Mutual Trust Bank

i. Letter of Transmittal

Date: 25 January, 2010

To

Mr. Junaid Khan

Lecturer, School of Business

North South University

Dear Sir:

I have completed my internship report on “The Risk Assessment of Mutual Trust Bank Ltd”. With your approval, I

could conduct the internship program and access data which were crucial to the accomplishment of this report.

Before I started writing this report I studied the operations of Foreign Exchange Branch of MTBL to the amplest at the

same time helped the officials in their day to day operations. Meanwhile i gathered data from literally anywhere

possible. Eventually by summating all my data I have managed to hold out the report at your good will.

In this report, I have given full company details of MTBL. Also I have portrayed the 3 most important divisions of a

commercial bank. Most elaborative effort is made for discussing the Foreign Exchange operations as I had been

placed to work there. I have also given a list of operations which are dissimilar to the theories set for the bank. A

SWOT analysis is provided to have a quick glance at the overall firm. The final chapter completely impersonates my

research work which I have conducted to assess the risk associated with MTBL. For the ease of the readers I have

given definitions of all technical terms, graphical analysis with detailed explanations of the findings. Lastly I have

recommended based on the analysis and personal experience gained.

I truly appreciate this assignment for it gave me the opportunity to further enhance my education with a practical

understanding and make an extensive research on a financial firm. End of the day I earnest hope that this report

helps the experts to research further on this topic and help build up a stronger Risk Management team which will

protect our Banking Sector which is one of the very few developed and booming sectors of our country.

Yours sincerely,

Rashida Shahabuddin

061 606 530

ii. Acknowledgement

1

All gratitude and thanks to almighty “ALLAH” the gracious, the most merciful and beneficent who gave me

courage to undertake and complete this task. It is due to HIS unending mercy that this work moved towards

success.

I am very much obliged to my ever caring and loving parents whose prayers have enabled me to reach this

stage. I would thank my sister for arranging my Internship placement at MTBL.

Most importantly I would like to thank Ashfaq Zaman, my fiancé who believed in me. He solved many little

clumsy problems without which this report would be incomplete like taking to Dhaka Stock Exchange where

my parents would never let me go alone, borrow pen-drives from his friends, quarreled with my internet

service provider at late nights as it went off every now and then.

I am highly indebted to my supervisor Mr. Juanid Khan for trusting me to work on this topic. I knew him from

the time I did other courses with him. Today at least I will not let go my opportunity to thank him not only for

this course but the other courses I did with him as I might no more be able to thank him enough since this is

my last course with him. Sir thanks for all your patience and for making us students work so comfortably

with you. Especially I would thank you for being so nice over the phone even during the weirdest times like

in your class hours and late evenings. The freedom you give us to open up and be creative is the best thing

we appreciate.

I prepared the report on the basis of my knowledge and experience gained from the finance courses and

the internship program. I feel great pride and pleasure on the accomplishment of this report.

iii. Executive Summary

2

3

CHAPTER 01

Introduction

1.1 Origin of the Report

As a part of academic requirement of completing Bachelors of Business Administration (BBA), every

student needs to under go an Internship program. Now you may ask what an Internship is. Well “Internship

4

is an agreement between a university and an organization that offers an opportunity for students like us to

undertake a temporary work assignment in the organization which enables us to have a realistic exposure

to job and organizational conditions. It is called an ‘earn while you learn’ program of training. It helps us

bridge up the gap between classroom learning and actual job conditions eventually preparing us for a

prospective job.” According to my experience an internship is a perfect blend of theoretical and practical

knowledge. Although it is not a compulsory in many universities in the country, but in North South

University it is a mandatory course for all. In fact it weighs 4 credits out of 124 for completion of BBA. It has

to cover duration of at least 8 to 10 weeks under a supervisor assigned by the students’ perspective

departments.

This report is originated for the fulfillment of my internship program for which I have been placed in one of

the best reputed private banks in the country-Mutual Trust Bank Ltd. I worked in the Foreign Exchange

Division Dilkusha Branch for about 3 months starting from 6th October 2008 to 6th January 2009. And as

assigned the report I came up with is about the Risk Assessment of Mutual Trust Bank Ltd.

1.2 Scope of the Report

I always disliked the fact what my other fellow students did that they always chose studying the department

they are assigned at, as their report topic, which according to me is the easiest way to get through as

department information is all readily available in the company websites and there is nothing new to find out

or research. Thus I have arranged my report in a way that the first part gives all the Company Details

starting from its history to its recent products, services and likewise. In the second part I put information

about the 3 most important divisions of a MTBL which are General Banking Division, Credit Division and

finally the Foreign Exchange Division. The data about the Foreign Exchange division is presented in the

most comprehensive manner as I was placed into it. Then the last part contains my ultimate report which

may be very insignificant to great researchers but at least I have attempted to do something which requires

some studying and investigating- The Risk Assessment of Mutual Trust Bank Ltd.

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1.3 Limitation of the Report

Mutual Trust Bank is one of the new generation banks of Bangladesh. There were innumerous

topics to be researched and studied but that could not happen due to lack of time, information and

other accessibilities.

Data collection was the biggest pain ever. I could sense a little bit of fear factor in all employee

levels regarding the sharing of data whereas I have not asked them any confidential data.

In the company part all the departments could not be presented in an elaborative way. It is due to

lack of accessibility and most of all the employees’ reluctance to talk about anything without a favor

in return.

I have used many useful ratios and graphs to present my analysis along financial statements of the

past 3 years starting from 2006 to 2008. Again my study was limited to the data given by the

organization only. No external factors could be measured which is highly critical to Risk Factors of

any private banks of Bangladesh.

Also there are many soft wares nowadays to assess bank risk factors but I was not literate of that

either. So my study and conclusions are all based on the ratios and trends in financial data.

The information obtained was directly used for analysis. They could not be checked or verified for

100% accuracy. I found out a mismatch of 200,000,000 in the cash flow statement of the year

2006. The net cash flow from the operating activities has been put to be as 2,159,292,446 and it is

audited. However when I did it in my excel sheet it came to be 2,359,292,446. Therefore the

discrepancies had to forgone too.

1.4 Methodology

I have used both primary and secondary sources very thoroughly for information. I could manage the

primary source while I worked there physically. Every now and then I tried to talk to different officials to find

out relevant facts even in unofficial manners like in tea breaks and lunch breaks. And talking about

secondary source I have used to the fullest extent possible. My readers, you will get that very evidence and 6

gain confidence over my report if you just check the bibliography at the end of this report. Whatever data I

received, I tried to recheck them from other different sources to confirm accuracy. For example I got

MTBL’s financial statements from their company’s website and I rechecked them with the ones posted in

the website of Dhaka Stock Exchange.

Primary Sources:

Practical experience and desk work.

Personal observation and discussion with staff members

Interview of different officials including the Deputy Managing Director of the bank.

Secondary Sources:

Annual reports of MTBL of the years 2006, 2007 and 2008.

CDs from Dhaka Stock Exchange

A few Financial Institution and Risk Management related Text Books

Financial articles in Newspaper

Circulars published by Bangladesh Bank

Other relevant data from the Internet.

7

CHAPTER 02

An Overview

Of

8

MUTUAL TRUST BANK LIMITED

2.1 An Overview of Mutual Trust Bank Limited

Mutual Trust Bank Ltd, a new generation private commercial bank strives to consolidate its position

among the top banks in the country by offering competitive services and products. It was incorporated in

Bangladesh in the year 1999 as a banking company under the Companies Act, 1994. All types of

commercial banking services are provided by the bank within the stipulations laid down by the Bank

Companies Act 1991and as directives received from Bangladesh Bank from time to time.

The bank has now 44 branches and 10 SME (Small and Medium sized Enterprises) service

centres. The Bank operates through its Head Office situated in the Motijheel area of Dhaka. They are also

9

looking forward to eight more branches and five more SME service centres to be added by the end of this

year.

The bank carries out international operations through a global network of foreign correspondents

banks. MTBL is also a member of SWIFT community as well. Their real time online banking facilities gave

them a pioneer role among its competitors.

The bank floated its shares in 2003 to the general public and was subsequently listed with Dhaka

Stock Exchange Ltd and Chittagong Stock Exchange Ltd.

As envisaged in the Memorandum of Association and as licensed by the Bangladesh Bank under the

provisions of the Companies Act 1991, MTBL started its banking operations and entitled to carry out the

following types of banking business:

All types of Commercial Banking Activities including Money Market operations.

Investment in Merchant Banking Activities.

Investment in Company Activities.

Financiers, Promoters, Capitalists etc.

Financial Intermediary Services.

Any related Financial Services.

2.2 Company History

It started its operations on 24 October 1999 with an authorized and paid up capital of Tk 1,000

million and Tk 200 million respectively. The capital is divided into ordinary shares of Tk 100 each. Soon in

December 2000, the bank total equity and reserve funds grew to Tk 208.48 million and Tk 8.48 million

respectively.

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The bank is a Bangladeshi joint venture company with equity participation from Advanced

Chemical Industries Ltd., East West Properties Development Ltd. and Associated Builders Corporation Ltd.

Previously the bank had its head office at Dhaka and started with only 4 branches. The total number of

employees of the bank was 68. The management of the bank was vested in an 18-member board of

directors, including representatives of the 3 sponsor firms. The managing director is its chief executive.

Though at present the bank conducts all types of commercial banking activities including foreign

exchange business and other financial services, during the first two years of operations, the bank's main

focus was only on the delivery of personalized customer services and expansion of its clientele base.

On 31 December 2000, the total deposits of the bank stood at Tk 1,673.63 million. The deposit-mix

comprised short-term deposits, savings deposits, current deposits, fixed deposits, deposits under special

schemes and other deposits. In 2000, the bank introduced two deposit products in the market namely,

Save Every Day and Brick by Brick. These two schemes attracted huge pool of depositors into the new

bank due to its special features.

Total loans and advances of the bank stood at Tk 602.32 million on 31 December 2000. Trade

finance was the main focus of lending but import and export finance as well as working capital finance for

industrial units was also major lending areas. In its lending policy, the bank gave priority to the private

sector and it is the same as yet. It introduced consumer credit facilities for the professionals, service

holders, students, and teachers to help them improve their standard of life. However MTBL had no

classified loan upto the end of 2000.

During 2000, its foreign exchange business amounted to Tk 2,071.57 million, which comprised

imports servicing (Tk 1,533.80 million), exports financing (Tk 507.34 million), and remittance facilities (Tk

30.43 million). The bank established correspondent relationships with 14 reputed banks at various foreign

financial centers. A list is given below. (Table 2.2)

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In December 2000, the total assets of the bank were valued at Tk 2,444.79 million. Assets sprung

from off-balance-sheet items were Tk 446.7 million which changed the total financial look of the firm. The

bank earned a good amount of interest incomes through treasury functions and by timely placement of

surplus funds in call money market. Investment of the bank other than loans and advances figured at Tk

125.10 million in 2000 and the whole amount was in government treasury bills.

During 2000, the total operating income of the bank was Tk 178.20 million and its operating

expenses were Tk 158.02 million which resulted in operating profits of Tk 20.18 million.

1% provision on the unclassified advances equivalent to Tk 6.19 million was made and Tk 5.60

million was retained as provision for taxation. The net profit after tax had been divided as follows. Tk 2.80

million was transferred to Statutory Reserves and the remaining Tk 5.59 million to General Reserves.

“The bank reached break even within only 67 days after it commenced business.” (S M Mahfuzur Rahman,

Financial Express)

2.3 Company Objective

The objective of the Mutual Trust Bank Limited is specific and targeted to its vision and to position itself in

the mindset of the people as ‘a bank with difference’. And to bring its objectives to reality they have

arranged to devote in the following issues. They are:

1. To mobilize the savings and channeling it out as loan or advance as the company approve.

2. To establish, maintain, carry on, transact and undertake all kinds of investment and financial business

including underwriting, managing and distributing the issue of stocks, debentures, and other securities.

3. To finance the international trade both in import and export.

4. To carry on the foreign exchange business, including buying and selling of foreign currency, traveler’s

cheques issuing, international credit card issuance etc.

5. To develop the standard of living of the limited income group by providing Consumer Credit.

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6. To finance the industry, trade and commerce in both the conventional way and by offering customer

friendly credit service.

7. To encourage the new entrepreneurs for investment and thus to develop the country’s industry sector

and contribute to the economic development.

2.4 Mission

“We aspire to be the most admired financial institution in the country, recognized as dynamic, innovative

and client focused company that offers an array of products and services in the search of excellence and to

create an impressive economic value.”

2.5 Vision

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

2.6 Structure of MTBL

The organization structure and corporate of Mutual Trust Bank Limited (MTBL) strongly reflects its

determination to establish, uphold and gain a stronger footing as an organization which is customer-

oriented and transparent in its management.

The Bank is being managed by highly professional people having wide experience in domestic and

international Banking.

The present Managing Director Mr. Anis A Khan has long experience in domestic and international

Banking. The Bank has made significant process within a very short time due to its very competent Board

of Directors, dynamic management and introduction of various customer friendly deposit and loan products.

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Board of Directors

In Mutual Trust Bank Limited, the board of directors has been conceived as the sources of all power

headed by its chairman. It is the legislative body of the bank board can delegate its power and authority to

professionals, but can not delegate, relinquish or avoid their responsibilities. The board of directors of the

bank consists of 13 members who are reputed business personalities and leading industrialists of the

country.

Hierarchy of the Board of Directors

Figure: 2.1: Hierarchy of the Board of Directors

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CHAIRMAN

VICE CHAIRMAN

DIRECTORS

MANAGING DIRECTORS

COMPANY SECRETARY

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

15

2. 7 Types of Committees

Board Committees

The Board of Directors who also decides on the composition of each committee determines the

responsibilities of each committee.

Executive Committees

All routine matter beyond delegated powers of management are decided upon by or routed through the

Executive Committee, subject to ratification by the Board of Directors.

Policy Committee

All mater relating to the principles, policies, rules, and regulation, ethics etc. for operation and management

of the bank are recommended by the Committee to the Board of Directors.

