1994,
were of three types, although all of them were 90-day bills. Among these three types, bulk was
represented by ad-hoc treasury bills issued to meet the cash balance need of the government. A second
type was the 3-months treasury bills on tap introduced in August 1972 and their purpose was to mop up
the excess liquidity of banks. The third type was the 3-months treasury bills introduced for subscription
exclusively by the non-bank financial institutions, non-financial enterprises and the public.
Initially, a limit of Tk 250 million was set for the issue of such treasury bills. Later this limit was
withdrawn and Bangladesh Bank was empowered to issue any amount of treasury bills for the non-bank
public. Despite the withdrawal of the limit, the holdings of non-banking sectors remained small and
commercial banks comprised the main market for the treasury bills. These bills continued to be reissued
in every ninety days. In December 1994, however, treasury bills on tap and the treasury bills for non-
banks were abolished. The holdings of treasury bills by the deposit money banks generally did not
exceed the amount needed to meet the liquidity requirement. A substantial part of the treasury bills
issued, therefore, needed to be held by Bangladesh Bank. Of the total treasury bill holdings, the amount
of holdings by the deposit money banks was 57% at the end of 1973 and amidst fluctuation, they came
down to 27% at the end of June 1982. Later, the share started to rise and stood at 68% at the end of
1992. Thereafter, it fell sharply and came down to a lowest minimum of 4% at the end of June 1995.
That the Bangladesh Bank bills were allowed as approved securities for the statutory liquidity
requirement of the banks and these bills were of yields higher than the treasury bill rate, might have
induced the banks to reduce their holdings of treasury bills. This trend continued up to February 1997.
In March 1997, the auctioning of Bangladesh Bank bills was suspended and only the 90-day treasury bills
were sold through auction. Up to 25 October 1995, the treasury bills of ninety days maturity were sold
at pre-determined rate, usually fixed time to time by the government. Thereafter, these were sold
through auction at market determined rate of interest. Subsequently, on 7 February 1996, the
government introduced 30-days and 180-days treasury bills and on 16 March 1997, 1-year treasury bills
for auction. Up to August 1998, four categories of treasury bills viz, 30-day, 90-day, 180-day and 1-year
bills were sold regularly through weekly auction basis. From 6 September 1998, these were replaced by
newly introduced 28-days, 91-days, 182-days, 364-days, 2-years and 5-years treasury bills.
V. Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from
many investors and invests typically in investment securities (stocks, bonds, short-term money market
instruments, other mutual funds, other securities, and/or commodities such as precious metals). The
mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance
with the fund's investment objective. It is registered in Securities and Exchange Commission.
Mutual funds raise money by selling shares of the fund to the public, much like any other type of
company can sell stock in itself to the public. Mutual funds then take the money they receive from the
sale of their shares (along with any money made from previous investments) and use it to purchase
various investment vehicles, such as stocks, bonds and money market instruments. In return for the
money they give to the fund when purchasing shares, shareholders receive an equity position in the
fund and, in effect, in each of its underlying securities.
For most mutual funds, shareholders are free to sell their shares at any time, although the price of a
share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by
the fund.
Benefits of mutual funds include diversification and professional money management. Mutual funds
offer choice, liquidity, and convenience, but charge fees and often require a minimum investment.
This is passive instruments having two forms namely open end mutual fund and close end mutual fund.
Closed End Mutual Fund: The scheme size is fixed so that the asset manager (who manage mutual
fund scheme) could not issue new instruments in the form of bonus or right.
Open End Mutual Fund: The scheme size is not fixed so that the asset manager could extend
scheme size by issuing new instruments in the form of bonus or right.
There are many types of mutual funds, including aggressive growth fund, asset allocation fund, balanced
fund, blend fund, bond fund, capital appreciation fund, clone fund, closed fund, crossover fund, equity
fund, fund of funds, global fund, growth fund, growth and income fund, hedge fund, income fund, index
fund, international fund, money market fund, municipal bond fund, prime rate fund, regional fund,
sector fund, specialty fund, stock fund, and tax-free bond fund.
VI. Credit card
A credit card is a small plastic card measuring about 85 mm by 54 mm bearing the name, date,
computer number and specimen signature of the holder and the validity with raised letters to facilitate
machine readability issued to users as a system of payment. It allows its holder to buy goods and
services based on the holder's promise to pay for these goods and services. The issuer of the card
creates a revolving account and grants a line of credit to the consumer (or the user) from which the user
can borrow money for payment to a merchant or as a cash advance to the user. Usage of the term
"credit card" to imply a credit card account is a metonym.
As per instruction given in the application form or lateron in writing, the credit card issuing authority will
dispatch the periodic bill to the card holder and realize the bill amount from his account as instructed
earlier. In other way, the card holder may pay the periodic bill in cash or by cheque within specific
period. If not paid within the grace free specific period, profit or interest or service charge on the bill
amount will be charged before full payment of the bill amount.
VII. Floating charge
A floating charge is a security interest over a fund of changing assets of a company or a limited liability
partnership (LLP), which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge
attaches to specific assets.
Floating charges can only be granted by companies. If an individual person or a partnership was to
purport to grant a floating charge, it would be void as a general assignment in bankruptcy.
Floating charges take effect in equity only. The floating charge has been described as "one of equity's
most brilliant creations.
VIII. KYC
Having sufficiently verified/corrected information about customers is known as “Know Your Customer”
(KYC)
Money Laundering Prevention Act, 2012 requires all reporting agencies to maintain correct and concrete
information with regard to identity of its customer during the operation of their accounts.
KNOW YOUR CUSTOMER PROGRAM
The adoption of effective Know Your Customer (KYC) program is an essential part of financial
institutions’ risk management policies.
COMPONENTS OF KYC PROGRAM
Financial institutions in the process of designing the KYC program should include certain key elements.
Such essential elements should start from the financial institutions’ risk management and control
procedures and should include –
(1) Customer acceptance policy,
(2) Customer identification,
(3) On-going monitoring of high risk accounts, and
(4) Identification of suspicious transactions.
Financial institutions with inadequate KYC program may be subject to the following risks regarding
Money Laundering:-
1. Reputational Risk
2. Operational Risk
3. Legal Risk
4. Concentration Risk
2. I. what is meant by a paying banker?
II. Describe the duties and responsibilities of a paying banker
Responsibility of Paying Banker
01. Cheques drawn on Branch :
The paying banker shall honour only those cheques which are drawn against the account maintained at
a branch of the bank where the cheques are presented.
02.Presentation within validity needed :
The paying banker is legally bound to pay only such cheques which are presented to him for payment
within a reasonable time. Reasonable time is 6 months from the date of issue of the cheque.
03. Presentation within banking hours:
Cheque must be presented within the banking hours. Any cheque presented after thebanking hours has
no legal effect and therefore banker cannot be held liable for refusing payment on such cheques.
04. Sufficient balance :
Funds in tha a/c must be sufficient and available to honour the cheques. For dishonour of cheque due to
shortage of funds banks are not held responsible. Rather, if cheques are drawn without funds, drawers
by punishable under Section -138.
05. Must be valid instrument :
Cheques not drawn in the proper form are refused by the paying banker. Section -5 & 6 of the N.I. Act
provide that the bank should examine the contents of the cheque to ensure taht it is perfectly a valid
instrument containing an unconditional order to pay a certain sum of money.
III. Under what circumstances a banker loss its protection under the Negotiable instrument Act, 1881?
3 I. why is introduction necessary at the time of opening bank account?
1. IMPORTANCE OF INTRODUCTION AND ENQUIRY:
While opening account of clients emphasis must be given on introduction. Enquiry about the constituent
must also be made. No account shall be opened without obtaining satisfactory introduction & reference.
The importance of introductory reference and enquiry are as follows: 1.1 Banker customer relationship
is established through opening an account on obtaining introductory reference and introduction. If there
is any lapse in this regard Bank may suffer loss subsequently.
1.2 Banker shall not get protection under section 131 & 131 (a) of Negotiable Instrument Act 1981
for negligence and will be guilty of conversion in case of collection of a cheque/instrument having
defective title if the account is not opened without proper introduction & enquiry.
1.3 If the status of the person is not properly known to the Bank while opening the account, the
banker will also be held responsible for negligence. For example, if a person desiring to open an account
as an employee, the name of his/her employer together with the name of firm or institution must be
obtained. Similarly if he/she is a Partner or a Director of a Company, the name of the firm or the
Company must be also obtained.
II. Under what circumstances can a banker disclose the secrecy of a customer’s account?
A bank can disclose information regarding customer's account to a person(s) under the following
circumstances.
(a)Under compulsion of law.
(b)Under banking practices.
(c)For protecting national interest.
(d)For protecting bank’s own interest
(e)Under express or implied consent of the customer
Disclosure under compulsion of law:
Banks disclose information to various authorities who by virtue of powers vested in them under
provisions of various acts require banks to furnish information about customer’s account. The
information is called under:
(i)Section 4 of Banker's Book Evidence Act, 1891
(ii)Section 94 (3) of Code of Civil Procedure Act, 1908
(iii)Section 45 (B) of Reserve Bank of India Act, 1934
(iv)Section 26 of Banking Regulation Act, 1949
(v)Section 36 of Gift Tax Act, 1958
(vi)Sections 131, 133 of Income Tax Act, 1961
(vii)Section 29 of Industrial Development Bank of India Act, 1964
(viii)Section 12of Foreign Exchange Management Act, (FEMA) 1999
(ix)Section 12 of the Prevention of Money Laundering Act, 2002
Banks are required to furnish only the called for information (no additional information is to be
furnished) on receipt of written request of the person who is vested with the authority to call for such
information under the said acts. The customer is kept informed about the disclosure of the information.
Disclosure under banking practices:
In order to ascertain financial position and credit worthiness of the person banks obtain information
from other banks with which they are maintaining accounts. It is an established practice among bankers
and implied consent of the customer is presumed to exist. The opinion is given in strictest confidence
and without responsibility on the part of the bank furnishing such information. Credit information is
furnished in coded terms to other banks on IBA format and without signatures.
III. What do you mean by Relationship Banking?
Relationship Banking is a strategy used by banks to enhance their profitability. They accomplish this by
cross-selling financial products and services to strengthen their relationships with customers and
increase customer loyalty. Relationship banking involves offering customers a broad array of financial
products and services that go beyond simple checking and savings accounts.
In addition to these two basic products, relationship-banking products may include certificates of
deposit, safe deposit boxes, insurance, investments, credit cards, loans and business services (e.g., credit
card processing). They may also include specialized financial products designed for specific
demographics, such as students, seniors or the wealthy.
Merits and Demerits of Relationship Banking
Relationship banking can add value through its contractual features that, though mostly implicit,
facilitate long-term relations (Ferri, Kang and Kim, 2001; Hoshi and Patrick, 2000). 5
Monitoring costs are economized through reciprocal delegated monitoring among credit suppliers,
virtually making the loans of a relationship bank subordinate to other banks’ loans and public debt.
Inefficient closures of distressed but economically solvent firms are prevented, and cases of corporate
financial distress are effectively resolved.
Liquidity constraints are mitigated and business risks shared between a relationship bank and its
corporate clients over their cycles of cash flows and profits, since loans are made from a long-term
perspective.
Potential conflicts of interest between the creditor bank and shareholders are controlled through the
holding of corporate shares by a relationship bank, easing the problem of asset substitution (investment
decisions biased towards projects that enrich stockholders at the expense of debtholders; Prowse,
1990).
However, relationship banking is not without potential perils, which must be minimized by sound
business judgment and discipline (Ferri, Kang and Kim, 2001; Hoshi and Patrick, 2000).
Investment efficiency can be low due to soft-budget constraints. That is, given the good chance of loan
renegotiations with their banks, firms with a relationship bank may have weaker ex ante incentives to
boost their effort (Bolton and Scharfstein, 1996).
A relationship bank might extract rents from its clients in the form of higher lending rates and others
because they are informationally captured and have difficulties turning to other financing sources.
Firms with a relationship bank may take too few risks in their businesses, as the bank will discourage
investment projects with both high return and high risk.
The system of relationship banking is often supported by heavy government regulation of the financial
markets, which delays capital market (including the market for corporate control) development and
results in inefficiency in the banking sector.
4. I. Define Negotiable instrument according to the Negotiable instrument Act, 1881.
According to section 13 of the Negotiable Instruments Act, 1881, "a Negotiable Instruments means a
promissory note, bill of exchange, or cheque, payable either to order or to bearer whether the words
‘order’ or ‘bearer’ appear on the instrument or not."
According to section 14 of the Negotiable Instruments Act, 1881, “when a promissory note, bill of
exchange, or cheque is transferred to any person so as to constitute that person the holder thereof, the
instrument is said to be negotiated”
II. What are the instruments that fall under the purview of this Act?
According to the Negotiable Instruments Act, 1881 there are just three types of negotiable instruments
i.e.,
(a) Promissory note,
(b) bill of exchange and
(c ) cheque.
Promissory Note: A ‘Promissory Note’ is an instrument in writing containing an unconditional
undertaking, signed by the maker, to pay a certain sum of money only to, or the order of certain person,
or to the bearer of the instrument (Section 4 of NI Act).
