A Bank is a financial institute & a financial intermediary that accepts deposits & channels those deposits lending activities, either directly or throughout capital markets. A Bank connects clients with capital deficits to customers with capital markets.
Characteristics/ Features of a Bank:
- 1. Dealing in Money-Bank is a financial institution which deals with other people’s money i.e. money given by depositors.
2. Individual / Firm / Company-A Bank may be a person, firm or a company. A banking company means a company which is in the business of Banking.
3. Acceptance of Deposit-A bank takes money from the people in the form of deposits which are generally repayable on demand or after the expiry of a fixed time. Customer feels safety for the deposit. It also acts as a caretaker of funds of its customers.
5. Payment & Withdrawal-A Bank services easy payment & withdrawal facility to its customers in the form of cheques & drafts. It also brings Bank money in distribution. This money provide through cheques, drafts, etc.
6. Agency & Utility Services-A Bank provides a variety of banking facilities to its customers. They contain general utility services & agency services.
7. Profit & Service Orientation-A bank is a profit seeking institution having service oriented approach.
8. Forever rising Functions-Banking is an evolutionary concept. There is permanent extension & diversification as regards the functions, services & activities of a Bank.
9. Connecting Link-A Bank acts as a connecting link between borrowers & lenders of money. Banks collect the money from those who have extra money & give the similar to those who are in need of money.
10. Banking Business-A Bank’s main activity should be to accomplish business of banking which should not be supplementary to any other business.
11. Name Identity-A bank should all the time add the word “Bank” to its name to enable people to know that it is a Bank & that it is dealing in money.
BANKERS ALL OVER THE WORLD SOMETHINK DO MISTAKE FOR WHICH THEY ARE LIABLE OR NOT
The Bank regulations are a form of Gvt. regulation which subject Bank to certain restrictions, condition & guideline. This regulatory composition creates transparency between Banking institutions & the individuals & corporations with whom they accomplish business, among other things. Given the inter connectedness of the Banking industry & the reliance that the national (and global) economy hold on Banks, it is very important for regulatory agencies to maintain control over the standardized practices of these institutions. Supporters of such regulation often hinge their arguments on the “too big to fail” notion. This holds that lots of financial institutions (particularly investment Banks with a commercial arm) hold too much control over the economy to fail without enormous consequences. Others supporter deregulation, or free banking, whereby Banks are given extended liberties as to how they manage the institute.
Objective of Bank regulation:
The objective of Bank Regulation, & the emphasis, varies between jurisdictions. The most common objectives are:
- Prudential—to diminish the level of risk to which Bank creditors are exposed (i.e. to protect depositors).
- Systemic risk reduction—to diminish the risk of disruption resulting from adverse trading circumstances for Banks causing several or major Bank failure.
- Stay away from misuse of Banks—to reduce the risk of Banks being used for criminal purposes, e.g. laundering the proceeds of crime
- To defend banking confidentiality
- Credit distribution—to direct credit to favored sectors.
Laws regarding Banks in Bangladesh
A set of acts, laws, regulations, & guidelines have been enacted & promulgated time to time since BB’s establishment that helped BB to perform its role as a central Bank particularly, to manage & control country’s monetary & financial system. Among others, essential laws & acts include:
- Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972)
- Bank Company Act, 1991
- The Negotiable Instruments Act, 1881
- The Bankers’ Book Evidence Act, 1891
- Foreign Exchange Regulations Act, 1947
- Financial Institutions Act, 1993
- Bank Deposit Insurance Act, 2000
- Money Loan Court Act, 2003
- Micro Credit Regulatory Authority Act, 2006
- Money Laundering Prevention Act, 2009 and
- Anti-terrorism Act, 2009 
In a perfect world, everything would be, fine, faultless. Unfortunately, that’s not always the case. Banking is a tough job. Many set of laws & regulations have to maintained & followed in order to maintain law & fulfill clients’ needs. In the face of fulfilling all duties bankers at times do mistakes for which they are not responsible. At times they have performed such acts which violets their clients’ rights but it is the banker’s responsibility to do those duties. Some examples of such mistakes are discussed below.