Management

The management of the bank is vastly on a Board of Directors, for overall supervision and directions on

policy matters by the board. The power of general supervision and control of the affairs of the bank is

exercised by the president and managing director of the bank who is also the chief executive officer of

MTBL. Above all, the bank will be manned and managed by a galaxy of talented professionals proficient in

their individual fields and dedicated to the cause of the bank. 16

2.8 Management Hierarchy

17

MANAGING DIRECTOR

DEPUTY MANAGING DIRECTOR

SENIOR EXECUTIVE VICE PRESIDENT

EXECUTIVE VICE PRESIDENT

SENIOR VICE PRESIDENT

VICE PRESIDENT

SENIOR ASSISTANT VICE

ASSISTANT VICE PRESIDENT

SENIOR PRINCIPAL

PRINCIPAL OFFICER

SENIOR EXECUTIVE

OFFICER

JUNIOR OFFICER

ASSISTANT OFFICER

SENIOR OFFICER

Figure: 2.2: Management Hierarchy

2.9 Organogram of MTBL

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2.10 Arrays of Services of MTBL

Consumer Banking

“We aim to satisfy all clients, regardless of how big or small they may be”- this is the motto of consumer

banking sectors’ officials of MTBL. Individuals are counseled on the best type of accounts suitable to them

such as Current, Savings, Short Term Deposits, Fixed Deposits, Consumer Asset and Liability Products,

etc.

Apart from the conventional banking operations MTB strives to introduce an array of products and services

and already launched a number of consumer banking products with the aim of popularizing consumer

banking operations and offer higher return to its clients. The most popular schemes offered are:

1. Brick by Brick Savings Scheme

2. Monthly Benefit Plan

3. Save Everyday Plan

4. Children’s Education Plan

5. Consumer Credit Scheme

6. Best Invest Plan

Foreign Trade

MTBL is one of the best performers in the foreign trade sector in the past few years. It provides a wide

range of banking services to all types of commercial concerns such as Import & Export Finance and

Services, Investment Advice, Foreign Remittance and other specialized services as required. Although it is 19

a private commercial Bank, they have a strong global network that helps them to undertake international

trade smoothly and efficiently.

Just a few of its features are listed below for each of the services. Later in this same chapter, these issues

have been discussed in detail in regard to foreign exchange.

1. Import Business

Mutual Trust Bank supports its customers by providing facilities throughout the import process to ensure

smooth running of their business. The facilities are:

a. Import Letter of Credit

b. Post Import Financing (LIM, LTR etc)

c. Import collection services & Shipping Guarantees

2. Export Business

Mutual Trust Bank offers extra cover to its customers for the entire export process to speed up receipt of

proceeds. The facilities are:

a. Export Letters of Credit advising

b. Pre-shipment Export Financing

c. Export documents negotiation

d. Letters of Credit confirmation

3. Remittance

Mutual Trust Bank provides to its customers the following services:

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a. Inward/ Outward Remittance Services

b. TT/ DD Issue

c. DD/ Cheque collection

d. Endorsements

e. Travelers Cheque Issuance

Correspondent Banking

The objective of their correspondent banking operations is to strengthen their existing relationships with

foreign banks and financial institutions around the globe as well as exploring new relationships. In addition

to that, they provide assistance in marketing the products of the correspondent banks.

At present MTBL is maintaining relationships with 30 (thirty) foreign correspondents and the number is

growing everyday. Currently the bank has 18 (eighteen) NOSTRO A/Cs with large foreign banks abroad.

The bank is also a "SWIFT" member and its Bank Identification Number or BIC is 'MTBL BDDH'.

Remittance Services

Mutual Trust Bank maintains a strong network with the Exchange Houses worldwide for ensuring better

remittance services for its customers. The Bank having a network of 30 branches has established

remittance arrangements with a number of exchange houses to facilitate wage earners to remit their money

to Bangladesh. The following is the list of exchange houses having arrangement with Mutual Trust Bank

Ltd.

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Exchange House Name Service Available Presence

UAE Exchange Centre LLC

web:http://www.uaeexchange.com

1. Taka Draft Arrangement

2.EFT Using XPIN

3. TT Arrangement

Global

Wall Street Exchange Centre LLC

web:http://www.wallstreetcorp.com

1. TT Arrangement UAE

Instant Cash Worldwide Ltd. 1. Taka Draft ArrangementGlobal

Locations List

Al Ahalia Money Exchange Bureau1. TT Arrangement

2. Taka Draft ArrangementUAE

Route of Asia Money Exchange Ltd. 1. TT Arrangement UK

Bangladesh Money Transfers (UK) Ltd. 1. TT Arrangement UK

Instant Exchange UK Ltd. 1. TT Arrangement UK

Moneylink UK Ltd.

web: http://www.moneylinkuk.com/mtb

1. TT Arrangement UK

Trust Exchange Co. W.L.L.1. Taka Draft Arrangement

2. TT ArrangementQatar

Table: 2.2: MTBL’s Network of Exchange Houses

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http://www.wallstreetcorp.com/

Web

The Internet has brought about a revolutionary change in the world leading to convergence of

communication and computing technologies. In order to provide round the clock and up to date information

on the Bank to the trade and business communities worldwide, the IT Team of Mutual Trust Bank Limited

has developed a web for the Bank. It can be accessed under the domain name: www.mutualtrustbank.com.

It contains details of all MTBL’s products and services. Also it has the audited financial statements of the firm.

SWIFT

The Bank has become the member of SWIFT Alliance Access, a multi-branch secure financial

messaging system provided by the Society for Worldwide Inter-bank Financial Telecommunication

[SWIFT], Belgium. With the activation of the SWIFT system the Bank enjoys instant, low-cost, speedy and

reliable connectivity for L/C transaction, fund transfers, message communication and other worldwide

financial activities. Officials of MTBL says SWIFT has accelerated MTBL’s performance almost 3 times.

2.11 Products of MTBL

No. Deposit Products Loan Products Visa Cards

1 Brick by Brick Savings Scheme Small Business Loan Local Classic Credit

Card

2 Monthly Benefit Plan Home Loan Local Gold Credit Card

3 Unique Savings Plan Home Repair Loan Prepaid International Travel

4 Festival Savings Plan Auto Loan Money Card

5 Save Everyday Plan Consumer Loan Prepaid Local Gift Card

6 Education Plan Visa Electron Debit

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http://www.mutualtrustbank.com/

Card

7 Double Saver Plan

8 Triple Saver Plan

9 Millionaire Plan

10 Best Invest Plan

Table: 2.3: Products of MTBL

2.12 Branches

Mutual Trust Bank Limited is a fast growing commercial bank in our country. It has established a good

operating network throughout the country. At present it has 44 Branches all around the country.

Dhaka Division: 22 Branches

Chittagong Division: 8 Branches

Sylhet Division: 2 Branches

Rajshahi Division: 2 Branches

Other parts of the country: 10 Branches

2.13 Departments

It would be very difficult to control the system effectively, if the jobs are not organized considering their

interrelationship and are not allocated in a particular department. If the departments are not fitted for the

particular works there would be random situation and the performance of a particular department would not

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be measured. Mutual Trust Bank Limited has done this work very well. The following are MTBL’s

departments and their sub divisions.

MDs Secretariat

Board Division

Internal Control & Compliance Division

o ICC Audit Department

o ICC Compliance Unit

o ICC Monitoring Unit

Human resource Division

General Services Division

o Security & Printing Stationery

Financial Administration Division

o Reconciliation Department

o MIS Department

Credit Division

o CIB Department

o Syndication Department

o Credit Processing & Approval

International Division

o Correspondent Banking Dept.

o Remittance Department

o SWIFT Department

Merchant Banking Division

Card Division

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SME Division

Treasury Department

o Asset Liability Mgt. Department

Banking Operations Department

o Anti Money Laundering

o Test Key Department

Corporate Banking Department

Credit Administration Department

Credit Monitoring Cell

Credit Recovery Cell

ID Department

Business Development& Marketing

Public Relations Department

Share Department

Engineering Department

Training Institute

Although there are innumerable departments specialized to perform different financial and non-

financial jobs of the firm, mainly there are three divisions which carves up the entire organization’s

financial activities. They are: General Banking division, Foreign Exchange Division and lastly

the Credit Division. I have tried to give a brief yet understandable description of the General

Banking Division and the Credit Division. While the Foreign Exchange Division is discussed very

much in details as I worked as an internee there. All these are comprised in the next chapter that is

chapter number 3.

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CHAPTER-03

GENERAL BANKING DIVISION

CREDIT DIVISION

&

FOREIGN EXCHANGE DIVISION

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3.1.0 GENERAL BANKING DIVISION

3.1.1 Introduction

General Banking is the starting point of all the banking operations. General Banking department aids in

taking deposits and simultaneously provides some ancillaries services. It provides those customers who

come frequently and those customers who come one time in banking for enjoying ancillary services. In

some general banking activities, there is no relation between banker and customers who will take only one

service form bank. On the other hand, there are some customers with whom bank is doing its business

frequently. It is the department, which provides day-to-day services to the customers. Everyday it receives

deposits from the customers and meets their demand for cash by honoring cheques. It opens new

accounts, demit funds, issue bank drafts and pay orders etc. Since bank is confined to provide the service

everyday general banking is also known as retail banking. Listed below are the features available at MTBL.

Customer Service

Account Opening/Closing

Remittance

a) Payment Order Issue

b) Demand Draft Issue/Collection

c) T.T. Issue/Collection

d) Endorsements

e) IBC/OBC Collection

Deposit Department

Locker Service

Account’s Department

a. Clearing.

b. Transfer.

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c. Cash.

3.1.2 Types of Account

Current Deposit:

o Interest Rate 0.00%

Individual Account

Joint Account

Proprietor Ship Account

Limited Company Account

Savings Deposits:


Individual Account

Joint Account



Short Term Deposits:


Individual Account

Joint Account



Fixed Deposits:

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o It’s an Individual Account and any individual can open this account by providing valid

personal details. Anytime withdrawal is not possible, a specific interest rate and maturity

date is specified and agreed at the beginning of the term. The interest amount or the whole

deposited amount can only be withdrawn at the end of the maturity. The duration and the

rates of the deposits are as follows:

1 month and above but less than 3 months: 8.50%

3 months and above but less than 6 months: 11.00%

6 months and above but less than 12 months: 11.25%

12 months and above: 11.75%

Festival Sanchay Prodalpa are:

Eid-Ul-Azha Sanchaya Prokalpa:

Interest Rate 10.00%

Eid-Ul-Fitre Sanchaya Prokalpa:


Durga-Puja Sanchaya Prokalpa:


Buddha-Purnima Sanchaya Prokalpa:


Boro-Din Sanchaya Prokalpa:


3.1.3 MTBL Consumer Banking Products

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1. Brick by Brick Savings Scheme

Monthly

Installment

5 Years* 8 Years* 10 Years*

Brick By Brick

Tk. 500/- Tk.38800/- Tk. 73000/- Tk. 102000/-

Tk. 1000/- Tk. 77600/- Tk. 146000/- Tk. 204000/-

Tk. 2000/- Tk. 155200/- Tk. 292000/- Tk. 408000/-

Tk. 5000/-* Tk. 388000/- Tk. 730000/- Tk. 1020000/-

The maturity value is an indicative figure. Tax/Excise Duty is deducted as per govt. rules. 90% Loan

Advantage can be taken on the deposited amount, in multiples of Tk. 5000 up to a limit of Tk. 100,000.

2. MTB Monthly Benefit Plan

Deposit Amount Income Amount for

3-year plan*

Income Amount for

5-year plan*

Monthly Benefit Plan

Tk. 50,000/- Tk. 400/- Tk. 425/-

Tk. 100,000/- Tk. 800/- Tk. 850/-

Tk. 150,000/- Tk. 1200/- Tk. 1275/-

Tk. 200,000/- Tk. 1600/- Tk. 1700/-

Tk. 250,000/- Tk. 2000/- Tk. 2125/-

Tk. 300,000/- Tk. 2400/- Tk. 2550/-

Tk. 350,000/- Tk. 2800/- Tk. 2975/-

Tk. 400,000/- Tk. 3200/- Tk. 3400/-

Tk. 450,000/- Tk. 3600/- Tk. 3825/-

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Tk. 500,000/- Tk. 4000/- Tk. 4250/-

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

Advantage is available on the deposited amount.

3. Save Everyday Plan

The primary advantage of “Save Everyday” plan is that an individual is absolutely free to choose

his/her own time for depositing money into this account. You can deposit daily, weekly or monthly.

Although the transaction will have to be within the bank’s transaction hours. An attractive interest rate

is offered which is accrued in the account on a daily basis. The initial deposit is Tk. 2500

4. MTB Education Plan

Monthly Installment 4 Years* 7 Years* 9 Years*

Education Plan

Tk. 1000/- Tk.

59,200/-

Tk. 122,000/- Tk. 175,000/-

Tk. 2000/- Tk.

118,400/-

Tk. 244,000/- Tk. 351,000/-

Tk. 4000/- Tk.

177,600/-

Tk. 366,000/- Tk. 526,000/-

Tk. 4000/- Tk.

236,800/-

Tk. 488,000/- Tk. 702,000/-

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The maturity value is an indicative figure. Tax/Excise Duty s deducted as per govt. rules. 90% Loan

Advantage can be enjoyed on the deposited amount.

5. Consumer Credit Scheme

In order to make a significant contribution in the living standards

of the people of medium and low income category, MTBL has

introduced a scheme called "Consumer Credit Scheme". With a

view to materialize the dreams of those who are unable to make

one time investment from their own savings, one can now afford

to buy necessary household equipments and thus improve the

standard of living.Consumer Credit Scheme

All sorts of household durables like Television, Refrigerators, Computers,

Air Conditioners, Video Cameras, Washing/ Drying Machines and

Furniture are allowed under this scheme. One can buy Motorcycle too

under this scheme.

6. Best Invest

Best Invest plan helps you to build up a sizeable income in easy and

affordable installments. This plan allows a person to own 5 times the initial

invested amount. Best Invest offers two separate and convenient term

deposit periods for 4 years and 6 years respectively.

Best Invest is available in units worth Tk.50,000/- each. The one who will invest Tk.10,000/- as down

payment for purchasing 1 (one) unit and the Bank will provide loan for Tk.40,000/-. The customer also

has the option to buy units in multiples of Tk. 50,000/- but maximum up to Tk. 1,00,00,000/- (one crore).

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The collateral security is the minimum and the interest rates are one of the lowest in the market.

3.1.4 Schemes offered by MTBL

MTB Double Saver Plan:

Deposit Amount Maturity Value after 6 Years*

Double Saver Plan

Tk. 10,000/- Tk. 20,000/-

Tk. 20,000/- Tk. 40,000/-

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

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

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

Advantage on deposited amount.