Bill of exchange: According to Section 5 of NI Act, a bill of Exchange is “an instrument in writing
containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum
of money only to, or to order of, a certain person or to the bearer of the instrument”.
Cheque: A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand (Section 6 of NI Act). A cheque is a bill of exchange which is always (i) Drawn
on a banker specified therein and (ii) Payable on demand.
III. What do you mean by endorsement? What are its different types?
An endorsement is the mode of negotiating a negotiable instrument. A negotiable instrument payable
otherwise than to a bearer can be negotiated only by endorsement and delivery. An endorsement,
according to sec. 15 of the NI Act is “when the maker or holder of a negotiable instrument signs the
same, otherwise than as such marker. For the purpose of negotiation on the back or face thereof or on a
slip of paper annexed thereto, he is said to endorse the same and is called the endorser. The person to
whom the instrument is endorsed is called the endorsee.
“The word endorsement is said to have been derived from Latin ‘en’ means ‘upon’ and ‘dorsum’
meaning ‘the back’. Thus usually the endorsement is on the back of the instrument though it may be
even on the face of it. Where no space is left on the instrument, the endorsement may be made on a
slip of paper attached to it. This attached slip of paper is called ‘Allonge’.
Types of Endorsement:
According to the N.I. Act, 1881 endorsement may take any of the following forms:
1. Endorsement in blank or general endorsement.
2. Endorsement in full or special endorsement.
3. Restrictive endorsement.
4. Partial endorsement.
5. Conditional endorsement.
Endorsement in Blank or General Endorsement:
In case of an endorsement in blank, the payee or endorser does not specify an endorsee and he simply
signs his name (S. 16 NIA).
Endorsement in Full or Special Endorsement:
When the payee or endorser specifies the person to whom or to whose order the instrument is to be
paid, the endorsement is called special endorsement or endorsement in full. The specified person i.e.
the endorsee then becomes the payee of the instrument.
Restrictive Endorsement:
An endorsement is restrictive when it prohibits further negotiation of a negotiable instrument. Sec. 50
of the NI Act 1881states. “The endorsement may, by express words, restrict of exclude the right to
negotiable or pay constitute the endorsee an agent to endorse the instrument or to receive its contents
for the endorser or for some other specified person.”
For example, if B endorses an instrument payable to barer as follows, the right of C to further
negotiate is excluded
Pay the contents to C only
Pay C for my use
Partial Endorsement:
If only a part of the amount of the instrument is endorsed, it is a case of partial endorsement. An
endorsement which purports to transfer to the endorsee only a part of the amount payable, or which
purports to transfer the instrument to two or more endorsees severally, is not valid.
Conditional Endorsement:
If the endorser of a negotiable instrument, by express words in the endorsement, makes his liability or
the right of the endorsee to receive the amount due thereon, dependent on the happening of a
specified event, although such event may never happen, such endorsement is called a conditional
endorsement (Section 52 of NI Act). Such an endorser gets the following rights:
He may make his liability on the instrument conditional on the happening of a particular event.
He will not be liable to the subsequent holder if the specified event does not take place to the
instrument even before the particular event takes place.
For example, “pay C if he returns from London”. Thus C gets the right to receive payment only on
the happening of a particular event, i.e. if he returns from London.
Effect of Endorsement
An unconditional endorsement of a negotiable instrument followed by its unconditional delivery has the
effect of transferring the property therein to the endorsee. The endorsee acquires a right to negotiate
the instrument further to anyone he likes.
Section 50 of NI Act also permits that an instrument may also be endorsed so as to constitute the
endorsee an agent of the endorser.
To endorse the instrument further or
To receive its amount for the endorser or for some other specified person.
5. I. describes the main functions of a central bank.
Central Bank: Functions
01. General Activities:
(a) Circulation & Issuance of Notes and Coins
(b) Credit Control / Inflation or Deflation Control
(c ) Stabilization of Local Currency Value in comparison to Foreign Currency
(d) Act as the bank of the Government
(e) Bank of the other Banks
(f) Lender of last resort for other banks
(g) Act as Clearing House
(h) Foreign Exchange Control
(i) CAMELS rating of Commercial banks
02. Agency Functions:
(a) Advisor & delegate of the government
(b) Guardian of the banks
(c ) Communication with other country's central banks
(d) Development of the banking sector
(e) Relationship with other international financial organizations (WB, IMF, ADB, IDB etc.)
03. Development Functions:
(a) Employment Generation
(b) Research of Economy and banking sector
(c ) Economic Development
04. Other Functions:
(a) Government Bond-Security Purchase and Selling
(b) Important Information Providing to Local and Foreign Queries
(c ) Changing of Mutilated Notes
(d) Establishment of Foreign Branches of Banks
(e) Fund transfer as per instruction of the government
II. Describe the role of Bangladesh Bank in developing the financial system of our economy.
One of the fundamental responsibilities of BB is to develop of the financial system of our country. To
furnish this role BB is engaged with the following activities:
In order to broaden financial market and also to diversify the sources of credit, a lrge number of NBFIs
have been allowed to operate. To regularize and supervise the activities of these institutions, a new
department is set up.
In order to safeguard the interest of ultimate uses of the financial services, and to ensure the viability of
institutions providing these services, BB has issued a comprehensive set of procedural regulations which
prescribed guidelines relating to classification of short term and long term loan facilities, set criteria for
management, prohibit criminal use of banking channels for the purpose of Money laundering and other
unlawful activities.
In recent years, BB has been enjoying more freedom in manage the monetary policy through traditional
banking tools including open market operations by its own treasury bills and instruments. It works for
the overall financial system of our country.
6. I. What do you understand by Money Laundering?
The fundamental concept of money laundering is the process by which proceeds from a criminal activity
are disguised to conceal their illicit origins. Money Laundering is defined in Section 2 (v) of the Money
Laundering Prevention Act 2012 as follows:
“Money laundering” means –
(i) Knowingly moving, converting, or transferring proceeds of crime or property involved in an offence
for the following purposes:-
1 1. concealing or disguising the illicit nature, source, location, ownership or control of the proceeds
of crime; or
2 2. assisting any person involved in the commission of the predicate offence to evade the legal
consequences of such offence;
(ii) Smuggling money or property earned through legal or illegal means to a foreign country;
(iii) knowingly transferring or remitting the proceeds of crime to a foreign country or remitting or
bringing them into Bangladesh from a foreign country with the intention of hiding or disguising its illegal
source; or
(iv)Concluding or attempting to conclude financial transactions in such a manner so as to reporting
requirement under this Act may be avoided;
(v) Converting or moving or transferring property with the intention to instigate or assist for committing
a predicate offence;
(vi) Acquiring, possessing or using any property, knowing that such property is the proceeds of a
predicate offence;
(vii) Performing such activities so as to the illegal source of the proceeds of crime may be concealed or
disguised;
(viii) Participating in, associating with, conspiring, attempting, abetting, instigate or counsel to commit
any offences mentioned above;
Dishonest people and criminals launder their money to avoid legal actions against them when they
make property with the illegal money they had obtained or stolen through unfair means. Countries of
the whole world have taken various measures to stop money laundering, especially after the terrorist
attack in New York on September 11, 2001. In Bangladesh the Money Laundering Prevention Act-2002
came into force on April 5, 2002 with the aim to prevent money laundering. Bankers are instructed to
watch over any suspicious transaction by any client. A banker must report to the central bank through
proper authority if he detects any unusual transactions in his bank. It is assumed that due to preventive
measures taken by all government against money laundering remittance to Bangladesh through banking
channels has increased manifold. Strict monitoring over money laundering will also reduce the
propensity of dishonest people in hoarding stolen money or taking bribes.
Money Laundering Prevention Act, 2002 defines money laundering as properties acquired or earned
directly or indirectly through illegal means; illegal transfer, conversion and concealment of location of
the properties earned through legal or illegal means or assistance in the said acts.
There are three main stages of money laundering. These are:
1. Placement: The physical disposal of the initial proceeds derived from illegal activity e.g.
depositing the money earned by theft, robbery, bribery or hijacking to a bank account.
2. Layering: Separating illicit proceeds from their sources by creating complicated layers of financial
transactions designed to disguise the audit trail and provide anonymity e.g. electronic transfer of the
fund to a fake firm, issuing overseas bank draft, purchasing travelers cheques, transfer of fund from one
bank account to various names of different bank branches.
3. Integration: It means the provision of apparent legitimacy to property gained in an unlawful way.
If the layering process is complete, integration process place the laundered proceeds back into the
economy in such a way that they re-enter the financial system appearing as normal business fund e.g.
sale of flat/house/land purchased by illegal income.
Reasons:
a) Criminals conduct their operations for financial gains. They have to bear expenditures like operating
expenses, purchasing services of the corrupt officials etc,
b) Criminals hide the sources of their wealth and they always try to disguise the ownership or control of
the wealth, and
c) Criminals conceal the proceeds from investigation or seizure.
II. Does black money whitened through the budgetary process fall in this category? Give reasons.
III. Is the money laundering law currently in force and adequate?
PENALTIES UNDER MLPA:
According to section 25 (2) of MLPA, 2012, if any reporting organization violates the directions
mentioned in sub-section (1) of section 25 of MLPA, 2012, Bangladesh Bank may-
(a) Impose a fine of at least taka 50 (fifty) thousand but not exceeding taka 25 (twenty five) lacs on the
reporting organization; and
(b) in addition to the fine mentioned in clause (a), cancel the license or the authorization for carrying out
commercial activities of the said organization or any of its branches, service centers, booths or agents,
or as the case may be, shall inform the registration or licensing authority about the fact so as to the
relevant authority may take appropriate measures against the organization.
In addition to the above mentioned provisions there are some new provisions of penalties in the section
23 of MLPA, 2012. These are:
(3) If any reporting organization fails to provide with the requested information timely under this
section, Bangladesh Bank may impose a fine on such organization which may extend to a maximum of
Taka 5 (five) lacs at the rate of Taka 10 (ten) thousand per day and if any organization is fined more than
3(three) times in 1(one) financial year, Bangladesh Bank may suspend the registration or license of the
organization or any of its branches, service centers, booths or agents for the purpose of closing its
operation within Bangladesh or, as the case may be, shall inform the registration or licensing authority
about the fact so as to the relevant authority may take appropriate measures against the organization.
(4) If any reporting organization provides with false information or statement requested under this
section, Bangladesh Bank may impose a fine on such organization not less than Taka 20 (twenty)
thousand but not exceeding Taka 5 (five) lacs and if any organization is fined more than 3(three) times in
1(one) financial year, Bangladesh Bank may suspend the registration or license of the organization or any
of its branches, service centers, booths or agents for the purpose of closing its operation within
Bangladesh or, as the case may be, shall inform the registration or licensing authority about the fact so
as to the relevant authority may take appropriate measures against the said organization.
(5) If any reporting organization fails to comply with any instruction given by Bangladesh Bank under this
Act, Bangladesh Bank may impose a fine on such organization which may extend to a maximum of Taka
5 (five) lacs at the rate of Taka 10 (ten) thousand per day for each of such non compliance and if any
organization is fined more than 3(three) times in 1(one) financial year, Bangladesh Bank may suspend
the registration or license of the organization or any of its branches, service centers, booths or agents
for the purpose of closing its operation within Bangladesh or, as the case may be, shall inform the
registration or licensing authority about the fact so as to the relevant authority may take appropriate
measures against the said organization.
(6) If any reporting organization fails to comply with any order for freezing or suspension of transaction
issued by Bangladesh Bank under clause (c) of sub-section 23(1) of MLPA, 2012, Bangladesh Bank may
impose a fine on such organization not less than the balance held on that account but not more than
twice of the balance held at the time of issuing the order.
(7) If any person or entity or reporting organization fails to pay any fine imposed by Bangladesh Bank
under sections 23 and 25 of this Act, Bangladesh Bank may recover the fine from accounts maintained in
the name of the relevant person, entity or reporting organization in any bank or financial institution or
Bangladesh Bank, and in this regard if any amount of the fine remains unrealized, Bangladesh Bank may,
if necessary, make an application before the court for recovery and the court may pass such order as it
deems fit.
(8) If any reporting organization is imposed fine under sub-sections 23 (3), (4), (5) and (6), Bangladesh
Bank may also impose a fine not less than Taka 10 (ten) thousand but not exceeding taka 5 (five) lacs on
the responsible owner, directors, officers and staff or persons employed on contractual basis of that
reporting organization and, where necessary, may direct the relevant organization to take necessary
administrative actions.
IV. Why it is necessary to prevent money laundering?
Money laundering allows terrorists and criminals to undertake various activities like:
1. Drug trafficking
2. Financing terrorist activities
3. Evasion of exchange regulations
4. Evasion of taxation rules
5. Making blackmail payments
6. Paying ransom for kidnapping.
7. Dealing of arms and ammunitions
7. Distinguish between them:
I. legal mortgage and equitable mortgage
Legal:
(a) Mortgage by demise:
In a mortgage by demise, the mortgagee (the lender) becomes the owner of the mortgaged property
until the loan is repaid or other mortgage obligation fulfilled in full, a process known as "redemption".
This kind of mortgage takes the form of a conveyance of the property to the creditor, with a condition
that the property will be returned on redemption.
