Do you think Bankers all over the world sometime do mistake for which they are not liable. Draw an analysis in this regard.




Page No.



  Bank regulation and their objective


Laws  regarding banks in Bangladesh



1.Policy on single borrower exposure


  2.Large Loan Restructuring Scheme (LLRS)



  3.Financial company and holdings firms


  4.Letter of credit









A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses.[1]

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 accepts money from the people in the form of deposits which are usually repayable on demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It also acts as a custodian of funds of its customers.

4. Giving Advances-A bank lends out money in the form of loans to those who require it for different purposes.

5. Payment and Withdrawal-A bank provides easy payment and withdrawal facility to its customers in the form of cheques and drafts. It also brings bank money in circulation. This money is in the form of cheques, drafts, etc.

6. Agency and Utility Services-A bank provides various banking facilities to its customers. They include general utility services and agency services.

7. Profit and Service Orientation-A bank is a profit seeking institution having service oriented approach.

8. Ever increasing Functions-Banking is an evolutionary concept. There is continuous expansion and diversification as regards the functions, services and activities of a bank.

9. Connecting Link-A bank acts as a connecting link between borrowers and lenders of money. Banks collect money from those who have surplus money and give the same to those who are in need of money.

10. Banking Business-A bank’s main activity should be to do business of banking which should not be subsidiary to any other business.

11. Name Identity-A bank should always add the word “bank” to its name to enable people to know that it is a bank and that it is dealing in money.[2]

Bank Regulations

Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. Given the interconnectedness of the banking industry and the reliance that the national (and global) economy hold on banks, it is 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 many financial institutions (particularly investment banks with a commercial arm) hold too much control over the economy to fail without enormous consequences. Others advocate deregulation, or free banking, whereby banks are given extended liberties as to how they operate the institution.

Objectives of bank regulation

The objectives of bank regulation, and the emphasis, vary between jurisdictions. The most common objectives are:

  1. Prudential—to reduce the level of risk to which bank creditors are exposed (i.e. to protect depositors).
  2. Systemic risk reduction—to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failure.
  3. Avoid misuse of banks—to reduce the risk of banks being used for criminal purposes, e.g. laundering the proceeds of crime
  4. To protect banking confidentiality
  5. Credit allocation—to direct credit to favored sectors.[3]

Laws regarding banks in Bangladesh

A set of acts, laws, regulations, and guidelines have been enacted and promulgated time to time since BB’s establishment which helped BB to perform its role as a central bank particularly, to control and regulate country’s monetary and financial system. Among others, important laws and acts include:

  1. Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972)
  2. Bank Company Act, 1991
  3. The Negotiable Instruments Act, 1881
  4. The Bankers’ Book Evidence Act, 1891
  5. Foreign Exchange Regulations Act, 1947
  6. Financial Institutions Act, 1993
  7. Bank Deposit Insurance Act, 2000
  8. Money Loan Court Act, 2003
  9. Micro Credit Regulatory Authority Act, 2006
  10. Money Laundering Prevention Act, 2009 and
  11. Anti-terrorism Act, 2009 [4]

In a perfect world, everything would be, well, perfect. Unfortunately, that’s not always the case. Baking is a tough job. Many rules and regulations need to maintained and followed in order to maintain law and fulfill clients’ needs. In the face of fulfilling all duties bankers sometimes commit mistakes for which they are not liable. At times they have performed such acts which violets their clients’ rights but it is the bankers duty to do those duties. Few examples of such mistakes are discussed below.

  1. Policy on single borrower exposure

As a prudential measure intended for ensuring improved risk management through restriction on

Credit concentration, Bangladesh Bank has from time to time advised the scheduled banks in

Bangladesh to fix limits on their large credit exposures and their exposures to single and group


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

Rescheduling large loans in order to ensure that credit facilities are not being provided to


(b) Banks 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 shall not sanction the

Large loan, but it can consider renewal of an existing large loan taking into account other

Favorable, conditions and factors. However if the result of an LRA is unsatisfactory,

Neither sanction nor renewal of large loans can be considered.

(c) While sanctioning or renewing of large loan, a bank should judge its borrowers overall

Debt repayment capacity taking into consideration the borrower’s liabilities with other

Banks and financial institutions.

(d) A banks shall examine is borrower’s Cash Flow Statement, Audited Balance Sheet,

Income Statement and other financial statements to make sure that its borrower has the

Ability to repay the loan.

(e) Sanctioning, renewing or rescheduling of large 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 of foreign banks. However, while approving proposals of large loans, among

Other things, compliance with the above guidelines must be ensured.[5]

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 5,000,000. The banker checked his past records with other financial institutions where his records were impeccable. Large transactions were made on a regular basis. Large amounts of money were deposited in the bank and were taken out as well. Moreover the banker collected all the relevant legal documents needed to assure that Mr.X 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 mistake 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 collectively extend 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 and 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, and hedge funds.

Syndicate members play different roles. Some just lend money. Others also facilitate the process. It is common to speak of an arranger, lead bank or lead lender that originates the loan, forms the syndicate and processes payments. But several syndicate members may share these tasks. Syndications with two or more arrangers are not uncommon.[6]

In Bangladesh in order to lessen the burden of potential risks involved in large loans Bangladesh Bank has recently taken some steps to encourage the banks to go for inter-bank loan syndication or consortium loans. Simultaneously banks are also sanctioning loans to large group or enterprise

Separately on bilateral basis. Whenever such loans, provided by the banks without syndication and on bilateral basis, are required to be restructured or rescheduled the same is also done by the banks bilaterally with their borrowers. Of late, it has been observed that this system of restructuring or rescheduling of loans by individual banks bilaterally with the large borrowers who have liabilities with more than one bank is not appropriate. Under the circumstance based on the extensive discussions with the banks the following scheme for rescheduling and restructuring of large loans is introduced by Bangladesh Bank for implementation by banks:

1. The scheme will be known as “Large Loan Restructuring Scheme (LLRS)”. The objective of the scheme is to ensure a transparent mechanism for restructuring of loans and to involve 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 crore and

Above. The scheme will not be applicable for loans sanctioned by a single banking company.