MTB Triple Saver Plan:

Deposit Amount Maturity Value after 11 Years*

Triple Saver Plan

Tk. 10,000/- Tk. 30,000/-

Tk. 20,000/- Tk. 60,000/-

Tk. 50,000/- Tk. 150,000/-

Tk. 100,000/- Tk. 300,000/-

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


34

MTB Millionaire Plan:

Monthly Installment Year Maturity Value*

Millionaire Plan

Tk. 10,125/- 6 Tk. 10,00,000/-

Tk. 6800/- 8 Tk. 10,00,000/

Tk. 4850/- 10 Tk. 10,00,000/

Tk. 3600/- 12 Tk. 10,00,000/

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


MTB Unique Savings Plan:

Unique Savings Plan is any day, any amount savings plan. The specialty of this plan is that a customer can

deposit any time and any amount. It offers the person to deposit any amount of his choice but not less

than Tk.500 for ¾/5 years. It’s a high income plan with withdrawal facility once a month. The depositor can

withdraw 50% of the deposited amount.

3.2.0 CREDIT DIVISION

3.2.1 Introduction

Banking business primarily involves accepting deposits from the public and investing or lending the same

and thereby making profit out of it. However, lending money is not without risk and therefore banks make

loans and advances to farmers, traders, businessmen and industrialist against either tangible (land,

building, stock etc.) or intangible security. Even then, the banks run the risk of default in repayment.

35

Therefore, the banks follow cautious measures while lending money to others. This core function of a bank

is performed by the Credit Department of the bank. In this case, the relationship of bank and customer is

that of the creditor and debtor.

3.2.2 Credit (Loan and Advances)

The profit of a commercial bank depends primarily on the utilization of its fund. But Bank cannot lend its

fund fully. As per Banking Company Act 1991 every banking company has to maintain a specified minimum

(presently 16%) of the total of its demand and time liabilities in the form of cash and approved securities

with Bangladesh Bank. This percentage or ratio is termed Statutory Liquid Ratio. Further every scheduled

bank has to maintain with Bangladesh Bank an average daily balance, the amount of which has not to be

less than a particular percentage (presently 4%) of the total of its demand and time liabilities. As such

Commercial Bank generally goes for short-term finance although a small portion of its total deposit is

invested as long term lending. Commercial banks allow different forms of advances which are discussed

below.

3.2.3 Types of Credit Offered by MTBL

MTBL offers following types of Credit (loans and advances) to its customers.

Cash Credit (Hypo): Cash Credit or continuing credits are those that form continuous debits and credits up

to a limit and have an expiration date. A service charge is the interest charge normally made as a

percentage of the value of purchases. These credits may be of the nature of pledged and /or hypothecated

36

and banks should report these in separate heads incorporated under the main head cash credit. A detailed

explanation of hypothecation is given below:

Under this arrangement a credit is sanctioned against hypothecation of the raw materials or finished goods.

The letter of hypothecation creates a charge against the goods in favor of the Bank but neither the

ownership nor its possession is passed on to it; only a right or interest in the goods is created in favor of the

Bank and the borrower binds himself to give possession of the goods to the bank when called upon to do

so. When the possession is handed over, the charge is converted into pledge. This type of facility is

generally given to the reputed borrowers of undoubted integrity.

Cash Credit (Pledge): Under this arrangement a cash credit is sanctioned against pledge of goods or raw

materials. By signing the letter of pledge, the borrower surrenders the physical possession of the goods

under the Banks effective control as security for payment of Bank dues. The ownership of the goods,

however, remains with the borrower. The pledge creates an implied lien in favor of the Bank on the

underlying merchandise. In the event of failure of the borrower to honor his commitment the Bank can sell

the goods for recovery of the advance. No collateral security is normally asked for grant of such credit.

Loan against Trust Receipts (LTR): This is a loan facility up to a satisfactory limit to the traders /

customers by a Bank against security of the value of the imported merchandise.

Term Loan: A Bank advance for a specific period to be repaid with interest under fixed schedules. The

term loans may be as follow:

Short Term: Up to and including 12 months.

Medium Term: More than 12 months up to and including 60 months.

Long Term: More than 60 months. [This item includes lease financing]

Lease Financing: An entrepreneur, under this Scheme, may avail of the lease facilities to procure

industrial machinery (without having to purchase it by down payment) with easy repayment schedule. The

clients also get special rebate in their income-tax payment under this scheme.37

Secured Overdrafts (SOD): It is a loan facility on a customer’s current account at a Bank, permitting him

to overdraw up to a certain agreed limit for an agreed period. The terms of the loan are normally that: it is

repayable on demand or at the expiration date of the agreement.

Others: Any loan that does not fall in any of the above facilities is considered as “other”. Blocked /

Segregated continuing credits (Pledge, Hypothecation or Overdraft) when re-scheduled by the Banks for

payments over a number of periods should also be reported against the head “other”.

3.2.4 Procedure for Giving Advance

The potential borrower will have to submit an application to MTBL for loan by filling up of a

specific Application form.

After receiving the loan application form, MTBL sends a letter to Bangladesh Bank for

obtaining a report from there. This report is called CIB (Credit information Bureau) report. This

report is usually collected if the loan amount exceeds Tk. 50 Lac. But MTBL usually collects

this report if the loan amount exceeds Tk.1 Lac. The purpose of this report is to being informed

that whether the borrower has taken loan from any other bank; if ‘yes’ then whether these

loans are classified or not.

After receiving CIB report if the Bank thinks that the prospective borrower will be a good

borrower, then the bank will scrutinize the documents. In this stage, the Bank will look whether

the documents are properly filled up and signed.

Then comes processing stage. In this stage, the Bank will prepare a proposal. This proposal

contains following relevant information like Name of the Borrower, Nature of Limit, Purpose of

Limit, Extent of Limit, Security, Margin, Rate of Interest, Repayment and Validity.

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Branch incumbent (Dhanmondi Branch) has the discretionary power to sanction loan

(SOD) up to Tk. 25 Lac against financial obligations by informing Head Office. But in that

case, the Branch Manager has to give attention to the following matters:

- The interest rate of the loan must not be less than 4.5% and

- The borrower must maintain 10% margin.

Except this case, the branch has to send the proposal to the Head Office. Head Office will prepare a minute

and submit it before the Executive Committee (EC). The minute has to be passed by EC. After passing the

minute, it will be sent to Bangladesh Bank for approval in case of following:

o If the proposed limit exceeds 15% of Bank’s equity;

o If the proposed limit against cash collateral securities exceeds 25% of Bank’s equity.

After the sanction advice, Bank will collect necessary documents (charge documents). These

documents are as stated below.

a) Joint Promissory Note

b) Single Promissory Note

c) Letter of Undertaking

d) Loan Disbursement Letter

a) Debit Figure Confirmation Sheet

b) Letter of Continuity

c) Letter of Authority

d) Letter of Revival

e) Right of Recall the Loan.

f) Letter of Guarantee

g) Letter of Indemnity

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h) Trust Receipt

i) Hypothecation of Goods

j) Hypothecation of Vehicles

k) Counter Guarantee

l) Letter of Lien

m) Letter of Lien in case of advance against FDR

n) Letter of Lien And Authority for advances to third parties against Fixed Deposit/Call Deposit/Special

Deposit or Margin or margin deposits.

o) Letter of Authority to encase FDR

p) Letter of Agreement for Packing Credit

q) Letter of Guarantee for opening L/C

r) Charges over Bonds or Certificates or shares etc. by third person, firm or company to secure specific

and general liability.

s) Memorandum of Deposit of Title Deeds

t) Hypothecation of goods to secure a Demand Cash Credit Or Overdraft/Loan amount

u) Guarantee by Third party

For withdrawing the loan amount, the customer creates a CD account and the loan is transferred to the CD

A/C. Afterwards the customer can withdraw the money.

3.2.5 Lending Risk Analysis (LRA)

Lending Risk Analysis

40

Lending Risk Analysis (LRA) is a technique by which the risk of the loan is calculated. Banker must analyze

LRA when loan application is above 1 crore. This analysis is done by experienced people of Credit

department in MTBL. It is a ranking whose total score is 140. Among this score, 120 is for Total Business

Risk and 20 for Total Security Risk. The aspects that are analyzed in LRA are: Supplies risk, Sales risk,

Performance risk, Resilience risk, Management ability, Level of Managerial teamwork, Management

competent risk, Management integrity risk, Security control risk and lastly Security covers risk

In case of business risk, if the score falls

“Between” 13-19, then-------Poor risk

“Between” 20-26, then -----Acceptable risk

“Between” 27-34, then-----Marginal risk

Over 34, then ------------- Good risk.

In case of security risk, if the score falls

“Between” 0 to 10 then ------------Poor risk

“Between” 10 to 14, then -------- Acceptable risk

“Between” 14 to 20, then --------Marginal risk

Over 20, then---------------------Good risk.

3.2.6 Securities

MTBL charges the following two types of security:

1. Primary security

2. Collateral security.

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3.2.7 Modes of Charging Security

Common methods of charging security:

Lien

Assignment

Set off

Pledge

Hypothecation

Mortgage

3.2.8 Nature of security and Way of charging

Nature of security Way of charging

Cash, Cash collateral and Documents of title to

goods

Lien, Assignment

Moveable stock of raw materials, finished

goods, merchandise.

Pledge, Hypothecation

Immovable property Simple/legal/registered and equitable mortgage

Intangible assets (Goodwill) Execution of personal guarantee and Letter of

Trust Receipt.

Table: 3.1: Nature of Security and Way of Changing

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3.2.9 Credit Monitoring, Follow-up and Supervision

MTBL Officer checks on the following points time to time to assure the quality and pay back of the loan.

1. The borrower’s behavior of turnover

2. The information regarding the profitability, liquidity, cash flow situation and trend in sales in

maintaining various ratios.

The review and classification of credit facility first starts at the Credit Department of the Branch headed with

the Branch Manager and then finally ends in credit division of the Head office.

3.2.10 Loan Classification

Type of classification Rate of provision

General Provision on unclassified loans and advances. 1%

Small enterprise financing for good loan. 2%

Special Mention Account. 5%

Provision on substandard loans and advances. 20%

Provision on doubtful loans and advances. 50%

Provision on bad/loss loans and advances. 100%

Table: 3.2: Loan Classification

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3.2.11 Classification Criteria

1. Overdue (OD)

2. Required Payment (RP)

3. Limit Overdrawn (LD)

4. Legal Action (LA)

5. Qualitative Judgment (QJ)

3.2.12 Guarantee

MTBL offers three types of Guarantee, which are as follows:

Tender or Bid Bond Guarantee

Performance Guarantee

Advanced payment guarantee (APG)

3.3.0 FOREIGN EXCHANGE DIVISION

3.3.1 Introduction

Foreign Exchange Department is an important one in MTBL Dilkusha Branch that deals with import, export,

and foreign remittance and post import financing. Through this is an ancillary service provided by the Bank,

The Bank is purchasing primary security by giving loan in form of loan against imported merchandise (LIM),

and loan against trust receipt (LTR). Bank branch should be ‘Authorized Dealer’ with the approval of

Bangladesh Bank to run foreign exchange business. This department is playing an important role in

enhancing export earning, which aids economic growth and, in turn, will be helpful for economic

development. On the other hand, it also helps to meet those goods and services, which are more

demandable and not adequate in our country.

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3.3.2 The Major Tasks of Foreign Trade Department

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

Import

Export

Remittance

3.3.3 Components of Foreign Trade

L/C (Letter of Credit) is a very important issue of foreign exchange management because without L/C

import and export cannot be possible. Importer and Exporter do not know each other. For this reason

settlement of payment cannot be possible without the arrangement of Bank particularly in foreign trade.

Therefore Import/Export becomes impossible if L/C cannot be made through Bank. Therefore L/C is a

very important issue in foreign trade.

L/C (Letter of Credit): L/C is a guarantee of a bank (Issuing Bank) on behalf of the importer in a trade in

favor of the exporter to pay a certain sum of money under some specific terms and conditions.

The L/C is a negotiable instrument (A form of documentary credit) that carries a promise of

payment with the fulfillment of certain conditions. An L/C can be used in foreign trade as well as for local

payments. We can divide L/Cs into two broad categories. Those are:

Revocable L/C: The terms and conditions of L/C can be changed at any time without the

consent of or notice of the beneficiary. In case of seller (Beneficiary) revocable credit

involves risk. A revocable credit may be amended or cancelled by the issuing bank prior

notice to the beneficiary. On the other hand revocable credit gives the buyer maximum

flexibility. This kind of L/C does not exist in our country thus it is also not available in

MTBL.

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Irrevocable L/C: In this type of L/C the terms and conditions cannot be changed. This kind

of L/C exists in Bangladesh. It is a definite undertaking of the issuing Bank, provided that

the stipulated documents are presented to the nominated Bank. Once this commitment

has been entered into, the bank cannot disown its responsibility without the agreement of

the beneficiary. A unilateral amendment or cancellation, as in the case of a revocable

credit is not possible in case of irrevocable, unconfirmed credit. Since under the

documentary credit a debt relationship exists only between the issuing bank and

beneficiary, it is advisable to assess the issuing banks standing as well as the sovereign

and transfer risk of the country involved.

In an L/C cycle, the following are the common parties:

Importer: The party that imports goods also knows as applicant, buyer or a consignee.

Exporter: The party that sells or exports goods, also known as seller, beneficiary

Issuing Bank: The Importer’s bank that issues the L/C. It is also called L/C opening Bank.

Advising Bank: The responsibility of this Bank is to authenticate the issuing Bank. Sometimes it

happens that the issuing bank does not have a branch in the exporter’s country. In this sort of

cases one bank authenticates the foreign bank and confirms the transaction provided that the

Issuing bank has a BKE (Bilateral Key Exchange) arrangement with the advising bank.

Correspondent bank (usually in the exporter's country) of an issuing bank (usually in

the importer's country) that receives a letter of credit (L/C) from the issuing bank for authenticating

it and informing ('advising') the exporter (the L/C's beneficiary) that a L/C has been opened by the

importer in the exporter's favor. The advising bank usually also takes on other roles in

the transaction, such as (1)confirming the letter of credit (playing the role of the 'confirming bank'),

(2) accepting a bill of exchange by endorsing it (becoming the 'accepting bank') and/or,

(3)paying the exporter on presentation of documents(becoming the 'paying bank' or 'negotiating

bank'). It is also called adviser bank or nominated bank.

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Negotiating Bank: The bank that the Exporter after receiving the L/C negotiates it along with

other documents for receiving the proceeds from the issuing bank.

Add Confirming Bank: Being suspicious about the payment, sometimes the exporter may ask

for confirmation of the payment from a bank of his own country – a bank giving such

confirmation is called confirming bank that takes a confirmation charge from the issuing bank.