(b) Mortgage by Legal Charge:
In a mortgage by legal charge or technically "a charge by deed expressed to be by way of legal
mortgage", the debtor remains the legal owner of the property, but the creditor gains sufficient rights
over it to enable them to enforce their security, such as a right to take possession of the property or sell
it.
02. Equitable Mortgage:
Equitable mortgages don't fit the criteria for a legal mortgage, but are considered mortgages under
equity (in the interests of justice) because money was lent and security was promised. This could arise
because of procedural or paperwork issues. Based on this definition, there are numerous situations
which could lead to an equitable mortgage. In equitable mortgage the lender is secured by taking
possession of all the original title documents of the property and by borrowers signing a Memorandum
of Deposit of Title Deed (MODTD). This document is an undertaking by the borrower that he/she has
deposited the title documents with the bank with his own wish and will, in order to secure the financing
obtained from the bank.
An equitable mortgage can arise in two different ways - either as a legal mortgage which was never
perfected by conveying the underlying assets, or by specifically creating a mortgage as an equitable
mortgage. A mortgage over equitable rights (such as a beneficiary's interests under a trust) will
necessarily exist in equity only in any event.
II. Money market and capital market
Money Market
Market for short-term debt securities, such as banker's acceptances, commercial paper, repos,
negotiable certificates of deposit, and Treasury Bills with a maturity of one year or less and often 30
days or less. Money market securities are generally very safe investments which return a relatively low
interest rate that is most appropriate for temporary cash storage or short-term time horizons. Bid and
ask spreads are relatively small due to the large size and high liquidity of the market.
The money market is a component of the financial markets for assets involved in short-term borrowing
and lending with original maturities of one year or shorter time frames. Trading in the money markets
involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds,
and short-lived mortgage- and asset-backed securities.[1] It provides liquidity funding for the global
financial system.
Money Market Instruments
-Short-term, high grade (low risk) financial instruments such as bankers' acceptance, certificates of
deposit (CDs), commercial paper, and treasury bills.
-Document (such as a check, draft, bond, share, bill of exchange, futures or options contract) that has a
monetary value or evidences a legally enforceable (binding) agreement between two or more parties
regarding a right to payment of money.
Debt instrument:
Document that serves as a legally enforceable evidence of a debt and the promise of its timely
repayment. Banker's acceptance, bills of exchange, bonds, certificates of deposit, debentures, and
promissory notes, all are debt instruments.
Equity instrument:
Document that serves as a legally enforceable evidence of the right of ownership in a firm, such as a
share certificate (stock certificate).
Financial instrument
Capital Market
A capital market is a market for securities (debt or equity), where business enterprises companies) and
governments can raise long-term funds. It is defined as a market in which money is provided for periods
longer than a year, as the raising of short-term funds takes place on other markets (e.g., the money
market).
The capital market includes the stock market (equity securities) and the bond market (debt).
Capital markets may be classified as primary markets and secondary markets.
In primary markets, new stock or bond issues are sold to investors via a mechanism known as
underwriting.
In the secondary markets, existing securities are sold and bought among investors or traders, usually on
a securities exchange, over-the-counter, or elsewhere.
Capital Market: Participants
The Capital market, an important ingredient of the financial system, plays a significant role in the
economy of the country.
1. Regulatory Bodies
The Securities and Exchange Commission exercises powers under the Securities and Exchange
Commission Act 1993. It regulates institutions engaged in capital market activities.
Bangladesh Bank exercises powers under the Financial Institutions Act 1993 and regulates institutions
engaged in financing activities including leasing companies and venture capital companies.
2. Participants in the Capital Market
The SEC has issued licences to 27 institutions to act in the capital market. Of these, 19 institutions are
Merchant Banker & Portfolio Manager while 7 are Issue Managers and 1(one) acts as Issue Manager and
Underwriter.
i) Stock Exchanges
There are two stock exchanges ( the Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange
(CSE) ) which deal in the secondary capital market. DSE was established as a public Limited Company in
April 1954 while CSE in April 1995. As of 30 June 2000 the total number of enlisted securities with DSE
and CSE were 239 and 169 respectively. Out of 239 listed securities with the DSE, 219 were listed
companies, 10 mutual funds and 10 debentures.
ii) Investment Corporation of Bangladesh (ICB)
The Investment Corporation of Bangladesh was established in 1976 with the objective of encouraging
and broadening the base of industrial investment. ICB underwrites issues of securities, provides
substantial bridge financing programmes, and maintains investment accounts, floats and manages
closed-end & open-end mutual funds & closed-end unit funds to ensure supply of securities as well as
generate demand for securities. ICB also operates in the DSE and CSE as dealers.
iii) Specialized Banks
Bangladesh Shilpa Bank (BSB), Bangladesh Shilpa Rin Sangstha (BSRS), BASIC Bank Ltd., some Foreign
Banks and NCBs are engaged in long term industrial financing.
III. Share and debenture
IV. IBRD and IMF
V. retail banking and wholesale banking
Retail Banking
It is such banking system where Savings Accounts, Consumer Loans, Credit Card and other such services
are provided to the individuals. It is also known as consumer banking. Retail Banks deal directly with
individuals and small businesses; business banking, providing services to mid-market business;
corporate banking, directed at large business entities; private banking, providing wealth management
services to high net worth individuals and families; and investment banking, relating to activities on the
financial markets. Most banks are profit-making, private enterprises. However, some are owned by
government, or are non-profit organizations.
Types of retail banks:
01. Commercial bank: the term used for a normal bank to distinguish it from an investment bank. After
the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas
investment banks were limited to capital market activities. Since the two no longer have to be under
separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that
mostly deals with deposits and loans from corporations or large businesses.
02. Community banks: locally operated financial institutions that empower employees to make local
decisions to serve their customers and the partners.
03. Community development banks: regulated banks that provide financial services and credit to under-
served markets or populations.
04. Postal savings banks: savings banks associated with national postal systems.
05. Private Banks: banks that manage the assets of high net worth individuals. Historically a minimum of
USD 1 million was required to open an account; however, over the last years many private banks have
lowered their entry hurdles to USD 250,000 for private investors.
06. Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks
are essentially private banks.
07. Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even 18th century.
Their original objective was to provide easily accessible savings products to all strata of the population.
In some countries, savings banks were created on public initiative; in others, socially committed
individuals created foundations to put in place the necessary infrastructure. Nowadays, European
savings banks have kept their focus on retail banking: payments, savings products, credits and
insurances for individuals or small and medium-sized enterprises. Apart from this retail focus, they also
differ from commercial banks by their broadly decentralised distribution network, providing local and
regional outreach—and by their socially responsible approach to business and society.
08. Building societies and Landesbanks: institutions that conduct retail banking.
09. Ethical banks: banks that prioritize the transparency of all operations and make only what they
consider to be socially-responsible investments.
10. A Direct or Internet-Only bank: is a banking operation without any physical bank branches, conceived
and implemented wholly with networked computers.
Whole sale banking is the provision of services by banks to the like of large corporate clients, mid-sized
companies, real estate developers and investors, international trade finance business, institutional
customer and service offer to other banks and other financial institutions. In essence, whole sale
banking service usually involves high value transaction.
Modern Whole Sale Banking includes in finance whole selling, underwriting, market making,
consultancy, merger and acquisition and fund management etc.
Whole sale banking is the provision of services by banks to the like of large corporate clients, mid-sized
companies, real estate developers and investors, international trade finance business, institutional
customer and service offer to other banks and other financial institutions. In essence, whole sale
banking service usually involves high value transaction.
Modern Whole Sale Banking includes in finance whole selling, underwriting, market making,
consultancy, merger and acquisition and fund management etc.
VI. Bankers lien and banker’s right of set off
Lien: Lien is the right of bank to possess goods or a security until an investment due is paid. The owner
of the property, who grants the lien, is referred to as the lienor and the person who has the benefit of
the lien is referred to as the lienee. There are two types of lien:
1) The general lien which means to retain any property belonging to the other for any lawful payment
and
2) It is relating to retain those goods, which are the subject matter of contract of particular lien.
Right of set off: It is the right of the bank in respect to a contractual relation to appropriate and adjust
the amount payable between two different accounts of the same party.
It is not unusual for a customer to have a current account, a savings account and a credit card account -
all with the same bank. When an overdraft facility on a current account runs out and the customer fails
to pay the amount owed, the firm takes money from the customer’s savings account to reduce or clear
the debt.
Or, if a customer fails to make credit card or mortgage payments, bank may use available funds from
that customer’s current or savings account to make the missing payments, thereby helping the customer
to avoid extra interest or charges.
Bank has a right, but not a duty, to look at a customer’s overall position and to ‘combine’ the accounts
held by that customer. This is sometimes called a right of ‘set off’ or a right to ‘combine’ accounts. A
bank has this as a general right, whether or not it mentions the right in the account terms.
VII. cheque and bill of exchange
Cheque: A ‘Cheque’ is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand (NI Act - Section – 6)
A cheque is an instrument in writing containing an unconditional order, signed by the maker (Drawer) ,
directing the Bank (Drawee) to pay on demand or at a fixed or determinable future time, a certain sum
of money only to, or to the order of, a certain person (Payee) or to the bearer of the instrument
There are three parties: Drawer, Drawee, and Payee.
Drawer: Means who draws (who makes or writes the cheque, mainly the A/C holder)
Drawee: The bank (who pays the money)
Payee: To whom the amount will be paid
Essential characteristics of Cheque:
1. It must be writing on specified form
2. it must bear date
3. the drawer, drawee and payee must be certain
4. the amount should be certain
5. it must be signed by the drawer (maker)
6. it is payable on demand
7. it should be drawn on banker
Bill of Exchange: A bill of exchange, is an instrument in writing containing an unconditional order, signed
by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a
certain person or to the bearer of the instrument. (Negotiable Instruments Act, 1881 S.5)
Parties: Drawer, Drawee, acceptor, payee, indorser, indorsee, holder, drawee in case of need, acceptor
for honor.
Essential characteristics of bill of exchange:
1. It must be writing with date
2. it must be signed by the drawer (maker)
3. the drawer, drawee and payee must be certain
4. the amount should be certain
5. it should be properly stamped
6. it must contain unconditional order
7. the order should be pay only money
8. I. What are the main aspects a banker has to look into while processing a loan application?
II. What is your idea of a collateral free lending? Is it applicable for all kind of advances? If not, please
suggest the areas where this principle should apply.
9. i. what do you mean by liquidity crunch?
A credit crunch (also known as a credit squeeze or credit crisis) is a reduction in the general availability
of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. A
credit crunch generally involves a reduction in the availability of credit independent of a rise in
official interest rates. In such situations, the relationship between credit availability and interest rates
has implicitly changed, such that either credit becomes less available at any given official interest rate,
or there ceases to be a clear relationship between interest rates and credit availability (i.e. credit
rationing occurs). Many times, a credit crunch is accompanied by a flight to quality by lenders and
investors, as they seek less risky investments (often at the expense of small to medium size enterprises).
II. How does a bank strike a balance between liquidity and profitability?
A commercial bank deals in the business of banking with a view to make profits.
In order to earn profits, the asset portfolio of a bank is of utmost importance.
It also gives a picture of the soundness of a commercial bank.
MEANING:
The manner in which a bank applies the various sources of funds on different types of assets reflects the
soundness of the bank .
Every bank has two important objectives :
Profitability
Since these two objectives are contradictory in nature, a good banker aims to reconcile both these
objectives by creating diversified and balanced asset portfolio.
EXPLANATION :
The two most important objectives of a commercial bank are :
PROFITABILITY :
Every bank aims to earn optimum profit for its shareholders
Hence, it invests in those assets that give them maximum returns
For regular updated Information on Investments keep visiting what is investments
Such assets are of long – term in nature and so,
They cannot be easily converted into cash .
So, these assets are less liquid in nature and so cannot be used to meet the withdrawal demands of the
customers (depositors)
Such assets include:
Cash credit and overdraft
Term loans
Investment in stocks, shares, bonds, debentures, mutual funds
Loans and advances (long term)
LIQUIDITY:
Liquidity is the second most important objective of a commercial bank as it ensures the bank's own
safety and security.
Hence a bank should invest in those assets that can be easily converted into cash.
It readily meets the withdrawal needs of the depositors and helps to build their confidence and trust in
the bank.
However, the more liquid the asset is, the less profit it yields.
These assets include:
Cash balances
Money at call and short notice
Bills of exchange
Investment in Government securities
Thus these twin-conflicting objectives of liquidity and profitability can be achieved to their optimum
level by wisely allocating the funds to various assets.
These assets are shown in the balance sheet in ascending order of profitability and descending order of
liquidity.
A well diversified and balance asset portfolio helps in creating a trade off or a reconciliation between
liquidity and profitability.
CONCLUSION:
Therefore, a commercial bank has to strike a balance between the contradictory objectives a liquidity
and profitability.
This can be achieved with an optimum mix of assets that lead to a sound and successful banking system.