1. Policy on single borrower exposure
As a prudential gauge intended for ensuring improved risk management throughout restriction on credit awareness, Bangladesh Bank has from timely advised the scheduled Banks in Bangladesh to fix restrictions on their huge credit exposures & their exposures to single & group
Borrowers According to Bangladesh Bank the procedures Banks should follow before sanctioning a loan to an individual are:
(a) Banks should collect the large loan information on their borrowers form Credit Information Bureau (CIB) of Bangladesh Bank before sanctioning, renewing or Rearrangement big loans in order to make sure that credit facilities are not being provided to Defaulters.
(b) Bank must perform Lending Risk Analysis (LRA) before sanctioning or renewing large loans. If the rating of an LRA turns out to be “marginal”, a Bank will not permit the big loan, but it can consider renewal of an existing big loan taking into account other favorable, conditions & factors. However if the result of an LRA is insufficient, neither sanction nor renewal of large loans can be considered.
(c) When sanctioning or renewing of big loan, a Bank would judge its borrowers in general Debt repayment capability taking into contemplation the borrower’s liabilities with other Bank & financial institutions.
(d) A Banks will examine is borrower’s Cash Flow Statement, Audited Balance Sheet, Income Statement & other financial statement to make sure that its borrower has the ability to repay the loan.
(e) Sanctioning, renewing or rescheduling of big loans should be approved by the Board of Directors in case of local Banks. Such decisions should be taken by the Chief Executives in case foreign Banks. However, while approving proposals of large loans, between other things, compliance with the above guidelines must be ensured. Even after following all these criteria’s there is a chance of default in the loans. For example, Mr.X came to Banker for a loan amounting to Tk 5000000.The Banker checked his past records with other financial institution where his records were impeccable. Large transaction was made on a regular basis. Large amount of money were deposited in the Bank & were taken out as well. Moreover the Banker collected the entire relevant legal document needed to assure that Mr. will be able to repay the loan. But Mr.X is a fraud. To make his records good he made an account in one bank and kept it for few months. Then he took out money from the account and then again deposited it back to the account in different amounts. The bank manager who performed all his duties won’t be able to know these details about Mr. X. So Mr.X managed to fake his credibility’s and disappeared with the loan amount. The fault was committed by the banker but he is not liable for it because he fulfilled all the criteria needed to sanction a loan.
2. Large Loan Restructuring Scheme (LLRS)
Syndicated lending is a form of lending in which a group of lenders collectivity extends a loan to a single borrower. The group of lenders is called a syndicate. The loan is called a syndicated loan, in contrast to a bilateral loan, which is a loan made by a single lender to a single borrower. Syndicated loans are routinely made to corporations, sovereigns or other government bodies. They are also used in project finance & to fund leveraged buyouts.
Syndicated loans are primarily originated by Banks, but a variety of institutional investors participate in syndications. These include mutual funds, collateralized loan obligations, insurance companies, finance companies, pension plans, & hedge funds.
Syndicate members play different roles. Some just lend money. Others also facilitate the process. It is familiar to speak of an arranger, lead Bank or lead lender that originates the loan, forms the syndicate & processes payments. But some syndicate members may share these tasks. Syndications with two or more arrangers are not uncommon.
In Bangladesh in order to lessen the burden of potential risks involved in big loans. To encourage the Banks Bangladesh Bank has recently taken some steps to go for inter-Bank loan syndication or consortium loans. Simultaneously Banks are also sanctioning loans to vast group or enterprise.
Separately on bilateral Basis, whenever such loan, provided by the Banks without syndication & on bilateral basis, is required to be restructured or rescheduled the same is also done by the Banks bilaterally through their borrowers. Of late, it has been observed that this system of restructuring or rescheduling of loans by individual Banks bilaterally with the huge borrowers who have liabilities with more than one Bank is inappropriate. Under the circumstance based on the widespread discussions with the Banks the following scheme for rescheduling & restructuring of huge loans is introduced by Bangladesh Bank for implementation by Banks:
1. The scheme will be known as “Large Loan Restructuring Scheme (LLRS)”. The purpose of the scheme is to make sure a transparent mechanism for restructuring of loans & to engage all the Financing Banks in the restructuring process. LLRS will apply to the loans provided by more than one Banks under or outside the consortium arrangement with outstanding of Tk.50.00 core & above. The scheme will not be appropriate for loans sanctioned by a single Banking company.