Reimbursement Bank: This is the bank that the L/C issuing bank maintains its nostro account

with (definition stated above). Upon instruction from the Issuing Bank, the reimbursement bank

makes transfer of funds to the negotiating bank.

Types of documentary credits according to payment methods:

Sight Payment: The payment is made as soon as documents shown to the issuing

Bank and payment received from importer. Instruction is given to reimbursing bank to

give payment.

Deferred Payment: The payment of this kind of L/C is made after 30, 60, 90, 120 or

180 days soon as documents shown to the issuing Bank. The credit with deferred

payment differs only slightly in its effect on the beneficiary from the credit with time

draft. It is also called USANCE L/C.

Special types of Documentary Letter of credit:

Revolving Credit: A Revolving credit is one where under the terms and conditions thereof the

amount of the credit is renewed or reinstated with out specific amendment to the credit being

needed. It can revolve in relation to time or value. But credit that revolves in relation to value is not

in common use. It is an arrangement which permits a purchaser to charge purchases against an

account every month, provided the balance does not exceed a predetermined credit limit. Monthly

payments must be made on the account.

Back to Back Credit:

Another special type of L/C is issued in Bangladesh that is called Back-to-Back (B to B) L/C where

the applicant opens an L/C against another export L/C. Arrangement in which one irrevocable L/C

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serves as the collateral for another; the advising bank of the first L/C becomes the issuing bank of

the second L/C. In contrast to a 'transferable letter of credit,' permission of the ultimate

buyer (the applicant or account party of the first L/C) or that of the issuing bank is not required in

a back-to-back L/C. It is used mainly by middlemen (intermediaries) to hide the identity of the

actual supplier or manufacturer. It is also called counter credit or reciprocal letter of credit.

Import section deals with L/C opening and post import financing i.e. LIM & LTR. Now the procedure from

opening L/C to disbursement against L/C is given below.

3.4.0 IMPORT SECTION

3.4.1 Application for Opening L/C

At first, an importer will request its banker to open L/C in favor of the buyer along with the following

documents.

1. An application

2. Indent or Performa Invoice

3. Import Registration Certificate (IRC)

4. Taxpayer Identification Number (TIN)

5. Insurance cover note with money receipt

6. A bank account in MTBL

7. Membership of chamber of commerce

Indent or Performa invoice

Indent or Performa invoice is the sale contract between seller and buyer in import-export business. There is

slight difference between indent and Performa invoice. The sales contract, which is direct correspondence

between importer and exporter, is called Performa invoice. There is no intermediary between them. On the

48

other hand, there may be an agent of exporter in importer’s country. In this regard, if the sale contract is

occurred between the agent of exporter and importer then it is called indent.

3.4.2 Delivered Forms by Banker to Importer

After scrutinizing above-mentioned documents carefully, officer delivers the following forms to be filled up

by importer and the banker should check the following:

Whether the goods to be imported is permissible or not.

Whether the goods to be imported is demandable or not.

The forms are:

Import Merchandised Permit Form (IMP).

L/C Application Form (L/CAF).

L/C Authorization Form (L/CAF).

3.4.3 Preparation of L/C by Banker

Bank’s officer prepares L/C when above mentioned forms are to be submitted by customer or importer.

Before preparing L/C SIBL officer scrutinizes the application in the following manner.

The terms and conditions of the L/C must be complied with UCPDC 500 and Exchange Control &

Import Trade Regulation.

Eligibility of the goods to be imported.

The L/C must not be opened in favor of the importer rather to the exporter.

Radioactivity report in case of food item.

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Survey reports or certificate in case of old machinery is required. Bank of the importer is called ‘L/C Issuing

Bank’. Then issuing bank inform it’s corresponding bank, called “Advising Bank’ or ‘Confirming Bank”

located in exporter’s country to advice and the credit forward to the exporter and simultaneously officer

makes L/C opening vouchers.

DESK WORK:

One debit voucher to be passed.

Corresponding credit voucher to be passed (Margin, commission, postage, stamp, F.F.C. and

others).

Liability voucher to be passed.

3.4.4 Accounting treatment of an L/C

L/C Applicants A/C or Customer’s A/C Dr.

Margin A/C Cr.

Commission A/C Cr.

Postage A/C Cr.

Stamp A/C Cr.

F.FC. (foreign corresponding charge) A/C Cr.

Telex charge A/C Cr.50

Other A/C Cr.

Customer’s liability A/C Dr.

Banker’s liability A/C Cr.

3.4.5 Forwarding Documentary Credit by Advising or Confirming

Bank

There are usually two banks involved in a documentary credit operation. The issuing bank in the buyer’s

country and the 2nd bank, the advising bank, is usually a bank in the seller’s country. The issuing bank asks

another bank to advise or confirm the credit. If the 2nd bank is simply “advice or credit”, it will mention that

when it forwards the credit to seller, such a bank is under no commitment or obligation to pay the seller.

If the advising bank is also “confirming the credit”, this mentions that the confirming bank, regardless of any

other consideration, must pay accept or negotiate without recourse to seller. Then the bank is confirming

bank.

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ADVISING BANK/ CONFIRMING BANK

EXPORTER/ SELLERSENDING DOCUMENTARY

CREDIT

3.4.6 Submission of Necessary Documents by Exporter to the

Negotiating Bank

As soon as the seller / exporter receives the credit and is satisfied that he can meet its terms and

conditions, he is in position to load the goods and dispatch them. The seller then sends the documents

evidencing the shipment to the bank.

Exporter will submit those documents in accordance with the terms and conditions as mentioned in L/C.

Generally the documents observed by me in the foreign exchange department were:

Bill of exchange

Commercial invoice

Proforma Invoice

Bill of lading

Certificate of origin

Packing list

Clean report of finding (CRF)

Weight list

Insurance cover note

Pre-shipment certificate

While exporting more sensitive goods, more documents are to be submitted by the exporter to the bank.

The types of documents are also determined by the countries involved in the trade considering some

countries are in restrictions of exporting or importing certain goods to another.

SOME DEFINITIONS

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Bill of Exchange

According to the section 05, Negotiable Instruments (NI) Actunconditional order signed by the maker,

directing a certain person to pay on or to the order of a certain person or to the bearer of the instrument. It

may be either at sight or certain day sight. At sight means making payment whenever documents will reach

in the issuing bank.

Commercial Invoice

Commercial Invoice issued by exporter is the accounting document by which the seller charges the goods

to buyer.

Bill of lading

A bill of lading is a document usually stipulated in a credit when exporter dispatches the goods. It is an

evidence of a contract of carriage, is a receipt for the goods and is a document of title to goods. It also

constitutes a document that is or may be, needed to support an insurance claim.

3.4.7 The Documents sent to the Issuing Bank through the

Negotiating Bank

The negotiating bank carefully checks the documents provided by the exporter against the credit, and if the

documents meet all the requirement of the credit, the bank will pay, accept, or negotiate in accordance with

the terms and conditions of the credit. Then the bank sends the documents to the L/C opening bank.

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3.4.8 Making the Payment of Foreign Bill through the Reimbursing

Bank

The L/C issuing bank getting the documents checks immediately and if they are in proper order and meet

the credit requirements, it will arrange to make payment against L/C through reimbursement bank and will

send the importer the document arrival notice.

But if there is any discrepancy in the documents, the L/C isssuing bank sends message to the negotiating

bank to rectify it by undertaking all its risks and responsibilities. They also charge a discrepency fee for this.

MTBL’s charge for discrepency varies based on the types of it.

3.4.9 Post-Import Financing

If there is no cash available in importer’s hand, he can request the bank to grant loan against the

documents for the purpose of post import finance. There are two following forms of post import finance

available in MTBL.

LIM (Loan against imported merchandise).

LTR (Loan against trust receipt).

On the arrival of goods and lodgment of import documents, importer may request the bank for clearance of

goods from the port (custom) and keep the same to bank godown. Proper sanction from the authority is to

be obatained before clearance of consignment. For giving these types of loan, officer makes loan proposal

and sends it to H/O for approval. After getting approval from H/O, bank grants loan in the form of either LTR

or LIM.

3.4.10 Accounting treatnent of Sanctioning a loan against L/C

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LIM/LTR creation:

LTR/LIM (Importer) A/C Dr.

PAD A/C Cr.

After payment of the loan or delivery of goods:

Party’s A/C Dr.

LTR/LIM A/C Cr.

Interest A/C Cr.

By and large, it is mentioned herewith that bank only deals with the documents, not with goods & services

in case of foreign exchange business.

Payment for goods exported from Bangladesh should be received through an Authorized Dealer in freely

convertible foreign currency or in Bangladesh Taka from a Non-Resident Account.

3.5.0 EXPORT SECTION

3.5.1 Parties involved in an Export L/C Transaction

L/C Issuing Bank

Importer

L/C Advising Bank

Exporter 55

Confirming Bank (If any)

Negotiating Bank

The paying/Reimbursing

Export L/C:

Export L/Cs is issued by a foreign bank favoring Bangladeshi exports through our banks having

correspondent relationship with them.

3.5.2 Services provided against Export L/C

A) Advising of export L/C

The advising bank getting the import L/C sent by the issuing bank located abroad will advise the L/C to the

beneficiary without any engagement or responsibly on their part. It will see the following only:

I. Authenticity of L/C (Test agreed in case of Telex L/C and signature verified in case (air mail L/C).

II. Merchandise specified in the L/C is permissible and clauses incorporated in the L/C are not

against country’s regulations.

B) Add Confirmation of Export L/C

Bank may add additional confirmation to export L/C where there is specific instruction from the L/ C issuing

bank to do so. Additional confirmation of L/C gives the seller a double assurance of payment. Bank’s

requirement of adding confirmation:

I. Issuing Bank should be a reputed bank.

II. Credit line/Arrangement with the L/C issuing bank.

III. L/C clause are to be acceptable to confirming bank

IV. Approval from the competent authority for adding confirmation of export L/C. 56

V. Confirmation charges are to be recovered as per rules.

C) Negotiating of Export L/C

Documents/papers to be submitted by exporter to bank for negotiation/collection against export L/C. the

exporter submit the documents to bank as per requirement of bank. List of export documents is as follows:

I. Export L/C

II. EXP Form

III. Bill of exchange

IV. Invoice

V. Bill of Lading

VI. Packing List

VII. Certificate of Origin

VIII. Inspection Certificate

IX. Insurance Document

X. Weight List

XI. Any other documents as per L/C

Bank must scrutinize all the documents stipulated in the credit with reasonable care to ascertain whether

they confirm with the terms and conditions or not. If the documents are drawn strictly in terms of the credit,

the bank may negotiate and pay the value of export bill to the exporter at:

OD buying rate (Sight Draft)

USANCE rate (For DA Bill)

Appropriate rate for DP Bill

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Accounting treatment

After adjustment of pre-shipment credit:

FBP (foreign bill purchased) A/C Dr.

Party’s A/C Cr.

3.5.3 Realization of Export Proceeds

On receipt of credit of the export bill from the foreign correspondent, banks realize the bill at specified rate

and following vouchers are passed.

H/O (ID) --------------Dr.

FBP A/C----------------Cr.

Income A/C on exchange earning ------Cr.

COLLECTION DOCUMENTS

Export documents not covered by and L/C documents not drawn in terms of the credit are accepted on

collection basis with the shipper authority at their documents are forwarded through foreign correspondents

to the drawee for payment or acceptance. After realization of the bills on collection, export is paid

appropriate rate after adjustment of liabilities on his account (if any)

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Voucher to be passed:

Lodgment (Accepted for sending on collection):

FBPL A/C Dr.

FBPC A/C Cr.

Realization: (Reverse of Contra Voucher):

FDPC A/C Dr.

FBPL A/C Cr.

H/O (ID) A/C Dr.

Party’s A/C Cr.

Income on com/charge Cr.

3.5.5 Export Financing

Financing of export credits is made in two stages:

1. Pre-shipment Financing/ Packing Credit : Packing credit is short-term advance granted by a

bank to an exporter against valid export L/C contract for the purpose of purchase of materials or

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finished goods or manufacturing, processing, packing, transporting up to ware house/ port of

shipment etc, of exportable goods for export.

Voucher to be passed:

packing Credit-------Dr.

exporter’s A/C--------Cr.

Adjustment:

FBP/FDBC-----------------A/C

Packing credit----------Cr.

Income A/C interest on PC----------Cr.

2. Post-shipment financing/ Back-to-Back L/C: Back-to-back L/C means one credit backs another

credit. It is new credit in favor of another beneficiary. Sometimes beneficiary/seller of a credit

himself is unable to supply goods specified in the L/C and required to purchase from another

supplier by opening second credit.

Besides, the normal formalities and requirements (for L/C opening) the following formalities and documents

are also required for opening back-to-back L/C:

1) Master L/C

2) Valid bonded warehouse license

3) Quota allocation for quota items

4) ERC in addition to IRC

5) Indemnity/undertaking

6) No objection from previous banker (if any)

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7) Factory inspection certificate

8) BGMEA Membership

Vouchers and accounting treatments are the same normal L/C opening except margin. In this case, no

margin is taken by the bank. After lodgment, maturity date of the import bill is intimated to foreign bank as

per L/C terms. The documents are delivered to the order of opener duty indorsed for clearance of goods

from custom authority. Goods are cleaned through approved clearing and forwarding agent of the bank.

Vouchers to be passed:

Banker’s liability for L/C------Dr.

Customer’s liability for L/C------Cr.

Reversal of contra Lodgment:

Customer’s liability on IFBC L/C------Dr

Party’s A/C ---------Dr.

Income A/C Bank charges-----Cr. (if any)

3.5.6 Payment of Import bills

Payment of Import bills is at maturity from the relative export proceeds repatriated. The required foreign

exchange for payment of import bills is kept in a separate account, out of repatriate proceeds of relative

export. Party wise and export L/C- wise funds are kept in FBPAR (foreign Bills Awaiting Remittance)

account from export proceeds for payment of bills at maturity.

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3.5.7 Types of Accounts maintained by Exporters and Importers

LORO ACCOUNT:

Loro account means “their account with you “. Account maintained by third party is known as Loro Account.

This account may be either in foreign currency or home currency.

NOSTRO ACCOUNT:

Nostro Account means “Our account with you:. The account that a home bank maintains with a foreign

bank is known as Nostro account. For example, Dhaka Bank’s US Dollar account maintained with City

Bank NA New York, USA is NOSTRO Account of Dhaka Bank.

VOSTRO ACCOUNT:

Vostro Account means “your account with us”. The account maintained by a foreign bank is known as

vostro account. We can term nostro account when referred to its account holder (foreign bank) by home

bank as vostro account. For example, State Bank of India’s taka account maintained with Dhaka Bank is a

vostro account of Dhaka Bank.