III. Will you consider excess liquidity a problem for a bank? Give reasons.
10. I. Describe the salient features of bankruptcy law in Bangladesh.
II. Describe the main provisions of Artha Rin Ain.
Money Lending Court (Artha Rin Adalat) Act-2003 : Important features
In case of failure to recover the Bank’s money in the normal way, a financial institution shall take legal action
against the defendant-debtor by taking permission from the competent authority observing all proceedings
of the Artha Rin Adalat Ain-2003 step by step and also other steps in other laws time to time in consultation
with BLA. The Act is consists of 60 (Sixty) sections. Among them for trial and disposal of proceedings of a
money suit, following provisions of the Arthara Rin Adalat Ain-2003 shall be followed:
Sale of mortgaged properties by the Financial Institution (Sec-12):
As per section 12, a financial institution shall try to sell out the mortgaged properties first towards
adjustment of the Bank’s money and shall not file a suit in the Artha Rin Adalat until failed to sell such
properties. After sale of the property, financial institution shall hand over the real possession to the
purchaser but if fails to give real possession then shall apply to the District Magistrate of local
jurisdiction seeking help for handing over possession. During sale, financial institution shall follow the
provisions of sub-section (1), (2) and (3) under section 33 of this Act.
Time limit for filing suit (Sec-46):
A financial institution shall file a suit within next one year in case of failure to recover the following
amount (%) of the realizable amount as per repayment schedule:
a. Minimum 10% of the realizable amount in the 1st year, or
b. Minimum 15% of the realizable amount in the 2 years, or
c. Minimum 25% of the realizable amount in the 3 years
- If repayment period is less than 3 years and realized amount is less than 20%, the financial
institution shall file suit within next 1 year.
If any suit is instituted after the period mentioned above due to the failure of an officer to carry out his
duty, appropriate authority shall take disciplinary action against such officer liable and inform the
government and the court about the action taken within 90(Ninety) days of receiving information from
the court.
Fixing of suit value (Sec-47):
No financial institution shall file a suit against a debtor imposing liability on the original loan, so that the
said total claim submitted in the Court is more than 200% (100+200 =Tk.300) of the original loan.
Filing of money suit through a plaint (Sec-6):
Failing direct sale of the mortgaged properties (under sec.12), financial institution shall file money suit
through a plaint (as mentioned in sec-8) with an affidavit in favor of the matters in the plaint and related
documentary evidences as per section 6 of this Act. Advalorem court fee shall also be deposited with
the plaint. Provisions of the Code of Civil Procedure-1908 shall be applicable in the trial or disposal of
proceedings of the suit.
Written statement of defence (Sec-9):
The defendant shall submit written statement in defence in accordance with the plaintiff’s demand
(sec.9).
Framing points for determination of the suit (Sec-13):
The Court, after considering the plaint & written statement shall frame points for determination of the
suit under section 13 of the Act.
Delivery of judgment (Sec-16):
The Court shall deliver judgment within maximum 10 days after completion of evidence recording &
submission of written argument or hearing of the oral argument (under sec.15) & direct the defendant
to pay the decreed money in a fixed time limit within maximum 60 days under section 16(2).
Time limit for disposal of the suit (Sec-17):
Cases filed under this Act shall be disposed of within maximum 30 days if the defendant does not
appear after the service of summons (section 7) and if appears, shall be disposed of within maximum 90
days after submission of the written statement under section 17 of this Act.
Time limit for filing Execution suit (Sec-28):
Later on, the decree holder Bank shall file execution suit to the Court through an application within
maximum 360 days of awarding decree or order to execute the decree or order through the Court as per
section 28(1).
Auction by the Court (Sec-33):
Accordingly, the Court shall invite a sealed tender to sell out the mortgaged property giving minimum 15
days time from the publication of the auction notice in a national Bengali daily newspaper towards
execution of the decree as per section 33 of the Act . Every bidder shall submit the following amount
against the quoted price as security to the Court with the tender through pay order or Bank draft:-
Range of the quoted price Security amount to be deposited to Time to deposit quoted price
the court to the Court
Upto Tk.10.00 lac Equivalent to 20% of the quoted price Within 30 days
Upto Tk.10.01 lac to Tk.50.00 lac Equivalent to 15% of the quoted price Within 60 days
Above Tk.50.00 lac Equivalent to 10% of the quoted price Within 90 days
If it is not possible to sell out the mortgaged property through auction, the Court shall issue a possession
certificate under section 33(5) and if necessary then issue ownership certificate under section 33(7) of
the Act upon request of the decree holder. If the title of the decretal property under section 33(7) is
vested in favor of a decree holder, the execution suit for decree shall be finally disposed of as per section
33(9) of the Artha Rin Adalat Ain-2003.
Civil imprisonment (Sec-34):
The Court may pass a judgment for 06 months civil imprisonment with warrant of arrest upon
submission of application by the decree holder as per section 34 of the Act.
Calculation of profit/Interest under this Act (Sec-50):
As per section 50 subject to the provision of sec-47, no Court under this act decrease the interest or as
the case may be, profit/fare shall disallow any money calculated lawfully by the financial institution for
the period from the day of lending up to the day of filing suit.
And as per section 50, if the defendant-debtor party does not file any appeal, revision, appeal in the
Appellate Division or any application to the higher Court against any decree awarded by the Artha Rin
Court, simple interest at the rate of 12% on the decreed amount for the period from the day of filing
case till the day of realization, simple interest at the rate of 16% if, appeal, revision or any other
application has been filed in a higher Court, for the aforesaid period, simple interest at the rate of 18% if
appeal in the Appellate Division is filed against appeal or decree of higher Court or against orders,
interest or as the case may be profit shall be imposed for the period from the day of institution of the
case to day of realization.
III. Do you think the existing laws related to the Artha Rin Adalat and Bankruptcy Law are adequate to
deal with the delinquent borrowers? Please Discuss.
11. I. what is consortium financing?
Syndicate:
As per encyclopedia of banking and finance “syndicate means a temporary association of parties
for the financing and execution of some specific business project”
Syndicate is a group of financial institutions participating in a single investment facility.
Syndicated financing:
Syndicate financing menas joint financing by a more than one bank or NBFIs to the same customer
against a common security. The entire security remains charged to all these banks for the total loans. All
the participating banks have a pari passu charge (a charge ranking equally in priority) on the syndicate
finance. In other words, syndicate financing means the gathering of more than one bank or NBFIs to
finance in aproject jointly, arranging a leader among them, against a common security.
Characteristics of Syndicated Investment:
1. Single/one customer
2. More than one investor/bank
3. Set of common documents with common terms & conditions
4. The borrower could be a corporation, a large project, or government.
5. The investment may involve fixed amounts, a credit line, or a combination of two.
6. Profit/rent rate can be fixed for the term of the investment or floating based on a benchmark rate
such as Dhaka Interbank offered rate (DIBOR).
II. What are the advantages and disadvantages?
Advantages:
I. It accommodate large loan project among different banks
II. It shares spreads risk among two or more banks
III. It examines/ analysis the project feasibility reports byn the experts of syndicate members from
different angels
IV. It comply the BB’s instruction regarding single borrower exposer limit and to maintain deposit
advance liquidity ratio properly.
V. It creates opportunity for the entrepreneurs of high potential to undertake big ventures
VI. it industrializes and creates employment opportunity in the country
VII. it enhances in return on assets
III. What is Lead Bank System?
Mandated lead Arranger/Arranger/Lead Arranger (captain of the syndication ship) :-
o Mandated lead arranger/arranger/lead arranger has to co-ordinate all the activities at various
stages of handling proposal and raising the fund from Banks/Financial Institutions.
o Role of lead arranger/Mandated lead arranger (MLA):-
The customer nominates lead Bank. It is very importer factor for a customer to nominate lead
arranger in the light of maintaining long term relationship
It leads to a lead arranger being an agent Bank of syndication, which is very common syndication
investment process. For this reason it should be an organization with which the customer is likely to feel
comfortable over the whole investment period.
After analyzing all the relevant aspects of risk, lead arranger helps the customer by taking proper
step and will set a plan to raise the fund from the Banks/Fls to set up the proposed project. A time
schedule to be prepared by the lead arranger to close the syndication deal
A good professional arranger will always be able to add something to a customer’s own
deliberations. It should be able to suggest amendments/value additions, which will make it easier for a
syndicate to take up the investment without compromising its essential elements.
It is very important that the lead bank has an in-depth knowledge of the individual customer. This
applies not only to the particular company but also to the wider environment in which it works, the
economic pressures, the competitive environment and so on.
As part of the process of selecting a potential syndicate leader it will be necessary to decide
whether it can sell this deal to the sort of syndicate that is desired. If a high-quality group is the aim,
then a high level of past performance in similar transactions will be required in order to encourage other
experienced into the syndicate.
Credibility can be equally important when dealing with less heavyweight players, who will to a
much greater extant on the senior members of the syndicate.
The lead Bank/arranger has responsibility for much of the selling of the investment to participants.
The lead Bank will be the first port of call for question and needs to be able to answer them
authorities in order to head off problems and sensitivities before they arise. This role will be particularly
important with respect to syndicate members who do not know the borrower particularly well.
December 2009
1. Write short notes on the following:
I. SME
II. Clearing House
Clearing House is a kind of house, where the representatives of all Banks would be met to settle their
inter-banking transactions under the control of Central Bank. Bangladesh Bank does the act as a Central
Bank but there is no branch of Central Bank; where Sonali Bank will do the same job.
The old practice of receiving the payment of the cheque drawn on other banks was to send bank clerk
with all such cheque and other instruments to collect the cash from various banks. Since this method
was time-consuming and aweful, the Automated Clearing House system was introduced where all the
member bankers daily assemble to settle their drawings upon each other.
Now a days Bangladesh Bank has modernize the Clearing House under (BACPS) Bangladesh Automated
Cheque Processing System. Under the BACPS, (BACH) Bangladesh Automated Clearing House has been
established. Live BACH has established in Dhaka on 20101007.
Main features of BACPS:
MICR Cheque (Magnetic Ink Character recognition)
Point of Truncation
Scanning Standard
Software/Integration
Communication Link
There are two types of Clearing:
Clearing outward
Clearing inward
III. CAMELS Rating
CAMELS ratings are the result of the Uniform Financial Institutions Rating System, the internal rating
system used by regulators for assessing financial institutions on a uniform basis and identifying those
institutions requiring special supervisory attention. Regulators assign CAMELS ratings both on a
component and composite basis, resulting in a single CAMELS overall rating. When introduced in 1979,
the system had five components. A sixth component—sensitivity to market risk—was added in 1996.
The regulators that year also added an increased emphasis on an organization’s management of risk.
The six component areas are:
• C—Capital adequacy
• A—Asset quality
• M—Management
• E—Earnings
• L—Liquidity
• S—Sensitivity to market risk
The ratings range from 1 to 5, with 1 being the highest rating (representing the least amount of
regulatory concern) and 5 being the lowest. CAMELS ratings are strictly confidential, and may not be
disclosed to any party. But only to the top management of the banking company use the rating to
prevent a bank run on a bank which has a bad CAMELS rating.
IV. Repo and Reverse Repo
The rate at which the central bank lends money to commercial banks keeping the treasury bills as
security is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of
funds they can borrow from the BB. A reduction in the repo rate helps banks get money at a cheaper
rate and vice versa. The repo rate in Bangladesh is similar to the discount rate in the US. Reverse Repo
rate is the rate at which the central bank borrows money from commercial banks. Banks are always
happy to lend money to the BB since their money is in safe hands with a good interest. An increase in
reverse repo rate can prompt banks to park more funds with the central bank to earn higher returns on
idle cash. It is also a tool which can be used by the BB to drain excess money out of the banking system.
The Bangladesh Bank (BB) has slashed its interest rate on repurchase agreement (repo) and reverse repo
by 50 basis points. The rate was cut after nearly four years aiming at boosting fresh investment
particularly in productive sectors, officials said.
The interest rate on repo auction came down to 7.25 per cent from 7.75 per cent while that on reverse
repo was re-fixed at 5.25 per cent from 5.75 per cent.
The revised interest rates on both repo and reverse repo will come into effect from February 1, a central
bank circular said Thursday.
V. Documents of title of goods
VI. Lending risk analysis
VII. SLR
MAY 2010 7 V
VIII. Allonge
Usually the endorsement is on the back of the instrument though it may be even on the face of it.
Where no space is left on the instrument, the endorsement may be made on a slip of paper attached to
it. This attached slip of paper is called ‘Allonge’.
2. i. Define customer in relation to a banker.
We can define customer in this manner that a person/ institution intend to open an account or having
an account, and want to avail investment facility, and other services fulfilling the prescribed format of
the bank.
Main features of Customer:
The Customer contains all the basic information about any "Customer" which the bank has
dealings with.
Customer ID contains all records of related customer.
It is unique and may be use into all branch of our Bank.
We should have open customer first then account, Deposit Ac, LC, Investment Ac, etc.
To monitor the customers properly, we can divide them into three categories:
a) Retail customer
b) Corporate Customer
c) General Customer
ii. What do you understand by banker-customer relationship
A banker, in course of his day to day business, enters into different kinds of relationship with his
customers and clients. These relationships may be broadly categorized as -
(a) General Relationship and
(b) Special Relationship.
The general relationship between a banker and customer differs depending on the basis of types of
dealing they undertake between themselves. Banker-customer is contractual relationship. Generally the
following are the major forms of relationships between a banker and his customers:
(1) Debtor-Creditor,
(2) Principal-Agent,
(3) Trustee-Beneficiary,
(4) Bailor-Bailee and
(5) Lessor-Lessee.