2. A two tier committee will be constituted for implementation of the LLRS. The constitution and function of the committees will be as under:
a) Standing Committee
i) The Standing Committee will be constituted comprising the Chief Executives of all Banks participating in LLRS. All Banks working in the country will participate in the scheme in their own interest & will become members of the Committee. The Committee will be a self empowered body, which will lay down policies & guidelines for restructuring & rescheduling of big loans & monitor the performance of the scheme.
ii) Deputy Governor in charge of the Department of Off-site Supervision (DOS) of Bangladesh Bank will act as Chairman of the Committee. The committee will meet at least once in every three months.
iii) The committee can decide to have a permanent secretariat & to recruit whole time officers/staff for the secretariat. It will also lay down policies for sharing administrative & other expenses by the participating Banks.
B. Inter Bank Committee
i) There will be an Inter-Bank Committee comprising the financing Banks. In case of consortium loans the Chief Executive of the lead Bank & in other cases the Chief Executive of largest financing Bank will be the Chairman of the Inter-Bank Committee.
ii) The Committee will examine the viability of restructuring & rescheduling proposals of the loans & will grant the proposals in right cases. The committee may, if essential, engage external consultants for valuation of restructuring proposals. For the intention, it may also take the help of Credit Rating Agencies working in the country. If any offer for restructuring is not found appropriate, the Committee will advise the Banks to initiate suitable legal steps for recovery of the debt.
C. Legal Basis
i) LLRS will be a voluntary & non-statutory mechanism based on Debtor-Creditor Agreement (DCA) & Inter-Creditor Agreement (ICA). The Standing Committee will prepare specimen of such agreements in consultation with lawyers having expertise in the field.
ii) In the Debtor-Creditor Agreement there should be a clause containing “stand still” agreement compulsory for 90 days or 180 days by both sides. Under this clause both the debtor and creditors will be of the same opinion to a legally binding “stand-still” whereby both the parties commit themselves not to take recourse to any legal action during the “stand-still” period, this would facilitate the valuation and processing of debt restructuring proposal without any outside intervention.
i) Whereas evaluating the debt restructuring or rearrangement proposal if any bank requires approval of Bangladesh Bank from the purview of big loan as per section 27(3) of the Bank Company Act, 1991 the Bank will have to obtain the sanction from Bangladesh Bank for the same.
ii) If 75% of secured creditors by value agree to a debt restructuring proposal, the same would be binding on the remaining secured creditors.
iii) Banks will disclose in their published Annual Report/Balance Sheet under a separate “notes” the total amount of debt reorganized under LLRS.
A big textile company went to a private Bank for a loan & amount is more than Tk.50.00 corer. So the Bank in order to broaden the risk of a borrower default across several lenders (such as Banks) or institutional investors contacted other Banks throughout Bangladesh Bank to contribute to the loan. For instance, five Banks came frontward and they were pleased with past records of the company. So together they approved the loan to the textile company. The lead Bank or underwriter of the loan, known as the “arranger”, “agent”, or “lead lender” put up a proportionally larger share of the loan, and performed duties like dispersing cash flows amongst the other syndicate members and organizational tasks. After a few months something, an unfortunate event occurred and the textile firm incurred vast loss. As a consequence, the borrowing company collapsed and was not able to repay bigger portion of the loan. In a condition like this where each single criteria was followed to the point a fault was made in forecasting the potential future of the company but who would be liable for it? The lead Bank, who first initiated the loan, finished all legalities needed to make sure the safety of the loan and the borrower but due to circumstances made the beneficial loan a fault for which no Banker can be held liable.
3. Financial company & holding firms
A Bank holding company is a company that control one or more Banks, or has controlling interest in, one or more Banks but does not necessarily engage in banking itself. A Bank holding company may also own another Bank holding company, which in turn owns or controls a Bank, the company at the top of the ownership chain is called the top holder. The Board of Governors is responsible for regulating & supervising Bank holding companies, even if the Bank owned by the holding company is under the primary supervision of a different federal agency (OCC or FDIC). Holding companies allow the diminution of risk for the owners & can allow the ownership & control of a number of different companies. In the, 80% or more of stock, in voting & value, must be owned before tax consolidation benefits such as tax-free dividends can be climate by 7 holding firm. In the United States, a Bank holding company, as provided by the Bank Holding Company Act of 1956 (12 U.S.C. § 1841(a)(2)(A) et seq.) is broadly defined as “any company that has control over a Bank”. All Bank holding companies in the US are required to register with the Board of Governors of the Federal Reserve System. Becoming a bank holding company makes it easier for the firm to increase capital than as a traditional Bank. The holding company can assume debt of shareholders on a tax free basis, borrow money, acquire other Banks and non-Bank entities more easily, and issue stock with greater regulatory ease. It also has better legal authority to accomplish share repurchases of own stock.