3.6.0 Foreign Remittance

‘Foreign remittance’ means purchase and sale of freely convertible foreign currencies as admissible under

Exchange Control Regulations of the country. Purchase of foreign currencies constitutes inward foreign

remittance and sale of foreign currencies constitutes outward foreign remittance.

So we see that there are two types of Foreign Remittance: 62

Foreign Inward Remittance

Foreign Outward Remittance

MTBL has established remittance arrangements with a number of exchange houses to facilitate wage

earners to remit their money to Bangladesh. This bank has already been in operation with UAE Exchange

Centre LLC, Wall Street Exchange LLC, Trust Exchange, Route Asia Exchange, Instant Cash and

Bangladesh Money Transfer. MTBL have obtained permission from Bangladesh Bank to start operation

with Al Saad Exchange, First Solution Exchange, Al Ahalia Exchange Bureau and Federal Exchange. The

bank maintains correspondence with other 16 Exchange House which are Al Fadaral Exchange, National

Exchange, City Exchange, Future Exchange, Al Ghurair Exchange, Habib Exchange, Al Ansari Exchange,

Emirates India International Exchange, Instant Exchange, Oman UAE Exchange, Modern Exchange,

Purusuttam Kanji Exchange, Musandam Exchange, Lasidas Tharia Exchange, Oman United Exchange and

ICICI Bank. The extensive branch network of these Exchange Houses has been largely helping

Bangladeshi expatriates working in the UAE, UK, Qatar, and Oman to transfer their funds speedily and

efficiently through online network. MTBL’s total foreign remittance volume was Tk. 2,671.53 million in 2006.

MTBL is exploring further avenues of remittance from other countries such as Saudi Arabia, Malaysia, USA

and Italy in the near future.

3.6.1 Types of Foreign Remittance Facilities

The Foreign Remittance department of MTBL Dilkusha Branch is equipped with a number of foreign

remittance facilities. Following are the types of foreign remittance facilities offered by MTBL Dilkusha

Branch.

Issuance of Foreign Demand Draft (F.D.D)

Issuance of travelers Cheques (T.C)

Issuance of foreign T.T (Telegraphic Transfer)

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Disbursement of the cash of incoming F.T.T.

Collection of F.D.D.

3.6.2 Foreign Demand Draft

MTBL issues the Foreign Demand Draft for the charges for TOEFL, SAT, GMAT, registration fee,

membership fee and also for the application or processing fee for the student who are interested to study

abroad. SIBL opens Student Files to issue Foreign Demand Draft following the permission of Bangladesh

Bank. MTBL Dilkusha Branch has more than 200 Student Files. Before issuance of FDD, MTBL asks the

students to fill up the TM Form; which contains the following particulars-----

o Name of the student

o Full address of the student

o Amount of FDD in Foreign Currency

o Purpose of Remittance

o Address of the Institution to which the FDD will be favored

o Country receiving payment

o Passport no. of the student with date of issue

o Signature of the student

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

FDD issued.

Commission for issuance of FDD @ Tk.500.

Commission for Cancellation of FDD @ Tk.500.

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The foreign bank/exchange company on local bank usually issues foreign Demand Draft. It is an order to

pay a certain sum to a certain person or as his instruction, issued by the bank on its overseas branch or on

its correspondent bank. The demand draft is handed over to the purchaser who sends it to the beneficiary.

The beneficiary obtains payment on presentation to the bank on which the draft is drawn.

Encashment of FDD may take place in two ways-

1) Purchase,

2) Sending for collection.

Purchase:

The following criteria must be fulfilled:

a) Firstly, the party applies for a Foreign Bill Purchase (FBP) to limit the facility, which is approved by the

Head Office authority for a certain period.

b) The local banks will entertain valued clients with this facility.

c) The party will give an undertaking regarding adjustment of FBP liabilities which is offered to him in case

of non-realization of proceeds (FDD).

d) It is necessary that all relevant charge documents (D.P. Note, Personal Guarantee etc.) be collected

from the party.

The following vouchers are passed after it is posted in the FBP register:

Dr. - FBP (at the spot buying rate)

Cr.-Income A/C Commission others

Cr. - Income A/C Postage

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The FDD is sent to the American Express Bank, Dhaka for collection along with a R.L. It is drawn on a

foreign bank in abroad otherwise it is sent to the respective bank on which the FDD is drawn after giving

endorsement on the backside of the FDD.

After realizing the proceeds, the following vouchers are passed-

Dr. – MTBL G/A

Cr. – FBP (liability adjusted)

Cr. – Income A/C (Exchange Gain)

Sending for Collection

It is posted in the Foreign Bills for Collection. The following functional activities are undertaken for a FBC:

i. It is posted in the FBC register. FBC No. Is assigned to the FDD.

ii. Then it is sent for collection to the branch of the bank on which it is drawn. If it is drawn on a

foreign bank in abroad, it is sent to the AMEX. Dhaka along with a R.L. and liability voucher.

a. Dr- FBR

b. Cr- FBC

iii. After receiving credit advice the following vouchers are passed.

Dr- MTBL, General A/C, ID (at spot buying T.T. clean rate)

Cr- Party A/C

Cr- Income A/C postage

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Cr- Income A/C Commission

And liability voucher is reversed.

Dr- FBC

Cr- FBR

3.6.3 Travelers Cheque (purchase):

The payment to the customer is made instantly by debiting “foreign bill purchased” account. As soon as

collecting bank abroad informs the bank about the realization of the traveler’s cheques, the bank branch

debit that particular foreign bank account and adjust the foreign bill purchased account.

The branch takes following steps chronologically as follows:

The signature of the party is taken on the T.C. and verified with that of his passport signature

to make sure that the particular T.C. belongs to the person.

The T.C. is allotted with a FBP No. and entry is passed into the FBP register. After that on the

back of the T.C. the endorsement “payee’s A/C credited” is written along with the FBP No.

And the following vouchers are passed:

Dr. FBP A/C. @ T.C. buying)

Cr. Income A/C commission (others) @ taka 0.25 per dollar)

Cr. Income A/C Postage @ Tk 50/-)

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Cr. Party’s A/C

Then a schedule is prepared in four sets. First three copies are forwarded with the T.C. to the foreign bank

and the fourth copy is kept in the FBP lodgment file along with a copy of T.C.

When the branch gets the credit advice against the proceeds from the NOSTRO A/C with which the

transaction took place, they adjust the FBP liability by passing the following vouchers:

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

Cr. FBP (liability adjusted)

Cr. Income A/C (Exchange gains).

Procedure for TC (outward):

For traveling purpose each person has a yearly foreign currency quota as follows:

Particulars In cash In TC Total

For outside SAARC countries $300 $2700 $3000

For SAARC

Countries

By road $300 $300 $600

By air $700 $300 $1000

The yearly quotas are mutually exclusive to each other.

But for the F.C.A/C hold a special advantage is prevailing there and that is the person can get TC for any

amount as much as his FC A/C balance permits.

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First, the party will fill up the form (purchase agreement) and sign it. Again he will sign the T/M form. After

that the banker will endorse the party’s passport and ticket declaring the amount of foreign currency issued

in cash and in the form of TC. Then the following vouchers are passed:

Dr. Cash or party A/C

Cr. MTBL General A/C. (@ TC selling)

Cr. Income A/C (Commission)

(Here 1% of total Taka amount is realized for issuance of TC)

Cr. Income A/C (Miscellaneous @Tk. 100/- per passport)

Then, entry is made in the TC issue register. Original copy of the purchase agreement, photocopy of the

ticket and passport are kept with the T/M form and the purchase agreement copy along with the TC,

passport and ticket are handed over to the party after getting his “received” signature in the TC issuing

register.

For TC sale the Accounting procedure is as follows

a. Dr. CD A/C or cash

Cr. FC Fund Purchase A/C (at actual rate)

Cr. Income A/C (Commisson).

b. Dr. FC Fund A/C (Notional rate)

Cr. MTBL General A/C (H.O)

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For TC settlement authorized AMEX, N.Y., U.S.A. debits the branch’s A/C along with purchase agreement.

3.7.0 DISSIMILARITIES BETWEEN THEORIES AND PRACTICES

Theoretically there are three types of L/Cs-revocable, irrevocable and confirming L/C. But in the

context of Bangladesh, banks are opening only irrevocable L/C in favor of exporter on the behalf of

importers/buyers.

Banks are advising/ forwarding only L/C provided by the bank of importer, but not giving

confirmation against the L/C. Hence it is true that there may be confirming bank involved in export

import business theoretically, it is not seen in my bank where I have done my practical orientation.

There is no provision or laws against taking discrepancy charges in L/C. Practically this charge is

well-accepted in banking word in fact it is one of the biggest sources of income for the banks.

In case of Loan against imported merchandise, on the arrival of goods and lodgment of import

documents, importer may request the bank for clearance of goods from the port and keep them to

bank godown. But in case of sanction of LIM no goods are kept in bank godown.

3.8.0 SWOT ANALYSIS OF MTBL

Strengths:

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MTBL has a group of giant clients who are extremely loyal and regular customer of MTBL. Every

month this group earns a substantial amount for MTBL in course of their business transaction. This

income can be called as fixed income of the firm.

The employee-customer inter-relationship is very strong and this is why customers are reluctant to

switch to other banks.

Employee to employee relationship is very friendly and cooperating thus making the total work

environment a place of harmony.

The Board of Directors of MTBL is very well established and recognized around the country.

Because of this its shareholders can rely on this bank thinking it is less risky one.

They have well equipped risk assessment team who has very strong forecasting ability which is

why MTBL did not suffer from losses like other banks during the world recession followed with the

downfall of garments industry of Bangladesh.

MTBL recently went through collaboration with DBBL for accessing its ATM facility. As we all know

that DBBL has the widest network of ATM in our country. Thus a MTBL customer can use DBBL’s

ATM booth for depositing or withdrawing money.

They have numerous attractive deposit schemes which attract a lot of new customers.

They provide comparatively good remunerations and scope of promotions to all its employees who

encourage and motivate its people to be loyal and productive towards the company. Also due to

this reason they are reluctant to switch off to other firms.

Weaknesses:

The inconsistency if the IT infrastructure at MTBL hampers the smooth flow of banking service to

the customers.

Their focus towards growth is insufficient. They are not aggressive enough to compete with other

such banks.

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Theoretically, any person can purchase pay order, demand draft and telex transfer by depositing

money and commission. However, the person who wants to purchase these should have account

in the bank branch. These will discourage customers to transact with bank.

There is a rule to deposit at least an amount of money in case of opening an account. But it is not

strictly followed. Sometimes more money is asked from a new customer who discourages him to

open an account in the bank. I think the amount should be fixed at a level that is not altered from

customer to customer.

When a client try to open an A/C he must have to need an introducer, sometimes it may create a

problem for the client as he might not have an introducer.

In case of depreciation only the straight-line is to be followed, but there are other methods of

charging depreciation, such as-double decline, sum year-digit methods etc are used as method of

depreciation. These are not followed by MTBL except the straight line method.

Interest rates for different types of loan and advances vary to different customers. A prospective

customer is allowed to take credit facilities at a lower interest rate. Again, the interest is charged at

a higher rate to a customer who is not so prospective.

Opportunities:

The economy of Bangladesh has again started accelerating gradually. There is good prospect of

foreign investment in the country which MTBL must attempt to get hold of. Also our money market

is expanding.

New export products are at demand like pharmaceuticals products, leather and jute products.

Therefore there is a good probability that if MTBL can get hold of these clients, it will earn for them

a good amount of foreign currency.

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More new branches can be introduced in areas which are in the process of development like

Mongla port and the South Western region.

Government has relaxed a little bit for commercial banks about giving entrepreneurship loans and

consumer loans to upgrade the economy which in other words is a good income source for any

bank.

Threats:

Their source of earnings is extremely concentrated to a certain group of clients which I have placed

as one of their “Strengths” too. This group contains a few garments and jute exporters. It is

definitely like one of their fixed incomes but if any sorts of downswing in these companies occur,

MTBL might be severely affected.

MTBL as I also mentioned earlier, lags a little behind in terms of financial services and embracing

of new technologies whereas other multinational banks and private banks upgrades their facilities

endlessly to provide their customers with extensive services.

There might be a frequent switch-offs of employees due to lack of human resource policies at

MTBL as it does not have a well equipped human resource team.

Other financial institutions’ promptness in embracing newer technologies might make MTBL seem

technologically challenged as they are very reluctant in entering anything new.

All the weaknesses listed above together can make the firm’s goodwill value fall compared to other

commercial banks and thus lowering the price of their share in the market.

3.9.0 EVENTS AT MTBL

While I worked in MTBL for 3 months, I learnt that financial firms do not only deal with money all

the time. Bank officials have to do a lot more than just receiving and lending money. They always strive to

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provide the society beyond their financial services. At the same time, by performing these activities they

earn profit as well as goodwill. Also it acts as one of their promotional activities since these are highlighted

in all kinds of newspapers, magazines, news programs and last but not the least in their official website. So

below I have listed some events of MTBL which have gained grand importance for their institution. Here, by

‘Events’ I have mainly referred to special agreements that the bank has made, the opening of new

branches, CSR (Corporate Social Responsibilities) activities and likewise. However I could not be fortunate

enough to attend all these events except for only one which was MTBL’s 10th Annual Anniversary. The

events are listed by their dates starting with the earliest to the latest.

1. Mutual Trust Bank Limited (MTB) opened its seventh brokerage house at Dhanmondi on Monday,

October 19, 2009. MTB Director Yasmeen Haque inaugurated the brokerage house.

Also present at the inaugural ceremony was MTB Managing Director and Chief Executive Officer

(CEO) Anis A Khan along with capital market investors, business personalities, dignitaries and

senior officials of the bank.

The objective of this as stated in the Financial Express newspaper is, the MTB is bringing its

brokerage house services nearer to the doorsteps of capital market investors across the country

and ensuring superior services so that they find it easy to trade in capital market instruments

through the bank.

The new brokerage house has been equipped with the latest technology and all other convenient

facilities will be delivered through quality customer services, the MTB managing director said.

He affirmed that MTB would play a key role in the country's capital market and contribute to

creating a healthy investment climate for growth of the country's economy.

2. On Saturday October 24, 2009 MTBL had its 10th Annual Anniversary. One this day in 1999, the

bank started its journey at the initiative of leading and highly reputable business personalities of

the country. MTB has drawn up an elaborate programme including various corporate social

responsibilities (CSR) events, to be held over one year starting from the first day of their 10th year

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Saturday, ending on October 23, 2010 to mark the 10th founding anniversary of the bank.