(1) Debtor-Creditor: The general relationship between a banker and customer (account holder) is that of
a debtor and creditor. If the customer's account shows credit balance, the bank is debtor and customer
is creditor. On the other hand, if the account of the customer is overdrawn, the relationship is just the
reverse and here the customer is the debtor.
(2) Principal-Agent: All modern banks provide agency services to their customers. When a bankers buys
or sells securities on behalf of his customer, he performs an agency function. Similarly, when he collect
cheques, bills, interest and dividend etc. or when he pays insurance premium from the customers
account, as per his instruction, he acts as an agent.
(3) Trustee-Beneficiary: Many times a banker is in the position of a trustee. A trustee is one who holds
property for the benefit of a person or beneficiary. The banker is a trustee when a customer deposits his
valuables and securities for safe custody. In this case, the customer continues to be the owner and is
entitled to the same goods and valuables as he deposited. The banker can not use the articles kept for
safe custody anyway he likes. He can not return equivalent goods in place of the original one. Here the
legal position of a banker as a trustee is quite different from that of debtor and creditor. For example, in
the event of bank's liquidation, securities and valuables held by the bank as trustee are not available for
distribution to the general creditors. Fund, if any, coming to the hands of the bank as a trustee must also
be applied for specific purpose as the trust deed indicates.
(4) Bailor-Bailee: When a bank advances money to a borrower, the goods of the borrower may be
brought under the control of a bank (pledge). Such goods are called pledged goods. In this case, the
relationship between a customer and a banker in respect of the goods under pledge is of
a bailor and bailee.
(5) Lessor-Lessee: In case of locker operation, the relationship between the banker and customer is
lessor-lessee. Here the banker is Lessor and customer is Lessee.
iii. Describe the procedure for opening the following types of account:
a) Joint Stock company b) Partnership firm c) Trust
3. i. What do you understand by a collecting bank?
The collecting banker is one who does the duty of collecting the proceeds of cheques and other
instruments for its customers. A bank may undertake to collect a cheque either as a holder for value or
merely as an agent to the holder thereof. Banker shall continue to act as an agent of its customer till the
amount of the cheque has actually been paid off.
ii. What are the duties and responsibilities?
Collecting Bank's Responsibility
Confirm the following checking ----
1. In case of Crossed Cheque confirm the genuineness of the drawee name and check signature in
account and endorsement
2. Cheque is properly endorsed
3. Name of Drawee, Bank address, date, amount of taka in wording and numeric are ok
4. If any modification made, must be signed by the maker
5. Must be placed before the payee bank in time (to present a cheque for payment with in a reasonable
time, not post/anti-dated)
6. Reason for dishonor must be mentioned (if a cheque is dishonored to notify its customer on the same
day that it is aware of the dishonor)
7. Should not collect cheque of an unknown person (collecting proceeds in the payees’ account which is
properly introduced.)
8. To adhere to current banking practice
9. Its responsibility is not discharged until the cheque in favor of its customer is delivered to the branch
upon which it is drawn.
10. Acting as agent of the client
11. The date of issue of the instrument must not be before opening of the account
iii. Under what circumstances collecting banker losses its protection under the Negotiable
Instrument Act 1881?
According to the section 131 of Negotiable Instrument Act 1881 a collecting bank is provided such
statutory protection, “where a banker in good faith and without negligence receives payment for a
customer of a cheque crossed generally or specially to himself or the customer has no title or a defective
title thereto, the banker shall not incur any liability to the true owner of the cheque by reason of only
having received such payment”. For the following circumstance, however, the collecting banker losses its
protection:
I. If the cheque is not crossed. The protection is available for the crossed (generally or specially) cheques
only.
II. Cheque is collected for person who is not a customer of the bank
III. The cheque is not collected in good faith, i.e. with notice of defective title of the customer and
with any involvement in the act of conversion.
IV. For following type of negligence:
a) Opening of account without satisfactory introduction
b) Endorsement is not properly verified
c)Insufficient inquiries in doubtful cases.
d) Failure to take note or account payee crossing and not negotiable crossing.
4. i. Describe the main function of a commercial bank.
As per Negotiable Instrument Act 1881 and Bank Company Act 1991, “Banker means the accepting, for
the purpose of lending or investment, of deposit of money from the public, repayable on demand or
otherwise and withdrawable by cheque, draft, and order or otherwise”.
The traditional functions of a Commercial bank are to receive deposit from the surplus unit with a
condition to repay on demand or otherwise and allowing loans/advances/investment to the deficit unit.
But now-a-days the functions of a commercial bank diversified and acting as a superstore. So, the
functions may be divided into five categories, such as (1) General functions, (2) Functions related to
foreign trade and foreign exchange, (3) Agency functions, (4) Welfare functions and (5) Other functions
General functions are: a) Maintain account of the clients,
b) To receive deposits of various types,
c) To make advance/investment against with or without securities,
d) To create deposits,
e) To create medium of exchange through cheque, Draft, Pay – order etc.
f) To issue guarantees (local)
g) To discount Bills.
Functions related to Foreign trade & Foreign exchange:
a) To make correspondent banking with overseas banks,
b) To place foreign currency funds with correspondents abroad,
c) To issue Letter of Credit (LC),
d) To issue Back to Back Letter of Credit (BTB L/C),
e) To amend L/Cs,
f) To extend investment/credit facilities to the importers through creating PAD/MIB,
MTR/LTR, LIM/LAM/MP etc,
g) To extend credit/investment facilities to the exporters through the modes of
Musharaka Pre-shipment/PC/ECC, LDBP, FDBP etc,
h) Acceptance of Bill of Exchange and make payment,
i) Make forward booking of foreign exchange on behalf of importer for preventing them from
exchange loss,
j) Sale and purchase of Foreign currency, TC, Credit Cards,
k) Maintaining Foreign Currency accounts,
l) Outward foreign remittance for import, foreign tour, travel, education, treatment, pilgrims, training
etc.,
m) Inward foreign remittance – export proceeds, wage earners remittance etc.,
n) Issuing guarantees (foreign).
Agency functions:
e) To transfer money,
f) To collect funds and makes payment for the clients,
g) To maintain confidentiality of customers,
h) To sale and purchase of shares and securities,
i) To make payments for utility charges and insurance premium on behalf of the client,
j) To receive rent, dividend, premium etc.
k) To work as trustee,
l) To work as representative of Central Bank.
Welfare functions:
a) Social welfare functions/Corporate Social Responsibility,
b) Functions related to the welfare of the employees/retired employees such as
• Establishment of institution,
• Establishment of Trust,
• Pensions and allowance.
Other functions:
a) Underwriting,
b) Work as safe custody through Locker service,
c) Advices the clients on business matters,
d) Repo,
e) Customer financing,
f) Leasing,
g) Income sharing,
h) Syndication, arrangement of funds,
i) Issuance of Sanchay Patra, ICB Unit Certificate, Bond,
j) Sale of Prize Bond,
k) Any other functions approved by the Gov’t/Bangladesh Bank.
l) Merchant banking.
ii. How does a commercial bank contribute towards the development of a country?
Role of Commercial Banks in Economic Development
The role of commercial banks in economic development rests chiefly on their role as financial
intermediaries. In this capacity, commercial banks help drive the flow of investment capital throughout
the marketplace. The chief mechanism of this capital allocation in the economy is through the lending
process which helps commercial banks gauge financial risk.
01. Arbiters of risk:
One of the most significant roles of commercial banks in economic development is as arbiters of risk.
This occurs primarily when banks make loans to businesses or individuals. For instance, when individuals
apply to borrow money from a bank, the bank examines the borrower's finances, including income,
credit score and debt level, among other factors. The outcome of this analysis helps the bank gauge the
likelihood of borrower default. By weeding out risky borrowers, commercial banks lessen the risk of
financial losses. As a result, loans that mature without any problems generate a larger pool of funds for
the bank to lend, further supporting economic development.
02. Generation of economic activity from individuals:
When commercial banks assess risk, they help ensure that loans go to creditworthy borrowers. In turn,
borrowers typically use loan proceeds to finance major purchases, such as homes, education and other
consumer spending. The effect of commercial bank lending generates economic activity from individuals
who now have the necessary funds to finance their own endeavors.
03. Financing in Small Business:
Commercial banks also finance business lending in a variety of ways. A business owner may solicit a loan
to finance the start-up costs of a small business. Once funded, the small business may begin operations
and embark on a growth plan. The aggregate effect of small business activity generates a significant
portion of employment around the country. According to the U.S. Census Bureau, businesses employing
between one and 19 people accounted for 4.4 million jobs in 2004. In contrast, businesses with more
than 20 employees only accounted for 1.2 million in the same year.
04. Help Government Spending:
Commercial banks also support the role of the government as an agent of economic development.
Generally, commercial banks help fund government spending by purchasing bonds issued by the
Department of the Treasury. Both long and short term Treasury bonds help finance government
operations, programs and support deficit spending.
05. Generates Individual Wealth:
Commercial banks also offer types of accounts to hold or generate individual wealth. In turn, the
deposits commercial banks attract with account services are used for lending and investment. For
example, commercial banks commonly attract deposits by offering a traditional menu of savings and
checking accounts for businesses and individuals. Similarly, banks offer other types of timed deposit
accounts, such as money market accounts and certificates of deposit. Some investors use these interest
bearing, low risk accounts to hold money for investment purposes, waiting for attractive investment
opportunities to materialize
(ii) Banks help in distribution of funds between regions: Another way by which commercial banks
encourage production and enhance national income is by the transference of surplus capital from
regions where it is not wanted so much, to those regions where it can be more usefully and efficiently
employed. This distribution of funds between regions has the effect of opening up backward regions and
paying the way for their economic development.
(iii) Banks create credit and help in business expansion: Fluctuations in bank credit have an important
bearing on the level of economic activity. Expansion of bank credit will provide more funds to
entrepreneurs and, hence, will lead to more investment. Under conditions of full employment,
expansion of bank credit will have the effect of inflationary pressure. But under conditions of
unemployment, it will push up production in the country. On the other hand, a decline in bank credit
will result in decline in production, employment, sales and prices. From the view of an under-developed
economy, the expansion of bank credit offering more financial resources to industries in one of the
contributory causes for greater economic development.
(iv) Banks monetize debt: A very important service the banks render to the community is the creation of
demand deposits in exchange of debts of other (viz., short and long-term securities). Commercial banks
buy debts of others which are not generally acceptable as money, either because the debtors are not
sufficiently known or because their debt is payable only after a period of time. In return for them, they
issue demand deposits which are generally accepted as money. By these exchange operations, banks
monetize debt. The significance of banks today flows from the fact that they are “not merely traders in
money but also, in an important sense, manufacturers of money.” Bank money is used for the promotion
of industry and trade. It is rightly said that they have not only the power to determine the aggregate
volume of bank money in existence but to influence the uses to which that money should be put.
(v) Banks promote capital formation: Commercial banks afford facilities for saving and thus encourage
habits of thrift and industry among people. The mobilize the idle and dormant capital of the community
and make it available for productive purposes. Economic development depends upon the diversion of
economic resources from consumption to capital formation. A higher rate of saving and investment is,
therefore, what constitutes real capital formation. In this, the role of banks is invaluable. But then there
can be other institutions also in a country such as insurance companies which may help in mobilizing the
savings of the community for productive purposes.
(vi) Banks influence interest rates : Banks can influence economic activity in another way also. They can
influence the rate of interest in the money market through its supply of funds. By offering more or less
funds, it can exert a powerful influence upon interest rates. Besides, it can also influence the people to
hold more less bank money or less or more other assets. In this way, too, it can influence the interest
rates. A cheap money policy with low rate of interest will tend to stimulate economic activity, if other
conditions are favourable.Thus, bans have come to occupy an important place in the industrial and
commercial life of a nation. A developed banking organization is a necessary condition for the industrial
development of a country.
5. i. Define check and describe its main characteristics
MAY 2009 7 VII
ii. What do you mean by crossing a check?
A cheque is said to be crossed when two transverse parallel lines with or without any words are drawn
across its face. A crossing is a direction to a payee banker to pay the money generally to a particular
banker, as the case may be, and not to the holder at the counter.
Ordinarily, the payee of a cheque is entitled to encash at the counter of the paying banker by presenting
it within the specified banking hours. In case of a bearer cheque, the paying banker does not need to go
into an elaborate exercise with regard to the identity of the holder of the cheque. An order cheque is
also paid by the paying banker on being apparently satisfied about the true identity of the presenter of
the cheque. To ensure that the cheque is not encashed by a wrong person, by concealing his identity,
there has developed a practice called ‘crossing of a cheque’. The practice has been given legal coverage
in the Negotiable Instrument Act, 1881.
When cheque is crossed it in effects means a request-more appropriately, an instruction by the client
not to pay the cheque directly over the counter but to a banker only for crediting the payees account
with the bank. A cheque bearing such an instruction is called a ‘crossed cheque’. The crossing of a
cheque is intended to ensure that its payment is made to the right payee. Section 123 to 131 of the
Negotiable Instrument Act contain provisions relating to crossing. According to section 131-A, these
sections are also applicable in case of drafts. Thus not only cheques but bank drafts also may be crossed.