The banker’s duty of confidentiality to the customer
It is an implied term of the contract between customers & their Banks & building societies that these firms will keep their customers’ information confidential. This confidentiality is not just confined to account transactions – it extends to all the information that the Bank has about the customer. But from time to time, mistakes happen and – for whatever reason – Banks end up releasing information that they should have kept secret. Sometimes, the resulting breach of confidentiality is little more than technical (in other words, nothing really flows from it), but occasionally it can have major consequences.
The Tournier principles
First of all, a Banker’s duty of confidentiality is not absolute. The 1924 case of Tournier v National Provincial & Union Bank of England sets out areas where a Bank can legally disclose information about its customer. These principles still hold good today a7 are:
- where the Bank is obligated by law to disclose the information
- if the Bank has a public sense of duty to disclose the information
- if the Bank’s own interests require disclosure; &
- Where the customer has agreed to the information being disclosed.
A holding Bank owns the controlling shares in a Bank. If it wants to analysis the financial statements of a Bank then the Bank in question has to disclose all information concerning the transactions of the Bank as well as the confidential information’s of its clients. In this situation the Bank is violating its client’s rights but they have no say in this kind of situation. So a fault is indeed being committed but the bankers are liable for it
4. Letter of credit
A standard, commercial letter of credit (LC) is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides as irrevocable payment undertaking. The letter of credit can also be payment for a transaction, meaning that redeeming the letter of credit pays as exporter. Letter of credit is used primarily in international trade transactions of significant value, for deals between a supplier in one country & a customer in another. In such cases, the international Chamber of Commerce Uniform Customs & Practice for Documentary Credits applies (UCP 600 being the latest version). The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing Bank of whom the applicant is a customer, & the advising Bank of whom the beneficiary is a client. Almost all letters of credit are unchangeable i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming Bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveler’s cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and documents proving the shipment were insured in opposition to loss or damage in transit.
Time Allowed Banks for Document Review (Article 14)
Under UCP 500, Banks have a “reasonable time … not to exceed seven Banking days” in which to honor or dishonor documents. UCP 600 shortens the period to a maximum of five “Banking days”. However, Article 2 defines a banking day as “a day on which a bank is regularly open at the place at which an act subject to these rules is to be performed.”
Non-Matching Documents (Article 14)
The previous LC rules required documents that were “on their face” not consistent with one another to be discarded as discrepant. Article 14(d) provides the standard for examination of documents generally. It seeks to resolution the problem of inconsistency in data by descriptive that there is no need for a mirror image but rather: ‘Data in a document, when read in context with the credit, the documents itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document or any other stipulated document.
On the subject of addresses on the various documents, Article 14 indicates that they do not have to accurately match as long as the country is the same. The only exclusion is when addresses appear as part of the consignee or notify party details on a transport document, in which case they must be the same as stated in the credit.
Examination of document:
The standard for examination documents has also been in focus. This is reflected in article 14, & here a small number of examples from that: Banks now only have 5 banking days to allow or deny documents. This replaces the “Reasonable time not exceeding 7 banking days”. The episode for staging (generally 21 days) only applies to original transport documents. It means that if only a copy or no transport document is requisite by the credit, & a period for presentation is requested, then the credit should expressly state that the document should be presented within a certain period of time from a defined moment or event. Addresses of beneficiaries & applicants need no longer be as mentioned in the documentary credit. They must however be within the similar country. Contact details (as like phone and fax numbers) may be disregarded – & if stated they necessitate not be as in the credit. An exception to this is where the address & the contact details are used in transport documents as part of the consignee or notify party. In that situation they must be as stated in the credit.