Their CSR events started through voluntary blood donation programmes in Dhaka and Chittagong

on this day. MTB officials from different branches and offices across the country took part in the

programme. Blood collected from the programme would be dedicated to save lives of severely ill

patients. It was a very extraordinary idea of MTBL to celebrate its anniversary in the dedication of

the society. This topic got so much response that it came in the front page of many newspapers

like Financial Express and The Daily Ittefaq. I was present in the Dilkusha Foreign Exchange

Branch and the official said that they are proud to be a part of this organization.

3. Mutual Trust Bank Ltd got the license for offshore banking as on Thursday December 4, 2009 and

will take part in financing Biman Bangladesh Airlines for purchasing aircraft under a syndicated

loan arrangement, the managing director of the bank said. "We hope to disburse the loan within

the shortest possible time. Now we will start working on primary tasks to take part in the

syndicated loan arrangement led by Eastern Bank Ltd," said Anis A Khan. "We will complete the

initial preparations, including fixing the ratio of the loan amount and the interest rate within this

month," he added. He was speaking at a scholarship giving ceremony styled 'Inspiring the

Nation's Future Leaders' jointly organised by Mutual Trust Bank and Dhaka University Alumni

Association (DUAA) on the university campus. "Of the total amount of $117 million to finance

Biman, we are planning to increase our loan up to $25 million from our offshore banking unit,"

Khan said, adding that the bank is likely to give the loan at 5-6 percent interest rate. He also said

the bank is set to finance local export-based industries under offshore banking and the companies

will have to repay in foreign currencies. The bank started the scholarship programme in 2008 and

awarded scholarships to 34 students yesterday from different departments of the university, who

got Tk 2,500 each. Dr Atiur Rahman, Bangladesh Bank governor, Samson H Chowdhury,

chairman of Mutual Trust Bank, and Syed Manzur Elahi, chairman of DUAA, were also present at

the ceremony.

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4. The weeklong Mutual Trust Bank-The Daily Star Debate Competition was held on Monday

December 7, 2009 in Dhaka. Important officials like the Deputy Commissioner (DC) Farid Uddin

Ahmad, Resident Editor of the Prothom Alo poet Abul Momen and Mutual Trust Bank Senior Vice

President Md Nazrul Islam were present on the occasion.

Drishty, a cultural organization, had organized the competition featuring 17th Inter-School Debate,

2nd Children Debate and 6th Inter-University Debate in association with Equity Properties

Management Limited. ATN Bangla and Radio Foorti were the media partners of the competition.

The participating schools at the school level debate were Chittagong Government High School, Dr

Khastagir Govt Girls' High School, Nasirabad Govt High School, Ispahani Public School and

College, BM School and College, BAF Shaheen College, Chittagong Collegiate School,

Government Muslim High School, St Placid's High School, Kapashgola City Corporation Girls'

High School, Aparanacharan City Corporation Girls' High School, Imaratunnesa City Corporation

Girls' High school, Krishnachura Girls' High School, City Government Girls' High School, Agrabad

Govt Girls' High School and Silver Bells Girls' High School.

Debaters from eleven institutions, including Chittagong University (CU), Dhaka University (DU),

Jahangirnagar University (JU), Rajshahi University (RU), North South University (NSU), Premier

University, Chittagong University of Science and Technology (CUET), International Islamic

University of Chittagong (IIUC), University of Science and Technology, Chittagong (USTC) and

Chittagong Maa O Shishu Hospital Medical College participated at the inter-varsity debate

competition.

5. Mutual Trust Bank Ltd. (MTB) participated in the 2 day long SME Financing Fair on Tuesday and

Wednesday December 8th and 9th 2009, held at a local hotel in Dhaka. The Fair was jointly

organized by DCCI and SME Foundation. MTB became one of the major sponsors of the event.

MTB is committed to contributing to the growth of the SME sector, and is a significant player in the

economic development of our nation.

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The MTB stalls at the Fair provided service and product information, customer briefing and instant

loan processing for Small and Medium entrepreneurs. MTB has an array of SME products with

MTB Krishi, MTB Byabsha and MTB Bhagyabati being appreciated by the SME, Women and

agricultural entrepreneurs. MTB also signed two agreements for project financing with two small

entrepreneurs Monowara Begum for her 'tulshi' tea project and Farmer Moyaz Uddin for producing

bio-gas for his agricultural farm, during the inauguration ceremony of the fair in the presence of

the Honorable Prime Minister.

6. On day December 22, 2009 Mutual Trust Bank Ltd (MTB) opened its 44th Branch at Alankar Mor

in Chittagong, the commercial capital of Bangladesh. MTB Brokerage's Agrabad Branch was also

relocated in new and expanded premises at Akhtaruzzaman Centre 21-22, Agrabad C/A,

Chittagong. Both the branches were formally inaugurated by MTB Founding Chairman Syed

Manzur Elahi on that day at simple ceremonies held at the respective branch premises. MTB

Managing Director & CEO Anis A. Khan, Sufi Mizanur Rahman, Chairman of PHP Group, M A

Malek, editor of Dainik Azadi, Taslim Uddin Chowdhury, editor of Dainik Purbakon were also

present. A large number of customers, elite, journalists and dignitaries attended the function.

MTB Founding Chairman Syed Manzur Elahi, in his address, said that MTB valued its customers

most highly, and was making continuous endeavors to provide them with modern technology

driven products and services. He also said that MTB was improving its capabilities to turn into an

institution with professionalism in a true sense and to this direction MTB board would provide all

sorts of support to the management team.

MTB Managing Director & CEO Anis A. Khan, in his speech, said that Mutual Trust Bank would

like to spread banking facilities and brokerage services to every nook and corner of the country to

serve the common people. He informed that MTB would open branches in all important business

areas and agricultural centers throughout the country, which would pave the way for the country's

balanced economic development between urban and rural areas.

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7. MTBL has recently signed a participation agreement with Bangladesh Bank (BB) on refinancing of

sustainable energy projects. Samson H. Chowdhury, MTB Chairman, launched the new MTB

product at a simple ceremony held on December 29, 2009 at the Corporate Head Office of the

bank by handing over the first loan sanction letter favouring Resource Development Foundation

(RDF) to its Executive Director Golam Mostafa. BB Governor Dr Atiur Rahman and Deputy

Governor Md Nazrul Huda and MTBL Deputy Managing Director Ahsan-uz Zaman were present

at the signing ceremony. Mutual Trust Bank Limited (MTB) launched MTB Green Energy Loan, a

new loan product for sustainable energy generation. MTB Founding Chairman Syed Manzur Elahi

along with other Directors was also present on the occasion. Anis A. Khan, Managing Director &

CEO of the bank and Mohammad Iqbal, Head of SME Banking were also present.

Under this loan scheme, MTB will be granting loans to the customers wishing to set up Solar PV

(photovoltaic) System for household and irrigation, Solar PV Assembly Plant, Bio-gas Plant,

Effluent Treatment Plant (ETP) or any other feasible renewable energy generation plants. The

product will supplement the government's efforts to meet the power and energy crisis of the

country and protect the environment from the adverse effects of the climate change.

8. On the 1st of January 2010, as a week long event Mutual Trust Bank Limited (MTB) has started

distributing blankets to the severely cold affected less advantaged people. On the first day they

covered the area of Sapahar in the district of Naogaon. Md. Hashem Chowdhury and Md. Ahsan-

uz Zaman, MTB Deputy Managing Directors, distributed blankets to the people at a gathering held

at the Shapahar Bidda Niketon ground of Shapahar, Naogaon.

MTB DMDs, in their speech, said that MTB had always been by the side of the common and less

advantaged people of the society in catastrophes of flood, cyclone, cold waves or any other

national crisis and blanket distribution is a part of these programs. They also said that MTB

launched loan products for the poor farmers and SME customers and had plans to introduce more

banking products and CSR programs for the poor segment of the society and through these

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activities MTB would like to be the bank of choice of the people of the country.

9. MTB Founding Chairman Syed Manzur Elahi launched the calendar for the year 2010 at a simple

ceremony held on January 3, 2010 at a local hotel in Dhaka. MTB Managing Director & CEO Anis

A. Khan, Managing Director of Expressions Ltd. Ramendu Majumdar were also present. Senior

Officials of Mutual Trust Bank, Journalists of print and electronic media, city elite attended the

function.

Syed Manzur Elahi, in his address, said that MTB was keenly interested in contributing to the

social development of the country and as part of this program MTB selected climate change as

the subject matter of this year’s calendar. Anis A. Khan, in his speech, said that MTB would play a

key role in positive change of the society through various programs in the times ahead.

Under the deal, MTBL will get refinancing facility from the BB for onward lending to its customers

for setting up solar energy projects, bio-gas and effluent treatment plants.

10. During the beginning of this year although the date is not specified, Mr. A. E. A. Muhaimen

Managing Director and CEO of Brac Bank and Mr. Anis A Khan, MD & CEO of Mutual trust Bank

are seen on an MoU signing. Mutual Trust Bank, through this agreement, joined ELDORADO-an

automated Remittance and Payment system led by Brac Bank. MTB already was a member of

SWIFT which accelerated their foreign trade. By joining ELDORADO, the officials said their

objective is to increase remittance service exclusively as the numbers of expatriates are at a

peak.

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CHAPTER 04

RISK ASSESSMENT OF MTBL

4.1 Introduction80

With the emergence of time, everything has changed into a new sophisticated version and along with that

made our lives more complex and difficult. Every day our market is growing, technology is alleviating and

the products and services we use are also enriching. No wonder there is a mushroom of private banks in

our country at this moment. Before going through this internship program, I used to have a rear feeling that-

except a few, all these banks are surely facing great difficulties to survive in such a poor economy like ours.

However my idea really changed after having practical experience of 3 months first time in a bank. I found it

really challenging-the way these banks are flourishing in spite of the fact that there are so many

competitors and moreover a struggling economy. Therefore I could not resist my curiosity to find out how

they managed such a prominent existence carrying so many risks in shoulder.

The last chapter that is chapter 3 is the project part of my internship report and as you may already have

guessed, it deals with the risk analysis of MTBL. In this section, as the title already implies, I have

showcased the most widely used financial indicators to measure both the quality and quantity of MTBL’s

performance. It centers on the most important dimensions of performance especially focusing on the bank’s

risk associated with it. (All the analysis has been done on the basis of my accessibility to company data).

4.2 Background of Banking in Bangladesh

The history of banking sector of Bangladesh is not new rather it started from the very moment of

independence. “The banking system at independence consisted of two branch offices of the former State

Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi

interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial

banks. Virtually all banking services were concentrated in urban areas. The newly independent

government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank

and renamed it the Bangladesh Bank. The central bank was responsible for regulating currency, controlling

credit and monetary policy, and administering exchange control and the official foreign exchange reserves.

The new banking system succeeded in establishing reasonably efficient procedures for managing credit

81

and foreign exchange.” (News Bangladesh, The Economy of Bangladesh: The Banking System, 2008, Para 1)

4.3 Current Status of Banking Sector of Bangladesh

As we all must have seen that the banking system of our country has grown very prominent. They are

striving to reach people at every corner of the country and is available almost anywhere these days.

Remarkably the private banks are one of the highest growth sectors of the country at this moment. The

number of banks in all now stands at 49 in Bangladesh. Out of the 49 banks, four are Nationalized

Commercial Banks (NCBs), 28 local private commercial banks, 12 foreign banks and the rest five are

Development Financial Institutions (DFIs).

However, regardless of all these facts, risks associated with this banking sector are many. Bangladesh

being a developing country has innumerous risks, especially financial risks are inescapable. Although

banks earn high yields, and trade finance in the emerging markets like ours offers some of the highest

returns available in conventional banking, there are many drawbacks too. Balancing risk and reward is

critical to maintaining profits and reputations in an emerging market like in Bangladesh.

4.4 Commercial Banks- The Risk Takers

Commercial banks are in the category of one of the riskiest businesses. In the process of providing

financial services, they assume various kinds of financial risks. Over the last decade our understanding of

the place of commercial banks within the financial sector has improved substantially. We, the general public

seek the services of these financial institutions because of their ability to provide market knowledge,

transaction efficiency and funding capability. In performing these roles they generally act as a principal in

the transaction. And to do this they use their own balance sheet that is their assets and other funds to

facilitate the transaction and most importantly to absorb risk associated with it. However there are also risky 82

activities which do not have direct implication to the bank’s balance sheet. These activities include agency

and advisory activities. For example: trust and investment management; private and public placement or

facilitating contracts; underwriting; the packaging, securitizing, distributing and servicing of loans in the

relevant areas. Thus we understand from here that a good amount of risk lies out of the bank’s balance

sheet. Nevertheless, the overwhelming majority of risks facing the banking firm are in their on-balance-

sheet businesses.

4.5 Why Banks Endeavor Risks?

Why do banks endeavor risks? Because it is about peoples’ money and since you are dealing with other

peoples’ (stakeholders’) money, government is always on the scene to intervene. This is how all the risks

are originated. Every single bit of information has to be exposed in public and thus you are reliable of all

mistakes. Therefore in simpler words banks are always in a risk of making mistakes of peoples’ money for

which they will be held reliable. After all, financial institutions are simply businesses, organized to maximize

the value of the shareholders’ wealth invested in the firm at an acceptable level of risk. The objectives of

maximum or at least satisfactory profitability with a level of risk acceptable to the institutions’ owners, is not

easy to achieve, as recent institutions failure around the globe suggest. Banking is a risk business; one

mistake can wipe out a year’s profits or more.

Why are financial institutions under such heavy scrutiny today? As already mentioned above, the key

reason is that banks and other financial institutions rely heavily upon the open market to raise the funds

they need by selling stocks, bonds and likewise. “Entry into the open market to raise money means that a

financial firm’s financial statements will be gone over ‘with a fine tooth comb’ by stock and bond market

investors, credit rating agencies, regulators, and scores of other people and institutions.” (Rose & Hudgins,

2009-2010, pp. 163-164)

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4.6 Extent of Risks Being Absorbed

Not all sorts of risks banks have to absorb. In a developing country like Bangladesh there are uncountable

types of risk factors. However, these commercial banks only need to worry about the risks contained in the

bank’s principal activities that is-those involving its own balance sheet and its basic business of lending and

borrowing, are not all borne by the bank itself. In many instances the institution will eliminate or mitigate the

financial risk associated with a transaction by proper business practices or in other words it will shift the risk

to other parties through a combination of pricing and product design. Thus they only take risks at firm level

and solve them as efficiently as possible. However the extent of risk can be broadly divided in two

categories which are Systematic Risk and Unsystematic Risk.