For our discussion we may differentiate crossing into following two types:
1. General Crossing.
2. Special Crossing.
iii. How does the payment modality change with the crossing of a check?
Significance of General Crossing:
i. The effect of general crossing is that it gives a direction to the paying banker.
ii. The direction is that, the paying banker should not pay the cheque at
the counter. It should be paid only to a fellow banker. In other words, payment is made through an
account and not at the counter. Sec.126 of the NI Act clearly lays down that, “Where a cheque is crossed
generally, the banker on whom it is drawn, shall not pay it otherwise than to a banker”.
iii. If a crossed cheque is paid at the counter in contravention of the
crossing:
a) The payment does not amount to payment in due course. So, the paying banker will lose
his statutory protection;
b) He has not right to debit his customer’s account, since, it will constitute a breach of his
customer’s mandate;
c)He will be liable to the drawer for any loss, which he may suffer;
d) He will be liable to the true owner of the cheque who may be a third party, irrespective
of the fact, that, there is no contract between the banker and the third party. As a general rule, a banker
is answerable only to his customer.
iv. The main intention of crossing a cheque is to give protection to it.
When a cheque is crossed generally, a person who is not entitled to receive its payment, is prevented
from getting that cheque cashed at the counter of the paying banker. But, it gives only a limited
protection, in the sense, that if the thief is not the customer of the paying banker, he can encash that
cheque through his banker, by forging the signature of the payee. However, it can be detected. To avoid
this danger, special crossing was introduced.
a) Significance of Special Crossing:
i. It is also a direction to the paying banker. The direction, is the, that paying
banker should pay the cheque only to the banker, whose name appears in the crossing or to his agent.
Sec.126 the NI Act clearly lays down that “where a cheque is crossed specially the banker on whom it is
drawn, shall not pay it, otherwise than to the banker to whom it is crossed or his agent for collection.
ii. If a cheque specially crossed to a bank is presented by another bank, not in
the capacity of its agent, the paying banker is justified in returning the cheque.
iii. A special crossing gives more protection to the cheque than a general
crossing. It makes a cheque still safer because a person, who does not have a real claim for it, would find
it difficult to obtain payment. In special crossing, the cheque is specially crossed to the payee’s banker.
Hence, the banker, in whose favour the cheque has been crossed, knows the payee and his specimen
signature well. So, he will not collect if for any person other than the payee. If there is any forgery, it can
be easily detected by the banker. But, we can not say that, it gives full protection in the sense, that, an
unscrupulous person, who has an account in the same bank but at a different branch, can encash it by
forging the signature of the payee. It can also be detected.
iv. What is meant by material alteration of a check? What material alteration is so important for a
banker?
6. i. What do you understand by bankers’ right of set-off?
May 2009 7 VI
ii. How can a banker exercise his right of set off?
When an overdraft facility on a current account runs out and the customer fails to pay the amount
owed, the firm takes money from the customer’s savings account to reduce or clear the debt.
Or, if a customer fails to make credit card or mortgage payments, bank may use available funds from
that customer’s current or savings account to make the missing payments, thereby helping the customer
to avoid extra interest or charges.
Bank has a right, but not a duty, to look at a customer’s overall position and to ‘combine’ the accounts
held by that customer. This is sometimes called a right of ‘set off’ or a right to ‘combine’ accounts. A
bank has this as a general right, whether or not it mentions the right in the account terms.
To exercise right of set off the the following feature must be present
I. Mutual debt must be certain: before excercising right of set –off the claim and the counter claim
must be determined accurately
II. Debt must be due: only those debts, which are due and recoverable on the date of set off, can be
subject of set off.
iii. What is banker’s lien?
May 2009 7 VI
7. Distinguish between them:
i. Primary security and collateral security
Primary security means a specific asset against which loan granted. For example, where a Bank finances
the purchase of a home, the home is the primary security. In the same way, a car purchased with the
help of a Bank loan, is the primary security for that loan. Bank creates a charge against this primary
security, to secure its loan. This charge gives the Bank the legal authority to dispose off the asset, and
apply the proceeds therefrom, to the loan amount in default. Primary security may be either personal
security or impersonal security or both. Personal Guarantee & Corporate Guarantee may be treated as
personal security & imported or locally produced goods may be treated as impersonal security.
Collateral/Secondary Security: if any additional security provides other than "primary Security" it is
called collateral security. When primary security remains under the custody of borrowers, banker to
secure its position ask the borrower to provide additional security. Such tangible security is called
collateral security. The collateral serves as protection for a lender against a borrower's default - that is,
any borrower failing to pay the principal and interest under the terms of a loan obligation. If a borrower
does default on a loan (due to insolvency or other event), that borrower forfeits (gives up) the property
pledged as collateral - and the lender then becomes the owner of the collateral.
Property pledged by a borrower to protect the interests of the lender in the event of the borrower's
default;; specifically under Article 9 of the Uniform Commercial Code : property subject to a security
interest.
ii. Core capital and supplementary capital
Core Capital/ Tier-1 Capital
'Core Capital' also known as Tier-1 Capital of a commercial bank comprises of highest quality of capital
elements like –
a) Paid up capital
b) Non-repayable share premium account
c) Statutory reserve
d) General reserve
e) Retained earnings
f) Minority interest in subsidiaries
g) Non-cumulative irredeemable preference shares
h) Dividend equalization account
Supplementary Capital/ Tier-2 Capital
'Supplementary Capital' also known as Tier-2 capital represents other elements which fall short of some
of the characteristics of the core capital but contribute to the overall strength of a bank -
a) General provision
b) Revaluation reserves
Revaluation reserve for fixed assets
Revaluation reserve for securities
Revaluation reserve for equity instrument
c) All other preference shares
d) Subordinated debt
iii. Holder for value and holder in due course
Holder for value: Person in possession of a negotiable instrument for which value has been given
Holder in due course: "Holder in due course" means any person who for consideration became the
possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or indorsee
thereof, if payable to order, before the amount mentioned in it became payable, and without having
sufficient cause to believe that any defect existed in the title of the person from whom he derived his
title.
Holder in due course: Essentials
A "bona fide holder for value" is the "holder in due course".
·Essentials:
1. Must be holder for consideration.
2. The Negotiable Instrument transferred to him before it becomes payable (overdue).
3. Must be transferred in good faith.
4. Should have no reason to believe that there existed any defect on the title of the person transferring
it to him (transferor).
5. An executor of a will cannot be a holder in due course
Holder in due course: Rights
The holder in due course gets better title even if there was defect in title of transferor. In fact all defects
are cleansed when the bill goes in the hands of holder in due course except in case where signature of
endorser or maker or drawee was forged.
Hence the holder in due course has following advantages and protections:
(a) A person who had signed an inchoate instrument is liable to holder in due course for full value as
provided under Section 20.
(b) Every prior party to the instrument is liable to holder in due course (section 36).
(c) Even if drawer is fictitious, acceptor is liable to holder in due course if signature of drawer and
endorser as appearing in the bill tallies (section 42).
(d) Parties to instrument are liable to holder in due course or against subsequent holder even if it was an
accommodation bill but the liability stands only to the consideration paid by him and not the full
amount (section 43).
(e) Even if Bill of Exchange was delivered conditionally or for a specific purpose and not for purpose of
transferring property in the bill absolutely, the holder in due course is still entitled for the amount of the
Bill (section 46 para 3).
(f) Even if Bill was lost or was obtained from maker/acceptor/holder by offence or fraud for unlawful
consideration the holder in due course is still entitled to get full amount of bill (Section 58).
(g) In a suit by holder in due course, maker of promissory note, drawer of bill of exchange or cheque and
acceptor of bill for honour of drawer cannot deny validity of the instrument as originally drawn (Section
120).
(h) In a suit filed by holder in due course, maker of promissory note and acceptor of bill payable to order
can not deny payee’s capacity to indorse the promissory note or bill (Section 121).
(i) Endorser can not deny signature or capacity of any prior party to the instrument (Section 122).
iv. SDR and Euro
SDR:
A Security Deposit Receipt is a written undertaking issued by a branch of a bank to pay a certain sum of
money to a specified person and organization. A security receipt is issue and paid by the same branch of
a bank and as the same. The person or the organization in whose favor it is issued is known as
beneficiary. It is sold to the applicant on payment of value who may or may not be our customer and is
called the purchaser.
A security deposit receipt may be sold to any person who desires to offer the same in payment of
earnest money, security deposit and other dues to government agencies autonomous bodies,
companies, local authorities, etc. in the course of business and other dealings.
Characteristics and payment:
I. It should be paid to the beneficiary after proper identification or it may be credited to his
account and it is not transferable.
II. On the applicant presenting his receipt purporting to be discharged by the beneficiary, payment
of the amount will not be effected to the applicant
III. The bank will not be required to examine the genuineness or otherwise of the beneficiary’s
discharge on the security receipt unless the beneficiary has furnished to the bank a specimen of his
signature duly attested by an authorized officer of the bank
IV. The bank reserves the right to effect payment of the amount of his security deposit to the
applicant on his surrendering this receipt to the bank even without beneficiary’s discharge.
Euro
The euro (sign: €; code: EUR) is the currency used by the Institutions of the European Union and is the
official currency of the eurozone, which consists of 17 of the 27 member states of the European
Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland,Italy, Luxembourg,
Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.[3][4] The currency is also used in a
further five European countries and consequently used daily by some 332 million Europeans. he euro is
the second largest reserve currency as well as the second most traded currency in the world after
the United States dollar.[ The name euro was officially adopted on 16 December 1995. [9] The euro was
introduced to world financial markets as an accounting currency on 1 January 1999, replacing the
former European Currency Unit
Characteristics
Coins and banknotes
The euro is divided into 100 cents. The coins are issued in €2, €1, 50c, 20c, 10c, 5c, 2c,
and 1c denominations. All circulating coins have a common side showing the denomination or value,
and a map in the background. The design for the euro banknotes has common designs on both sides.
The design was created by the Austrian designer Robert Kalina.[22] Notes are issued
in €500, €200, €100, €50, €20, €10, €5. Each banknote has its own colour and is dedicated to an artistic
period of European architecture. The front of the note features windows or gateways while the back has
bridges, symbolising links between countries and with the future.
Payments clearing, electronic funds transfer
Capital within the EU may be transferred in any amount from one country to another. All intra-EU
transfers in euro are treated as domestic transactions and bear the corresponding domestic transfer
costs.[24] This includes all member states of the EU, even those outside the eurozone providing the
transactions are carried out in euro.[25] Credit/debit card charging and ATM withdrawals within the
eurozone are also treated as domestic transactions, however paper-based payment orders, like cheques,
have not been standardised so these are still domestic-based. The ECB has also set up a clearing
system, TARGET, for large euro transactions
Currency sign
A special euro currency sign (€) was designed after a public survey had narrowed the original ten
proposals down to two.
v. Loan, overdraft and cash credit
Loan: when an advance is made in a lump sum repayable either in fixed monthly installments or in lump
sum and no subsequent debit are ordinarily allowed except by way of interest, incidental charges etc is
called a loan. Loans are thus, allowed for a definite purpose and for a predetermined period to those
parties who have either fixed source of income or who desire to pay it in lump sum.
Overdraft: when a customer requires temporary accommodation, he may be allowed to overdraw on his
current account, usually against collateral security, and pay interest on the amount actually used by him.
Sometimes, the customer may be sanctioned a certain limit upon which he can overdraw his current
account within a stipulated period. Here, withdrawals or deposits can be made any number of times at
the conveyance of the customer, provided the total amount overdrawn does not, at any time, exceed
the agreed limit. Interest is calculated and charged only on the actual debit balance on daily product
basis.
Cash credit: a cash credit is an arrangement by which a banker allows his customer to borrow money
against pledge of goods, either in bank’s godown or borrower’s godown under bank’s effective control. It
is a favorite mode of borrowing by traders, industrialists and agriculturist for meeting their working
capital requirement. This type of facility is more freely granted by banks than any other advance. It is the
more secured advance.
vi. Bill of lading and bill of entry
BILL OF LADING: In international trade Bill of lading occupies an importing place as a mode of transport.
Bill of Lading is a quasi negotiable instrument issued by shipping company which is a document of title
to the goods described in it. A thorough bill of lading involves the use of at least two different modes of
transport from road, rail, air, and sea. The term derives from the verb "to lade" which means to load a
cargo onto a ship or other form of transportation.
A bill of lading renders the following three functions:
1) It is an evidence of contract of carriage.
2) It is a receipt for the goods received by the carrier, and
3) It is a document of title to goods.
The Bill of Lading must contain the following information:
1) The name of shipper, consignee and name and address of notify party.
2) Description of goods.
3) Identifying marks and number of B/L with date.
4) The port of shipment and discharge.
5) Evidence that the goods have been loaded on board.
6) The name of the carrying ship.
7) Amount of freight paid or unpaid.
8) The date of shipment.
9) The number of original Bill of Lading issued.
10) Flag of nationality.
11) Gross/net/tare weight; and
12) Freight rate/measurements and weighment of goods/total freight.
b) Meaning: A special crossing implies the specification of the name of a banker on the face of the
cheque. Sec.124 of N.I. Act 1881 reads. “Where a cheque bears across its face an addition of the name
of a banker, either with or without the words “Not Negotiable” that addition shall be deemed a crossing
and the cheque shall be deemed to be crossed specially, and to be crossed to that banker”.