In the case of documents other than transport/insurance documents or commercial invoices, art 14(f) states: ‘Banks will permit the document as presented if its content appears to complete the function of the required document & if not complies with sub Article 14(d).’ Both sub-articles provide a component of subjectivity and so the liability will be on the applicant and issuing bank to make sure that the credit exclusively deals with anything that is specifically required.
Under theses condition, upon receiving the shipment from the seller the buyer Bank will pay the seller’s Bank according to the contract. But unfortunately, the goods in the shipment were faulty but the buyer was too late in informing the Bank & the Bank had already paid the money due. So in this situation, it is not the bankers mistake that the money was sent rather the buyer mistake of not informing the Bank on this or not taking action on appropriate time. The Bank did its job according to the book but in doing so the client faced hassles and missing money.
It is universal true that man is mortal & mistakes are bound to happen one way or another. Banking is a very tough job. Multiple jobs need to be done by a single person in a very short period of time. So it is very common to making mistake. But these common mistakes may cost some one very dearly. But the mistakes done by the bankers & this mistake are not always cause of their faults. Sometimes they are bound by the law or sometimes it is their bad luck that mistakes come to pass. All Bankers are bound by many restrictions in order to balance them sometimes other mistakes are committed but only not violet other superior mistakes. So what we can see from the above details is that mistakes are a very big part of a Bankers professional life but not always it their one and only mistake that clients bear mistakes. If the banker follows all the procedures according to the law and even after that mistakes happen then it’s not because of their fault. In the case of sanctioning a loan to an individual the bankers collected all legal documents looked-for verifications of the potential client everything came out clean. The client’s intentions were incorrect but he presented the banker with all real legal documents to support his loan. Then in the case of syndicated loan the whole thing was checked by multiple bankers there was no option of a mistake happening but unfortunate events made the loan a loss project. Though it is the banker’s duty to maintain their clients information confidential when requested by senior authorities they have to violet their client’s rights in order to complete their duty as an employee of the Bank. In the case of LC the bankers performed his duties it was not his mistake that the good shipped was faulty and he had to pay the exporter thigh his client had to bear a loss. So it tells us that situations are not in our control mistakes will take placing but it is not all the time the bankers mistake.
- Article on syndicated loans, available from http://www.riskglossary.com/link/syndicated_loan.htm [accessed on Dec 2011]
- banking laws, available from http://www.sai.uni-heidelberg.de/workgroups/bdlaw/1991-a14.htm [accessed on 2bd Dec 2011]
- Bank company, available from http://en.wikipedia.org/wiki/Holding_company
- Bank holdings company available from http://en.wikipedia.org/wiki/Bank_holding_company
- Letter of credit available from http://en.wikipedia.org/wiki/Letter_of_credit [accessed on 3Ded 2011]
- Retrieved from http://www.financial- ombudsman.org.uk/publications/ ombudsman-news/45/45_bankers_duty.htm [accessed on 3 Dec 2011]
- Retrieved from http://www.iibf.org.in/scripts/pns1_ru_ucp.asp
- Retrieved from http://kalyan-city.blogspot.com/2011/02/what-is-bank- http://kalyan-city.blogspot.com/2011/02/what-is-bank-introduction-definition.html [accessed on Dec 2011]
- See banking regulation, available from http://en.wikipedia.org/wiki/Banking_regulation
, A market in which individuals & institutions trade financial securities. Organization/institutions trade financial securities on the capital market in order to raise funds. Thus, this type of market is composed of both the primary & secondary markets.
, A process in which something passed by degrees to different stage (specially a more advanced or mature stage)
, Regulatory structure creates transparency between Banking institution & the individual & corporation with whom they conduct business, among other things.
, Extraordinarily large in size or extent or amount or power or degree.
, The official announcement of a new law or ordinance whereby the law or ordinance is put into effect.
, Anti-terrorism legislation designs various types of laws passed in the aim of fighting tourism. They usually, if not always, follow specific bombings or assassinations.
, Arising from or characterized by prudence especially in business matters (careful & sensible; marked by sound judgment)
, Contemplation refers to the activity of contemplating that is, thinking deeply about something. When one gives something a deep and thorough thought, he or she is contemplating over that particular issue.
 , Considering that in what is likely the most stable banking system in the world.
, An irrevocable trust is a trust that cannot be changed unless there is expressed consent from the beneficiary. Once the trust has been established by the grantor, it cannot be altered.