Systematic Risk: This risk is also called Market Related Risk or Non-diversifiable Risk. These type of

risks cannot be eliminated no matter how much perfect a financial firm or its management is. However a

firm can be advantageous if it takes precautious measures, the extent of loss will be less compared to other

firms.

Unsystematic Risk: This risk is also called Firm-specific or Company-unique Risk or Diversifiable Risk.

These types of risks can be reduced or eliminated altogether if the firm has a good posture at all aspects.

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

risk.

4.7 Types of Risks Associated with Commercial Banks

What do we mean by the word perform when it comes to financial firms? In this case performance refers to

how adequately a financial firm meets the needs of its stockholders (owners), employees, depositors and

creditors, and other borrowing customers. At the same time financial firms must find a way to keep

government regulators satisfied that their operating policies, loans and investments are sound, protecting

84

the public interest. Therefore a financial firm is fully entitled to all these responsibilities thus involving a lot

of risks.

Risk to a manager of a bank or a financial institution means the perceived uncertainty associated with a

particular event. For example, will the customer renew his or her loan? Will deposits and other sources of

funds grow next month? Will the financial firm’s stock price rise and its earnings increase? Are interest

rates going to rise or fall next week?

Each of these forms of risk can threaten a financial firm’s day-to-day performance and its solvency and long

run survival. The types of risks are:

A. Credit risk

B. Liquidity risk

C. Market risk

D. Operational (Transactional) risk

E. Legal and Compliance Risk

F. Reputation risk

G. Strategic risk

H. Capital risk

I. Other risk

To measure the extent of these risks I have used several ratios which are illustrated below with

values and graphs (where applicable). Also an excel spreadsheet is provided for detailed

computations of the ratios. The spreadsheet also contains the financial statements of MTBL of the

3 years from 2006 to 2008, on which I have done the analysis.

A.Credit Risk 85

The probability that some of a financial firm’s assets, especially its loans will decline in value and perhaps

become worthless is known as credit risk. In simple words “It is a risk that a borrower will not pay a loan as

called for in the original loan agreement, and may eventually default on the obligation. Credit risk is one of

the primary risks in bank lending, in addition to Interest Rate Risk.”(Answers.com, Banking Dictionary,

2010).

Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit- either the

principal or interest or both. Most financial firms (lenders) employ their own models (credit scorecards) to

rank potential and existing customers according to risk, and then apply appropriate strategies and rates.

With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher

risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is

controlled through the setting of credit limits. Some products also require security, most commonly in the

form of property.

Compared to other banks, MTBL does not have too much a record of Default loans, which implies they

have a well equipped management team and good handling power on loans. Further statistical detail is

given in the later part. The following are four of the most widely used indicators of credit risk and I have

used them to demonstrate a clear view of the Credit Risk of MTBL.

The ratio of nonperforming assets to total loans and leases

The ratio of net charge-offs of loans to total loans and leases

The ratio of the annual provision for loans losses to total loans and leases or to equity capital

The ratio of allowance for loan losses to total loans and leases or to equity capital

The ratio of nonperforming assets to equity capital

The ratio of total loans to total deposits

Nonperforming assets are income generating assets, including loans that are past due for 90 days or more.

In other words they can be called doubtful loans in the sense that they are not written off and there is still

hope of getting it back. Charge offs, on the other hand are loans that have been declared worthless and 86

written off the lender’s books which we mostly know as bad loans or loan losses. If some of these loans

ultimately generate income, the amounts recovered are deducted from gross charge-offs to yield net

charge-offs. As these ratios rise, exposure to credit risk grows, and failure of a lending institution may be

just around the corner. The final two credit risk indicator ratios reveal the extent to which a lender is

preparing for loan losses by building up its loan-loss reserves (the allowance for loan losses) through

annual charges against current income (the provision for loan losses). The last ratio of total loans to total

deposits is a very popular and long standing credit risk measure. It is an alarming situation if this ratio

grows because loans are usually among the riskiest of all assets for depository institutions and therefore

deposits must be carefully protected. A rise in bad loans or declining market values of otherwise good loans

relative to the amount of deposits creates greater depositor risk.

Exhibit: 4.1: Credit Risk I

2006 2007 20080

0.2

0.4

0.6

0.8

1

1.2

1.4

Total loans to total deposits

Total loans to total deposits

Exhibit: 4.2: Credit Risk II

Explanation:

87

Non performing assets are doubtful loans and net charge-offs are bad loans. These factors

increased by a certain amount every 3 years based on both total loans and leases and also to the

total equity. As we can see in Exhibit: 4.1: Credit Risk I, these two items are negligible in 2006 and

rose a little bit in 2007. In 2008, net charge-offs rose significantly while non-performing assets rose

at a low constant rate. Thus credit risk of MTBL has risen in the following years. Along with that the

bank has also prepared itself adequately. It has increased its annual provision for doubtful loans

and allowance for loan losses in all the three years. The last indicator which is total loans to total

deposits (Exhibit: 4.2: Credit Risk II) has also risen consecutively in the following year which is also

something to be aware of. Loans are a bank’s most profitable assets at the same time it is the

riskiest one; thus if majority of the loans turn out to be bad loans, MTBL will loose all its hold.

However this ratio also indicates bank’s profitability since its assets (loans) is more than its

liabilities (customers’ deposits), provided that all the loans are matured and achieved successfully.

B.Liquidity Risk

Banks having insufficient cash to meet customers’ cash withdrawals, loan demands and other cash needs

is referred as Liquidity risk. Faced with liquidity risk a financial institution may be forced to borrow

emergency funds at excessive cost to cover its immediate cash needs, reducing its earnings. However very

few financial firms ever actually run out of cash because of the ease with which liquid funds can be

borrowed from other institutions. I have used four ratios to measure the exposure of MTBL’s Liquidity risk.

Cash and Cash Equivalents to Total Assets

Purchased funds to Total Assets

Balance held at other Banks and Financial Institutions to Total Assets

Cash Assets and Government securities to Total Assets

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Cash and Cash Equivalents include ready cash and quickest accessible assets like Cash in hand (including

foreign currency), cash with Bangladesh Bank and its Agent Banks. Also balances in other financial

institutions inside and outside Bangladesh are considered to be comparatively liquid assets as they can be

withdrawn if necessary yet banks do not usually do this. “Purchased funds comprise of Eurodollars or other

currencies bought, government securities, large CDs, Repurchase Agreements and Commercial Paper.”

(Rose & Hudgins, 2009-2010, p. 178). Lastly it includes Money at call or short notice. It includes funds lent

to discount houses, money brokers, the stock exchange, bullion brokers, corporate customers, and

increasingly to other banks. ‘At call’ money is repayable on demand whereas ‘short notice’ money implies

that notice of repayment of up to 14 days will be given. After cash, money at call and short notice are the

banks' most liquid assets. They are usually interest-earning secured loans but their importance lies in

providing the banks with an opportunity to use their surplus funds and to adjust their cash and liquidity

requirements.

All of the above items are done as a ratio of total assets of the bank. The more the ratio is, more liquid is

the bank. However too much liquidity is also not preferable as it means there is a lot of idle cash which

could be invested elsewhere and earn a substantial amount of interest.

89

2006 2007 20080

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Cash&equivalentsPurchased fundsBalance at other banksCash Assets&govt.securities

Exhibit: 4.3: Liquidity Risk I

Explanation:

Cash and cash equivalents fell a little in every year but it did not increase the liquidity risk of MTBL much as

the other liquid assets had offset the impact. Purchased funds are highest as we see in the graph in 2006

and again in 2008. It is comparatively very low in 2007 because if you just go through the financial

statement of MTBL or the ratios I have calculated, you will find that it faced a big downfall in its profitability

in this year and thus it sold out a lot of their investments to meet up the target.

C.Market Risk

In market-oriented economies which we have in Bangladesh, the market values of assets, liabilities and net

worth of financial service providers are constantly in a state of flux due to uncertainties concerning market

90

rates or prices. Market risk is mainly determined by two other risks which are Price Risk and Interest Rate

Risk.

Price risk

The risk that the value of a security or portfolio of securities will decline in the future is known to be as Price

risk. Especially sensitive to these market value movements are bond portfolios and stockholder’s equity

(net worth), which can dive suddenly as market prices move against a financial firm. Here the important

indicators are:

Book value of assets to market value of those same assets

Book value of Equity capital to its market value

Book value of Bonds to its market value

Explanation: This ratio could not be derived due to lack of accessibility of information. All the assets are

presented at the market value of the respective years. Neither the book value is mentioned anywhere nor

there is enough data to calculate it ourselves. Their depreciation method which is straight line and the rate

at which they depreciate each different category of assets are given in note # 2.6, however I could not find

out when exactly they bought which asset and thus did not know how much depreciation to add back to find

out the book value. It is because there is no list provided of how many new assets are bought at each year

and how much they had previously and for what duration. What I could do is make a rough estimation of

the book value based on the market value, but since there is a concept of “time value of money”, this

estimation process would be very inaccurate.

Nevertheless we all understand that Price risk factor affects all firms of all categories no matter how

precautious they are. It is because Price is a Market Risk factor which falls under the category of

Unsystematic risk and thus it is un diversifiable. Moreover with an increasing inflation rates (consumer

price) like 7, 7.2 and 9.1 in 2006, 2007 and 2008 respectively (Index Mundi, Bangladesh-Inflation Rate,

2008), we understand that the Price risk did exist in the firm.

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Interest Rate Risk

The impact of changing interest rates on a financial institution’s margin of profit is called Interest rate risk.

Rising interest rates can greatly diminish the profit of a financial institution if the structure of the firm’s

assets and liabilities is such that interest expense on borrowed money increases more rapidly than interest

revenues on loans and security investments. The most important measures are as follows.

The ratio of interest-sensitive assets to interest sensitive liabilities

The ratio of uninsured deposits to total deposits

When Interest sensitive assets exceed interest sensitive liabilities in a particular maturity range, a financial

firm is vulnerable to losses from falling interest rates. In contrast, when rate-sensitive liabilities exceed rate-

sensitive assets, losses are likely to be incurred if market interest rate rises.

In a depository institution like banks, where uninsured deposits are usually government and corporate

deposits that exceed the amount covered by insurance and are usually so highly sensitive to changing

interest rates that they will be withdrawn if yields offered by competitors rise even slightly higher. As I have

gone through the notes of the financial statements, I have not found any such uninsured deposits or like

wise. Thus this ratio can be state as 0 which means there is no risk of uninsured deposits at all.

2006 2007 20081.005

1.011.015

1.021.025

1.031.035

1.04

Interest sensitive assets to in-terest sensitive liabilities

Interest sensitive assets to interest sensitive li-abilities

Exhibit: 4.4: Market Risk I

92

Explanation: As I have calculated of MTBL, the ratio went down with quite an extent from 2006 to 2007

and again went up in 2008. As we can see above (Exhibit: 4.4: Market Risk I). It implies that in the year

2006, interest sensitive assets were many compared to interest sensitive liabilities. In 2007 the interest

sensitive assets did not raise much but the interest sensitive liabilities rose significantly thus making the

overall ratio very low. In 2008 the ratio again rose but did not exceed the limit of 2006.

Therefore it can be said that although the ratio fluctuated vigorously over the three years, MTBL reduced its

exposure to interest rate risk.

With more volatile market interest rates in recent years, bankers have developed several new ways to

defend their earnings margins against interest rate changes, including interest rate swaps, options, and

financial future contracts. MTBL also have arranged these procedures to prevent losses from interest rate

fluctuation.

D.Operational (Transactional) Risk

Operational risk refers to uncertainty regarding a financial firm’s earnings due to failure in computer

systems, errors, misconduct by employees, floods, strikes and similar events. The broad group of actions in

this risk definition often decreases earnings due to unexpected operating expenses. Especially in

Bangladesh it is the most common phenomenon. All the banks both government and private use the

computerized system along with heavy paper works too.

As from my own experience in MTBL I have seen the computer systems involve a patchwork of old

programs, requiring employee intervention to reconcile and create reports. Also the software system which

MTBL uses named to be as ‘Flora Systems’ fails quite often mostly during day time putting a halt in all sorts

of transactions. All these together make MTBL’s operational risk high thus making its earning low. Although

93

I have seen this physically, I could not put the extent of loss into numbers as it needs very thorough and

detailed information of everyday transaction which I did not have access to.

E. Legal and Compliance Risk

Legal or compliance risk creates variability in earnings resulting from actions taken by the legal system.

Unenforceable contracts, lawsuits or adverse judgments reduce a financial firm’s earnings by increasing its

expenses. For example, if a depository institution fails to hold adequate capital; costly corrective actions

must be taken to avoid its closure. Fortunately MTBL neither had this sort of records during the time I

worked there, nor in its history of past ten years.

F. Reputation Risk

Reputation risk is the uncertainty associated with public opinion. Negative publicity, whether true or not, can

affect a firm’s earnings by dissuading customers from using the services of the institution, just as positive

publicity may serve to promote a firm’s products and services.

I would say MTBL has a moderate amount of risk in this factor as it is neither too reputed nor too badly

reputed. As I believe the true nature of a financial firm’s business requires maintaining the confidence of its

customers and creditors, MTBL lacks a little bit at least in the foreign exchange branch in which I have

worked; although I am unaware of the other branches. They have a few customers who are their only loyal

and regular clients. New customers are hardly seen at MTBL which I think is a big pull back for them. Other

commercial banks like Dutch Bangla Bank, Prime Bank, Brac Bank and a few others have a good extent of

reputation to attract new chunks of customers, which brings them a whole lot of deposits. According to my

limited point of view I think this factor is immensely pulling back MTBL growth potentiality.

G.Strategic Risk 94

Variations in earnings due to adverse business decisions, improper implementation of decisions, or lack of

responsiveness to industry changes are parts of what is called Strategic risk. “This risk category can be

characterized as the human element in making bad long-range management decisions that reflect poor

timing, lack of foresight, lack of persistence, and lack of determination to be successful.”(Rose & Hudgins,

2009-2010, p. 180)

With my limited knowledge and experience I could not find any wrong decisions made by the officials rather

I would say they have a very strong foresight of specific industry trends. No to wonder as you will find out

later in this report that they could very well figure out the downfall of garments industry and accordingly they

inclined more towards jute. Eventually they did not face any loss due to recession and other international

factors which most of the other banks are still suffering.