Drawing of two transverse and parallel lines is not necessary in case of a special crossing. When a
cheque has been specially crossed, the banker upon whom it has been drawn will make the payment
only to that banker in whose favour it has been crossed.
c) Specimen of Special Crossing:
iv. What is meant by material alteration of a check? What material alteration is so important for a
banker?
DECEMBER 2009 4 III
5. i. Define customer of a banker.
DECEMBER 2009 2 I
ii. What do you understand by banker-customer relationship?
DECEMBER 2009 2 II
iii. Describe the procedure for opening the following types of account:
b) Joint Stock company b) Club c) Trust
DECEMBER 2009 2 III
6. i. What do you understand by bankers’ right of set-off?
May 2009 7 VII
ii. How can a banker exercise his right of set off?
DECEMBER 2009 6 II
iii. What is banker’s lien?
May 2009 7 VII
7. Distinguish between them:
I. Share and mutual fund
May 2009 1 V 7 III
II. Primary security and collateral security
DECEMBER 2009 7 I
III. Bill of lading and bill of entry
DECEMBER 2009 7 VI
IV. Holder for value and holder in due course
DECEMBER 2009 7 III
V. Bearer check and order check
Bearer cheque: A cheque which is payable to any person who presents it for payment at the bank
counter is called ‘Bearer cheque’. A bearer cheque can be transferred by mere delivery and requires no
endorsement.
2. Order cheque:
It is a cheque which is expressed to be so payable or which is expressed to be payable to particular
person, without containing words prohibiting transfer or indicating that it is not transferable. In such a
cheque the word ‘bearer’ may be cut out or cancelled and the word ‘order’ may be written. The payee
can transfer an order cheque to someone else by signing his or her name on the back of it.
VI. Retail banking and wholesale banking
May 2009 7 V
VII. Bridge finance and lease finance
8. i. discuss the objects and importance of bank loans and advances.
ii. What do you understand by loan classification? Describe the various types of classification with
example
Classification means segregation/separation/the act of forming into classes. In the context of banking
investment, classification is the process to identify the invested amount into classes or status of loan as
per formula given by BB considering their nature, transaction or turnover, repayment process and
qualitative judgment.
The purposes of loan classification are:
IX. To segregate the loan accounts into classes to take appropriate steps.
X. To strengthen the loan discipline of every bank
XI. To increase the recovery of outstanding loan.
XII. To suspend the loan of interest from classified loan accounts into income account.
XIII. To maintain actual/accurate provision against probable loss of classified loan
XIV. To determine the proper capital adequacy on the basis of risk weighted assets
XV. To establish transparency of the bank’s account
XVI. To determine the accurate profit for payment of tax and distribution of profit to the stakeholders.
.iv Why it is necessary to keep provision against classified loan?
DECEMBER 2009 8 III
iv. How keeping of provision affects the balance sheet of a bank/
DECEMBER 2009 8 IV
9. i. Describe the procedure for lending against the following securities:
e) financial obligation b)immovable property c) work order d) trust receipt
DECEMBER 2009 9
10. i. What are the risk a banker is likely to face in paying a a) post dated check b) stale check and
c) crossed check over the counter?
DECEMBER 2009 11 I
ii. A demand draft issued by you on one of your branches is lost before it reaches the payer. As a
banker what procedures you will follow when the purchaser of the draft demands his money back?
DECEMBER 2009 11 II
11. i. what is loan syndication?
MAY 2009 11 I
ii. what are its advantages and disadvantages?
MAY 2009 11 I
iii. what is meant by lead bank/ what is its role in a loan syndication?
MAY 2009 11 I
May 2011
1 Write short notes on the following:
I. Liquidity Ratio
Liquidity ratio is a class of financial metrics that is used to determine a company's ability to pay off its
short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety
that the company possesses to cover short-term debts.
Common liquidity ratios include the current ratio, the quick ratio and the operating cash flow ratio.
Different analysts consider different assets to be relevant in calculating liquidity. Some analysts will
calculate only the sum of cash and equivalents divided by current liabilities because they feel that they
are the most liquid assets, and would be the most likely to be used to cover short-term debts in an
emergency.
A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when
creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the
liquidity ratios to determine whether a company will be able to continue as a going concern.
II. Microfinance
MAY 2010 1 V
III. core risk management
MAY 2010 1 I
IV. convertible bond
In finance, a convertible note (or, if it has a maturity of greater than 10 years, a convertible debenture) is
a type of bond that the holder can convert into shares of common stock in the issuing company or cash
of equal value, at an agreed-upon price. It is a hybrid security with debt- and equity-like features.
Although it typically has a low coupon rate, the instrument carries additional value through the option
to convert the bond to stock, and thereby participate in further growth in the company's equity value.
The investor receives the potential upside of conversion into equity while protecting downside with cash
flow from the coupon payments.
V. contingent liability
Contingent Liabilities
1. Acceptance, Endorsements.
2. Bank Guarantee.
3. Liability On Account Of Outstanding Forward Exchange Contracts.
VI. Mutual Fund
MAY 2009 1 IV
VII. SME
DECEMBER 2009 1 I
VIII. CAMELS Rating
DECEMBER 2009 1 III
2 I. why is introduction necessary at the time of opening bank account?
MAY 2009 3 I
II. what are the modes through which a customer can withdraw his money under the present modern
banking system?
III. Under what circumstances can a banker disclose the secrecy of a customer’s account?
MAY 2009 3 II
3 I. describe the main functions of a central bank.
MAY 2009 5 I
II. What are the different instruments used by the BB to pursue its monetary policy?
MAY 2010 4 II
4. I. what is meant by a paying banker? Describe the duties and responsibilities of a paying banker
MAY 2009 2 I & II
II. Explain the protection offered by law to the paying banker.
MAY 2009 2 III
III. Mr. Rahim has an overdraft limit of Tk. 500000 with your bank and the account shows a debit
balance of Tk. 45000 as on 1st January 2011. On the same say a check of Tk. 7500 drawn on the
account is presented for cash payment by a third party Mr. Karim. Will you pay the check and why. If
not what would be your remarks for returning the check unpaid.
5. I. on what occasion’s payment of checks may be refused by a banker
1. when the balance of the investment/credit of the customer is insufficient to meet the
cheque
2. when the funds are not properly applicable to the payment of a cheque e.g. when the
account was opened for a purpose other than that for which the cheque has been drawn i.e. personal
cheques cannot be paid out of trust
3. After receiving the notice or information of death, the banker should stop payment of all
cheques against his account. The account will cease to be operative till his successor or legal
representative produces to the bank the succession certificate or probate of the will or a letter of
administration.
4. when the customer has informed the bank about the loss of the cheque
5. When the bank comes to know the defect in the title of the person presenting the
cheque.
6. When the bank come to know that the customer is applying funds in breach of trust.
7. When the bank receives notice of an assignment by a customer of his investment/credit
balance
8. When the customer close the account before the cheque is presented for encashment
9. When the cheque is post dated and is presented for payment before its ostensible/
apparent date
10. When the cheque is out of date or stale or ante-dated
11. When the balance of the account is blocked as per order of competent authority.
II. What is the legal position of a banker if he pays a cheque after business hour?
Late payment of cheques means cash payment of a cheque after transaction hour. Banking law does not
allow any late payment. Bankers always try to discourage this type of payment due to following reasons:
1. Cheque may be stopped before next working day
2. Account holder may be expired
3. Account holder may become insane
4. Account holder may be declared as insolvent
5. Account may be garnished/blocked.
However on special cases the branch authority sometimes allow late payment if investment/credit
balance of the account exists after observing the following formalities:
1. Manager must mark late payment on the cheque with his initial.
2. Cash of the late payment cheque must be received by the account holder duly putting his two
signatures on the back side of the cheque, not by the bearer.
3. Cheque should be posted, to be passed by authorized officer(s) and also to be entered into the
payment register.
4. This payment cheque must be made as voucher on the following working day.
6. i. What is remittance? What are the different modes of Remittance/
The synonyms of the word remittance are payment, transfer of funds, transmittal, release, discharge etc.
Therefore remittance means transfer of funds from one place to another within the country or outside
the country i.e a payment to a remote recipient through official channel.
Commercial Bank in Bangladesh offers the facility of transferring funds, from one place to another, to
their customer as well as to the general public following the rules of Money Laundering Act. Such
transfer of fund can be affected either through Demand Draft or telegraphic transfer. The aforesaid two
methods of remitting money from one place to another within the country is known as inland
remittance. While it is for out side Bangladesh the same is called foreign remittance. The advantage of
remittance is quick transfer of money with minimum cost and also the risk of physical transportation of
cash is eliminated.
Remittance: DD, TT, PO issue & maintenance of the registers, TT/DD, advice issue, Responding of TT/DD
advice, DD paid without advice.
II. Can payment be made against a bank draft without advice?
III. Describe the steps fpor cancellation of a Draft.
The purchaser may request to cancel the draft purchased by him and ask for refund of money. For
cancellation of a draft the following points should be kept in mind:
a) On receipt of application along with the demand draft for its cancellation the signature of
the application is verified from the original application form and the genuineness of the Demand Draft is
examined.
b) Before the draft is cancelled it is ascertained that no Duplicate Draft has been issued.
c) If the date of issue of the draft is much earlier, consent of the payee in writing should be
obtained.
d) If the draft is in favour of a company, semi-government body or government official, consent of
the payee in writing is essential.
e) If the draft has been negotiated, the draft should not be cancelled.
f) The signatures of officer on the draft should be crossed but in no case torn, and the draft be
marked “Cancelled”. A note in respect of cancellation should be made in the draft issued Register and on
the application.
g) The cancelled draft should be attached to debit voucher along with the request letter of the
purchaser.
h) In case of cancellation of a DD, payment procedure would be Dr. HO General a/c drawee branch
& Credit Payee.
i) The drawee branch must be advised about the cancellation of draft through copy of Debit advice,
second copy to be sent to Head Office and the third one to be kept with the debit voucher.
7. Distinguish between them:
I. Pledge and Hypothecation
II. Core capital and supplementary capital
DECEMBER 2009 7 II
III. Fixed Charge and floating charge
Fixed Charge
Any of certain charges, as taxes, rent, interest, etc., which must be paid, usually at regular intervals,
without being changed and without reference to the amount of business done.
Floating Charge
A floating charge is a security interest over a fund of changing assets of a company or a limited liability
partnership (LLP), which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge
attaches to specific assets.
Floating charges can only be granted by companies. If an individual person or a partnership was to
purport to grant a floating charge, it would be void as a general assignment in bankruptcy.
Floating charges take effect in equity only. The floating charge has been described as "one of equity's
most brilliant creations.
IV. Accommodation Bill and Trade bill
Accommodation Bill
Bill of exchange endorsed by a reputable third party (called an accommodation party or accommodation
endorser) acting as a guarantor, as a favor and without compensation. The bill then can be discounted
on the financial strength of the guarantor who remains liable until the bill is paid. Also called
accommodation note, accommodation paper, or (in the UK) windbill.
V. Euro and SDR
DECEMBER 2009 7 IV
VI. Promissory Note and bill of exchange
MAY 2009 7 III
VII. Share and debenture
MAY 2009 7 VII
8. Describe the procedure for lending against the following securities:
a) Life Insurance Policy b) Shares Certificate c) Guarantee d) ICB Unit Certificate
9. Discuss the various means adopted in committing fraud and forgery in banks and suggest measures
to check these activities.
Fraud is defined as "any behavior by which one person intends to gain a dishonest advantage over
another". In other words , fraud is an act or omission which is intended to cause wrongful gain to one
person and wrongful loss to the other, either by way of concealment of facts or otherwise.
Losses sustained by banks as a result of frauds exceed the losses due to robbery, dacoity, burglary and
theft-all put together. Unauthorized credit facilities are extended for illegal gratification such as case
credit allowed against pledge of goods, hypothecation of goods against bills or against book debts.
Common modus operandi are, pledging of spurious goods, inletting the value of goods, hypothecating
goods to more than one bank, fraudulent removal of goods with the knowledge and connivance of in
negligence of bank staff, pledging of goods belonging to a third party. Goods hypothecated to a bank are
found to contain obsolete stocks packed in between goods stocks and case of shortage in weight is not
uncommon.
Despite all care and vigilance there may still be some frauds, though their number, periodicity and
intensity may be considerably reduced. The following procedure would be very helpful if taken into
consideration:
1. All relevant data-papers, documents etc. Should be promptly collected. Original vouchers or other
papers forming the basis of the investigation should be kept under lock and key.
2. All persons in the bank who may be knowing something about the time, place a modus operandi of
the fraud should be examined and their statements should be recorded.
3. The probable order of events should thereafter be reconstructed by the officer, in his own mind.
4. It is advisable to keep the central office informed about the fraud and further developments in regard
thereto.
10. a) What is mortgage? What are the rights and liabilities of a mortgagor and a mortgagee?
Mortgage: A mortgage is a security interest in real property held by a lender as a security for a debt,
usually a loan of money. According to Transfer of Property Act 1882, 58(a) defines, "Mortgage is the
transfer of an interest in specific immovable property"
While a mortgage in itself is not a debt, it is the lender's security for a debt. It is a transfer of an interest
in land (or the equivalent) from the owner to the mortgage lender, on the condition that this interest
will be returned to the owner when the terms of the mortgage have been satisfied or performed. In
other words, the mortgage is a security for the loan that the lender makes to the borrower.
Participants:
01. Mortgage lender:
A mortgage lender is an investor that lends money secured by a mortgage on real estate. The borrower,
known as the mortgagor, gives the mortgage to the lender, known as the mortgagee. As the mortgagee,
the lender has the right to sell the property to pay off the loan if the borrower fails to pay.
02. Borrower:
A mortgagor is the borrower in a mortgage; they owe the obligation secured by the mortgage. Generally,
the debtor must meet the conditions of the underlying loan or other obligation and the conditions of
the mortgage. Otherwise, the debtor usually runs the risk of foreclosure of the mortgage by the creditor
to recover the debt. Typically the debtors will be the individual home-owners, landlords or businesses
who are purchasing their property by way of a loan.
b) What factors should be considered while taking security?
1. Lien is a right to retain that which is in possession of a person and belongs to another until his
demands are satisfied. According to the Contract Act 1872 Section 170” a lien is the right of a creditor in
possession of goods, securities or any other assets belonging to the debtor to retain them until the debt
is repaid.”
The owner of the property, who grants the lien, is referred to as the lienor and the person who has the
benefit of the lien is referred to as the lienee.
There are two types of lien
1) particular lien is a right of the creditor to retain the goods of the debtor in respect of a particular
debt and this debt must have arisen out of service rendered or money expended on the goods
2) General lien is a right of the creditor to retain in possession of the goods and securities till the dues
are paid. In case of general lien the creditor has no right to sell or liquidate the property without filing
suit against the debtor.
11. i. What do you mean by crossing a check? Give examples.
DECEMBER 2009 5 II
ii. Distinguish between the crossing “Not Negotiable”, “Not Transferable” and “Account Payee”
cheque.
The crossing “Not Negotiable” restricts the transferability of cheque. This is because a transferee of a
cheque bearing words “Not Negotiable” will not get a better title than that of a transferor. In other
words, if the transferors’ title is defective, the title of the holder will also be defective even if he happens
to be holder in due course.
The crossing “Account Payee” shall cease to be negotiable and it shall be the duty of the collecting
banker of the cheque to credit the proceeds thereof only to the account of the payee named in the
cheque.
iii. As a banker would you action be legally justified in returning a cheque presented for payment to B
which is drawn in favor of A and marked “Not Negotiable”. Give reasons in support of your action.
December 2011
Restrictions:
Following functions to be restricted in case of dormant account-
Issuance of cheque book.
Renewal of ATM/Debit Card.
Change of address
Addition or deletion of joint account holder.
Signature modification or change.
Withdrawal through ATM.
Internet or SMS Banking.
Activation of Dormant/inoperative account:
A dormant/inoperative account can be activated or turned into regular account in the following two
ways-
1) Through Application: The account holder(s) will apply to the manager for activation of the account
narrating the valid cause of keeping the account non-transacting for long period and being satisfied the
Manager will activate the account. But no service charge to be levied for activation of
inoperative/dormant account.
2) Through transaction: If any transaction takes place in the dormant account it becomes activated. If
the account holder(s) transact frequently, the Manager will convert the account into regular account
and transfer the account in the general ledger.
6. i) What do you understand by a customer of a bank?
DECEMBER 2009 2 I
ii) What do you mean by bank-customer relationship?
DECEMBER 2009 2 II
iii) discuss the procedure for opening the following types of account:
a) Joint Stock Company b) Club c) Trust account
DECEMBER 2009 2 III
7. Distinguish between the following:
i) Bank Rate and LIBOR
Libor: The London Interbank Offered Rate (LIBOR) is a daily reference rate based on the interest rates at
which banks borrow unsecured funds from other banks in the London wholesale money market (or
interbank market).
LIBOR is defined as:
"The rate at which an individual Contributor Panel bank could borrow funds, were it to do so by asking
for and then accepting inter-bank offers in reasonable market size, just prior to 11.00 London time."
ii. Working capital and venture capital
Working Capital
Working capital is the fund use to meet up the day to day cash requirement of a firm. A measure of both
a company's efficiency and its short-term financial health. The working capital ratio is calculated as:
Working Capital = Current Assets - Current Liabilities
Positive working capital means that the company is able to pay off its short-term liabilities.
Negative working capital means that a company currently is unable to meet its short-term liabilities with
its current assets (cash, accounts receivable and inventory).
Also known as "net working capital", or the "working capital ratio".
iii. Nostro and vostro account
A. Nostro Account:
Nostro accounts are usually in the currency of the foreign country. This allows for easy cash
management because currency doesn't need to be converted. Nostro is derived from the latin term
"ours."
B. Vostro Account:
The account a correspondent bank, usually U.S. or UK, holds on behalf of a foreign bank. Also known as
a loro account. Vostro is latin for you
(1) An ISO term. An account serviced by a bank on behalf of an account owner bank.
(2) An account held by a bank in our books on behalf of another (=correspondent) bank. In principle, a
liability account representing balances maintained with the reporting entity for another bank.
(3) Loro accounts are also known as "vostro accounts" and "due to accounts"
iv. bad debt provision and reserve
Reserves :
Reserve is a portion of profit of an organization, which is created by debiting the profit & loss
appropriation account to meet an unknown liability or to strengthen the financial position of the
company or for equalization of dividends etc.
Specific reserve and general reserve :
A reserve may be either specific or general. If a reserve is created to meet a specific contingency or
purpose, e.g. to equalize dividends, it is called specific reserve. But a reserve may be created for a more
general purpose without envisaging any specific contingency. In such a case, the reserve is said to be a
general reserve.
Thus, a specific reserve is meant to serve a specific purpose, whereas a general reserve is created with a
view to making the concern, as a whole, financially strong. Again a specific reserve may be invested in
outside securities, which is not done normally in a case of a general reserve.
Capital Reserve and Revenue Reserve
A reserve which is not available for distribution as dividend through the Profit & Loss A/c is a Capital
Reserve. Capital Reserves arise from specific “Capital” transactions. Examples of Capital Reserve are
profit on revaluation of fixes assets, profit on re-issue of forfeited shares, profits earned prior to
incorporation etc.
A reserve which is free for distribution through the Profit & Loss A/c or otherwise is a Revenue Reserve.
Revenue Reserves are created as allocations out of ascertained periodic profits. Since a Revenue reserve
is available for distribution, it is sometimes called “Free Reserve”.
Provisions :
A provision is an amount in excess of what is considered as reasonably necessary for the purpose of
providing for depreciation, renewals or diminution in the value of assets or retained by way of providing
for any known liability of which the amount cannot be determined with substantial accuracy.
It is created by debiting the profit & loss account to meet a known liability or a specific contingency, e.g.
provision for bad and doubtful debts or provisions for depreciation of fixed assets.
Provisions are a temporary accounting title. It basically refers to expense. Ex: If one of the expenses is
for the month of April and still not paid so to close that expense in that specific month, we prepare one
temporary accounting title (provision) for that particular expense. While in the opening of that new
month if that expense is paid, we reverse that provision in terms of recording expense and closing the
provision title.
Distinction between reserves and provisions :
Reserves Provisions
1. It is created by debiting the profit and 1. It is created by debiting the profit and
loss appropriation account. loss account.
7. It is usually shown on the liability side 7. The provision is generally shown on the
of the balance sheet as it is not a specific assets side of the balance sheet.
reserve.
2) Types of business (proprietorship, partnership, Ltd. Co.) . In case of Ltd. Co. In case of Ltd. Co.
balance sheet of last 3 (three) years and the name of directors.
3) Historical background.
4) Amount of limit required.
5) Terms of payment.
6) Goods to be imported.
7) Security to be offered.
8) Repayment Schedule and source of fund.
9) Other liabilities of the customer with the bank.
10) Statement of Assets and liabilities.
11) Trade License.
12) Valid bonded warehouse license.
13) Membership Certificate
14) Income Tax declaration with TIN.
15) Memorandum & Articles of Association.
16) Registered partnership deed (if partnership firm).
17) Board Resolution.
18) Photographs (all directors)
19) Vat Registration Certificate.
On receipt of above particulars and papers, the Back to Back L/C opening section of the bank will
prepare a credit report of the concerned importer/exporter. The report should be collected from their
previous banker if any.
Banks prepared a credit report in prescribed forms. Bankers have to make enquiries from those if their
customers and other people and enquired the report made by the banker. Sometime information are
gathered by deputing marketing officer or a credit officer.
On receipt of above information, the designated branch must obtain a sanction from Head Office for
opening Back to Back L/C.
In all cases the sanction must be informed to the importer for acceptance. On security confirmation
from the client that the terms and conditions of the sanction are acceptable, the subsequent
documentation/charge documents are taken up.
Bank will supply the following papers/documents for opening a Back to Back L/C:
i) L/C application form.
ii) LCA Form.
iii) IMP Form.
iv) Charge documents.
The above paper must be completed and signed by the party and will be verified the signatures.
For opening L/C, the client is to submit to the bank an application in the printed format of the
designated bank which is also an agreement between the Importer and the Bank. The form is to be
stamped under stamp act. In force in Bangladesh. The importer must submit the LCAF, IMP Insurance
Cover Note and Indent/Contract/Purchase Order/Proforma Invoice (duly accepted by the importer) or
more whenever required.
The L/C application must be completed/filled in and signed by the authorized person of the importer
giving the following particulars :
i) Full name and address of the suppliers or beneficiary and importer.
ii) Brief description of the goods.
iii) L/C amount (CFR value) which must not exceed the LCAF value.
iv) The unit price, quantity, quality of the goods.
v) Origin of the goods, prot of loading and port of destination must be mentioned.
vi) Mode of shipment (Sea, Air, Truck or Rail)
vii) Last date of shipment and negotiation time (must not be beyond 30 days from the shipment date).
viii) Insurance cover note number and name of the company.
ix) Tenor of draft (i.e. sight / usance / deferred etc.)
x) Mode of Advising L/C (Air/Full telex or short telex).
xi) Whether shipment/transshipment is allowed.
xii) Instruction to add confirmation if required.
xiii) LCAF number.
xiv) Export L/C number and date.
xv) Any other relevant information and instructions if any must be mentioned in the L/C application
form.
Scrutiny/Checking of L/C application :
On receipt of L/C application it must be checked by an officer of L/C section very carefully in the
following manner :
1. That the terms and conditions as stipulated in the L/C application are in order as per export L/C
lien with bank and exchange control regulation of the country and UCPDC.
2. That all the informations mentioned in above column have been furnished.
3. That the terms to be imported is eligible according to importers entitlement.
4. That all the cutting / erasing / alternation if any are authenticated by the authorized person of the
company.
Confidential report of foreign suppliers :
According to exchange control regulations bankers are required to obtain confidential report of the
beneficiary of L/C before opening the same, if the amount of L/C exceeds Tk. 5.00 lac. Bank can open l/C
below Tk. 5.00 lac without obtaining confidential report. Bankers can write to their foreign
correspondents to supply the confidential report. But from practical experience foreign correspondents
of different countries do not supply the C.R. timely.
To overcome the above situation bankers can consult reference books i.e. MUNN/DUNN/BRADSTREET/
Trade Directory of various Chamber of Commerce of different countries. On receipt of confidential
report from any source the banker can accumulate the same in one master file.
LCA Form :
L/C authorization form consists of six copies. 1 st copy (original) for exchange control purpose, 2 nd copy
customs purposes for delivery of goods, 3rd and 4th copies will be sent to the concerned licensing office.
5th copy for registration unit of the Bangladesh Bank, 6th copy is the office copy of the issuing bank.
Authorized dealer shall keep carefully till retirement of the documents.
L/C numbering :
If the L/C application and other all formalities are found in order then the serial number in the Back to
Back L/C opening register. The L/C number put the L/C application form on the appropriate blank space.
Enter the particulars in the L/C opening and the L/C opening commission and other charges to the
realized.
L/C advising :
L/C must be typed in the printed format of a bank. After typing, L/C should again be checked up by two
authorized signatories and would be despatched under their full signature, bearing signature number.
Add confirmation :
Sometimes the beneficiaries of the L/C may ask for add confirmation to a L/C by and internationally
reputed bank in the beneficiary’s country. The importer is to request his bank i.e. opening bank to do so
in writing.
The opening bank advised the L/C through their correspondent with whose they have prior arrangement
of credit line. Adding confirmation L/C is the negotiation restricted to the Bank who has added their
confirmation to the credit.
10. i) describe the formalities to be observed and safeguards to be adopted when lending against Life
insurance Policy as security.
ii) Mr. Bashar has been sanctioned an advance of Tk. 5 lak against the security of goods value at Tk. 10
lacs. He proposed to insure the goods as required by the bank but only to the extend of the bank’s
advance amount i.e. 5 lac only. How will you react to the proposition and why?
11. i) what is loan syndication?
MAY 2009 11 I
ii. what are the advantages and disadvantages of it?
MAY 2009 11 I
iii. What is meant by a lead bank? What is its role in loan syndication?
MAY 2009 11 I
December 2012