H.Capital Risk

The impact of all the risks stated above can affect a financial firm’s long run survival, often referred to as its

capital risk. Actually capital risk is all those risks which drag a firm to the limit of insolvency or ultimate

failure. For example, if a bank takes on excessive amount of bad loans or if a large portion of its security

portfolio declines in market value, generating serious capital losses when sold, then its equity capital

account, which is designed to absorb such losses, may be overwhelmed. If investors and depositors

become aware of the problem and begin to withdraw their funds, regulators may have no choice but to

declare the institution insolvent and close its doors.

Measuring the capital risk is far more extensive job to be done by me but what I did is I have used four

ratios which will give not the exact but at least an approximation of the extent of capital risk involved.

The ratio of stock price per share to annual earnings per share.

The ratio of equity capital (net worth) to total assets.

The ratio of purchased funds to total liabilities.

The ratio of equity capital to risk assets.95

If the ratio of stock price per share to annual earnings per share falls it indicates that investors have lost

belief and thinks that the firm is undercapitalized relative to the risks it has taken on. This is when investors

sell the shares immediately keeping in mind the risk involved and eventually the equity stops growing.

A decline in the second ratio which is equity capital (net worth) to total assets indicates that the bank do not

have enough assets for example loans and investments to earn a good return for its shareholders.

The ratio of purchased funds to total liabilities. Purchased funds usually include uninsured deposits and

borrowings in the money market from bank and non-bank corporations and from governmental units that

fall due within one year.

The last ratio of Equity capital to risk assets reflects how well the current level of a financial institution’s

capital covers potential losses from those assets most likely to decline in value. Risk assets mainly consist

of loans and securities and exclude cash, plant and equipment, and miscellaneous assets. Some

authorities also exclude holdings of short-term government securities from risk assets because the market

values of these securities tend to be stable and also there is always a ready resale market for them.

2006 2007 20080

5

10

15

20

25

Stock price per share to EPS

Stock price per share to EPS

Exhibit: 4.5: Capital Risk I

Explanation:

In Exhibit: 4.5 we see that the stock price per share to earnings per share stroke up highly in

2007 and remained almost constant also in 2008. While trying to figure out the reason I found

that in 2006 the stock price was moderate neither too high nor too low but EPS in this year was

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very high. This factor boost up the stock price next year which is in 2007 but the EPS fell back

and remained almost constant over the two year that is 2007 and 2008.

Therefore we can say this particular capital risk factor is low for MTBL.

2006 2007 20080.058

0.060.0620.0640.0660.068

0.070.0720.0740.076

Equity capital to Total Assets

Equity capital to Total Assets

Exhibit: 4.6: Capital Risk II

Explanation:

This figure looks shocking and this is an alarming situation too since the firm’s equity is

declining drastically. It implies that the firm has assets but they are not earning enough for its

stockholders. The risk of MTBL can be sensed high for this scenario.

2006 2007 20080

0.10.20.30.40.50.60.70.80.9

Purchased funds to Total Equity

Purchased funds to To-tal Equity

97

Exhibit: 4.7: Capital Risk III

Explanation:

2006 2007 20089

9.5

10

10.5

11

11.5

12

Equity capital to Risk Assets

Equity capital to Risk Assets

Exhibit: 4.8: Capital Risk IV

Explanation:

Although the value fell in 2007 and did not increase much in 2008, we can see that MTBL’s

equity capital is sufficient to cover its risk assets if any mishaps take place in future. However

they should still increase its equity capital little more to cover other risk factors. Risk level here

can be stated as moderate over here.

I. Ratios to Measure Management Performance

Operating Efficiency Ratio: In a financial institution a greater efficiency in operations is

desired to attain maximum profit. This usually means reducing operating expenses and

increasing the firm’s employee productivity through the use of automated equipments and

improved employee training.

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Employee Productivity Ratio: this measures the amount of net income per employee.

The less it is means that a greater amount is spend for the employees.

Earnings spread: The spread measures the effectiveness of a financial firm’s

intermediation function in borrowing and lending money and also the intensity of

competition in the firm’s market area. Greater competition tends to squeeze the difference

between average assets yields and average liability cost.

J. Other Risk Factors

In a country like Bangladesh risks are many as I have mentioned many times. Risks like Inflation risk,

Currency or Exchange rate risk, Political risk and Crime risk can also greatly affect a firms’ profit adversely.

Though they are among the external market forces, they have immense impact on any bank’s profitability.

A few of the risks and their influence are listed below.

Inflation Risk – The possibility that the value of assets or income will decrease

as inflation shrinks the purchasing power of a currency. Inflation causes money to decrease in

value at some rate, and does so whether the money is invested or not. Thus it erodes the actual

value of a bank’s income. A rise in inflation negatively affects a bank’s asset returns, lending

capacity and profitability. “Several economists have found that countries with high inflation rates

have inefficiently small banking sectors and equity markets.” (Sandra, 2006, p. 4). Although it is

not true in case of this country since Bangladesh has grown quite strong in the commercial

banking sector. At present the inflation rate of Bangladesh is 8.9% according to the statistics

given by Bangladesh Bank, which is quite high compared to other developing countries. Not only

MTBL, every financial firm has got an exposure to this risk.

Currency or Exchange Rate Risk- Currency risk is a form of risk that arises from the

change in price of one currency against another. Whenever investors or companies have assets 99

or business operations across national borders, they face currency risk if their positions are

not hedged. (Hedge- An investment made in order to reduce the risk of

adverse price movements in a security, by taking an offsetting position in a related security,

such as an option or a short sale). MTBL is most exposed to this risk as you already must have

observed in the liquidity risk section that they invested the most in purchased funds which

includes purchase of foreign currencies like US dollars and GBPs. Also from my personal

experience I have seen that their major transactions are export and import oriented which again

involves a lot of exchange rate risk.

i. Transaction risk is the risk that exchange rates will change unfavorably over time. It can be

hedged against using forward currency contracts

ii. Translation risk is an accounting risk, proportional to the amount of assets held in foreign

currencies. Changes in the exchange rate over time will render a report inaccurate, and so

assets are usually balanced by borrowings in that currency.

Political Risk- Broadly, political risk refers to the complications businesses and

governments may face as a result of what are commonly referred to as political decisions

—or “any political change that alters the expected outcome and value of a given economic

action by changing the probability of achieving business objectives. There are both macro-

and micro-level political risks.

i. Macro-level political risks have similar impacts across all foreign actors in a given location.

While these are included in country risk analysis, it would be incorrect to equate macro-level

political risk analysis with country risk as country risk only looks at national-level risks and

also includes financial and economic risks.

ii. Micro-level risks focus on sector, firm, or project specific risks.

100

Crime Risk – since Bangladesh has embraced automated banking system, financial crime

risk seemed to get a rise. It is associated with default, fraud, embezzlement, theft and illegal acts.

Iindividuals and organized crime groups have historically targeted financial institutions to obtain

account information and funds by exploiting vulnerabilities through a variety of fraudulent

schemes. The value of customer information has been recognized by organized crime for many

years with theft and or compromise of customer sensitive information increasing at an alarming

rate.

In these sorts of cases the financial firm may also be financially liable for losses incurred by a

third party as a result of breaches of your data security which result in losses by other

organizations. It also happens that failures in the systems and controls leads to criminally derived

funds being transacted through your firm could result in criminal prosecution or regulatory

sanctions on both the firm and individual employees including board members. Moreover it

destroys the reputation of the firm. Financial Crime occurs from two sources.

i. External- this is done by crime groups

ii. Internal- it is done solely by employees or by a combination of both employees and the

organized crime which is the most dangerous.

(All the results of the ratios have been rounded to 3 digits for the ease of understanding. The unmodified

numbers are provided in the excel sheet of this report for reference)

K.Key Profitability Ratios:

1. Return on Equity Capital (ROE): it is a measure of the rate of return flowing to shareholders. It

approximates the net benefit that the stockholders have received from investing their capital in the

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financial firm that is by placing their funds at risk in the hope of earning a suitable profit. MTBL’s

ROE came to be as 0.251, 0.103, and 0.123 for the years 2006, 2007 and 2008 respectively.

2006 2007 2008

0

0.05

0.1

0.15

0.2

0.25

0.3Return on Equity (ROE)

Series 1

Exhibit: 4.9: Return on Equity

Explanation: the data and the graph both shows that Return on Equity in 2006 was quite high compared to

the other two years. In 2007, we can see a big downfall of return and then again it rose a little bit in 2008.

2. Return on Assets (ROA): Return on Assets is primarily an indicator of managerial efficiency which

indicates how capable management has been in converting assets into net earnings. MTBL’s ROA

for 2006, 2007 and 2008 are as follows: 0.018, 0.007 and 0.008 respectively.

2006 2007 20080

0.004

0.008

0.012

0.016

0.02

Return on Assets (ROA)

Series 1

Exhibit: 4.10: Return on Assets

102

Explanation: Here also we see a common trend that is ROA is high in 2006, then a drop in 2007

followed by a slight increase again in 2008. Decline in ROA implies poor performance of financial

firms and in regard to that investors might drop out MTBL stock from their portfolio basket.

3. Break-down of ROA: I have broken down RAO into 3 important factors for better understanding

the scenario. They are:

Net Profit Margin- reflects effectiveness of expense management (cost control) and service

pricing policies. Financial institutions can increase their earnings and the returns to their

stockholders by successfully controlling their expenses and maximizing revenues.

Asset Utilization- reflects portfolio management policies, especially the mix and yield on assets.

By carefully allocating assets to the highest yielding loans and investments while avoiding

excessive risks, management can raise the average yield on assets.

Equity Multiplier- reflects leverage or financing policies or the sources chosen to fund the financial

institution that is debt or equity. The measure shows how many dollars/taka of assets must be

supported by each dollar/taka of equity (owner’s capital) and how much of the firm’s financial

resources, therefore must rest on debt.

103

2006 2007 20080

2

4

6

8

10

12

14

16

18

13.641

15.742 15.692

Net Profit MarginAsset UtilizationEquity Multiplier

Exhibit: 4.11: Break-down of ROA

Explanation:

The figure here is very unclear since all the three factors could not be portrayed. Although Net

profit margin and Asset Utilization seem to be insignificant here but in reality they do have effect on

overall RAO. In the following years net profit margin is declining which means MTBL’s operating

expenditures is increasing implying that operating efficiency is declining.

Asset utilization fell in 2007 and again rose in 2008.

Equity Multiplier has the highest value among all the components of ROA. Unlike all the other

components it rose in 2007 and dropped a little in 2008. It implies MTBL assets

4. Debt Equity Ratio:

104

2006 2007 200811.5

1212.5

1313.5

1414.5

15Debt Equity Ratio

Debt Equity Ratio

Exhibit: 4.12: Debt Equity Ratio

Explanation:

5. Debt Ratio:

2006 2007 20080.9220.9240.9260.928

0.930.9320.9340.9360.938

Debt Ratio

Debt Ratio

Exhibit: 4.13: Debt Ratio

Explanation:

105

6. Net Interest Margin:

2006 2007 20080

0.0050.01

0.0150.02

0.0250.03

0.0350.04

Net Interest Margin

Net Interest Margin

Exhibit: 4.14: Net Interest Margin

Explanation:

It shows that interest revenues in average earn quite good for MTBL every year even though it fluctuated

over the years. In other words it can be said that their assets bring in good amount of interest revenues for

the firm.

7. Net Non Interest Margin:

106

2006 2007 2008

-0.012

-0.01

-0.008

-0.006

-0.004

-0.002

0Net Non Interest Margin

Net Non Interest Margin

Exhibit: 4.15: Net Non-Interest Margin

Explanation:

All the values are negative as we can see. It means that revenues other than interest revenues are not at

all sufficient to cover the non interest expenses of the firm. Sometimes it happens that some firms earn a lot

as interest income but all gets spent out to cover the non interest expenditure and the profit can not be

realized.

8. Net Operating Margin:

107

2006 2007 20080

0.01

0.02

0.03

0.04

0.05

0.06

Net Operating Margin

Net Operating Margin

Exhibit: 4.16: Net Operating Margin

Explanation:

At an average we see that net operating margin is good for MTBL but the decline in value in 2007 means

decline in operating efficiency. If operating expenditure can be lessened operating revenues would be

maximized, ultimately rising the net operating margin.

9. Earnings per Share:

2006 2007 20080

0.1

0.2

0.3

0.4

0.5

0.6

Earnings Per Share

Earnings Per Share

Exhibit: 4.17: Earnings per Share

108

Explanation:

Any downward trend in Earnings per Share (EPS) of any financial firm implies negative issues about that

particular firm. EPS declining means overall performance of the firm over the year was not good enough

thus could not provide its shareholders with a better return. This is when stockholders loose trust and sell

out their stocks making the overall company’s equity go down. MTBL is not giving as to what it used to give

previously.

10. Interval Measure:

　

Reference:

109

1. Rose, Peter S, & Hudgins, Sylvia C. (2009-2010). Bank Management & Financial Services. New

York, NY: McGraw-Hill

2. Answers.com: Banking Dictionary. (2010). Retrieved November 24, 2009 from

Website: http://www.answers.com/topic/credit-risk

3. Pianalto, Sandra. (2006, September 15). Inflation, Inflation Expectations and Monetary Policy.

Retrieved January 10, 2010 from Federal Reserve Bank of Cleveland Website:

http://www.clevelandfed.org/research/Commentary/2006/0915.pdf

4. News Bangladesh, Economy of Bangladesh: The Banking System, ( 2008, Oct 25). Retrieved December 7,

2009 from News Bangladesh Website: http://www.bengaliwiki.com/page/The+Banking+System

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

Bibliography:

1. www.mutualtrustbank.com/

2. Rose, Peter S, & Hudgins, Sylvia C. (2009-2010). Bank Management & Financial Services. New

York, NY: McGraw-Hill

110

http://www.indexmundi.com/g/g.aspx?c=bg&v=71

http://www.indexmundi.com/bangladesh/inflation_rate_(consumer_prices).html

http://www.bengaliwiki.com/page/The+Banking+System

http://www.clevelandfed.org/research/Commentary/2006/0915.pdf

http://www.answers.com/topic/credit-risk

3. Keown, Arthur J, Martin, John D, Petty, J William & JR, David F. Scott. (2006-2007). Financial

Management: Principles and Applications. New Jersey: Pearson Prentice Hall

4. www.the financialexpress -bd.com/

5. http://www.bangladeshbank.org.bd/

6. www.dsebd.org/

111

http://www.bangladeshbank.org.bd/

http://www.thefinancialexpress-bd.com/

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