2. A two tier committee will be constituted for implementation of the LLRS. The constitution and functions 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 shall participate in the scheme in their

own interest and shall become members of the Committee. The Committee will be a self

Empowered body, which will lay down policies and guidelines for restructuring and rescheduling

Of large loans and monitor the performance of the scheme.

ii) Deputy Governor in charge of the Department of Off-site Supervision (DOS) of Bangladesh

Bank shall act as Chairman of the Committee. The committee shall meet at least once in every

Three months.

iii) The committee may decide to have a permanent secretariat and to recruit whole time

Officers/staff for the secretariat. It will also lay down policies for sharing administrative and other expenses by the participating banks.

B. Inter-Bank Committee

i) There shall be an Inter-Bank Committee comprising the financing banks. In case of consortium

Loans the Chief Executive of the lead bank and in other cases the Chief Executive of largest

Financing bank shall be the Chairman of the Inter-Bank Committee.

ii) The Committee shall examine the viability of restructuring & rescheduling proposals of the

Loans and shall approve the proposals in appropriate cases. The committee may, if necessary,

Engage external consultants for evaluation of restructuring proposals. For the purpose, it may also take the help of Credit Rating Agencies working in the country. If any proposal for restructuring is not found suitable, the Committee will advise the banks to initiate appropriate legal steps for recovery of the debt.

C. Legal Basis

i) LLRS will be a voluntary and non-statutory mechanism based on Debtor-Creditor Agreement

(DCA) and Inter-Creditor Agreement (ICA). The Standing Committee shall 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

Binding for 90 days or 180 days by both sides. Under this clause both the debtor and creditors shall agree 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 evaluation and processing of debt restructuring proposal without any outside intervention.

D. Miscellaneous.

i) While evaluating the debt restructuring or rescheduling proposal if any bank requires approval

Of Bangladesh Bank from the purview of large loan as per section 27(3) of the Bank Company

Act, 1991 the bank shall have to obtain the approval 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 shall disclose in their published Annual Report/Balance Sheet under a separate “notes”

The total amount of debt restructured under LLRS.

iv) Banks shall also send a quarterly statement containing the information of the debt rescheduled & restructured under LLRS to DOS of Bangladesh Bank.[7]

A large textile company went to a private bank for a loan amounting to more than Tk.50.00 crore. So the bank in order to spread the risk of a borrower default across multiple lenders (such as banks) or institutional investors contacted other banks through Bangladesh Bank to contribute to the loan. For instance, five banks came forward and they were satisfied with past records of the company. So together they sanctioned 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 bigger share of the loan, and performed duties like dispersing cash flows amongst the other syndicate members and administrative tasks.  After a few months something, an unfortunate event occurred and the textile firm incurred huge loss. As a consequence, the borrowing company collapsed and was unable to repay larger portion of the loan. In a situation like this where every single criteria was followed to the point a mistake 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, completed all legalities needed to ensure the security of the loan and the borrower. But due to circumstances made the profitable loan a mistake for which no banker can be held liable.



3. Financial company and holdings firms

A bank holding company is a company that controls 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 and 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).[8] Holding companies allow the reduction of risk for the owners and can allow the ownership and control of a number of different companies. In the US, 80% or more of stock, in voting and value, must be owned before tax consolidation benefits such as tax-free dividends can be claimed by an holding firm.[9] 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 raise 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 a greater legal authority to conduct share repurchases of its own stock.[10]

The banker’s duty of confidentiality to the customer

It is an implied term of the contract between customers and their banks and 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 and Union Bank of England sets out four areas where a bank can legally disclose information about its customer. These principles still hold good today and are:

  • where the bank is compelled by law to disclose the information
  • if the bank has a public duty to disclose the information
  • if the bank’s own interests require disclosure; and
  • Where the customer has agreed to the information being disclosed.[11]

A holding bank owns the controlling shares in a bank. If it wants to review the financial statements of a bank then the bank in question has to disclose all information regarding the transactions of the bank as well as the confidential information’s of its clients. In these circumstances the bank is violating its clients rights but they have no say in this kind of situation. So a mistake 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 an irrevocable payment undertaking. The letter of credit can also be payment for a transaction, meaning that redeeming the letter of credit pays an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. In such cases, the International Chamber of Commerce Uniform Customs and 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 client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, 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 was insured against loss or damage in transit.[12]

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” inconsistent with one another to be rejected as discrepant. Article 14(d) provides the standard for examination of documents generally. It seeks to resolve the problem of inconsistency in data by clarifying 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.

Regarding addresses on the various documents, Article 14 indicates that they do not have to exactly match as long as the country is the same. The only exception 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 documents: The standard for examining documents has also been in focus. This is reflected in article 14, and here are a few examples from that: Banks now only have 5 banking days to accept or refuse documents. This replaces the “Reasonable time not exceeding 7 banking days”. The period for presentation (usually 21 days) only applies to original transport documents. This means that if only a copy or no transport document is required by the credit, and 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 and applicants need no longer be as mentioned in the documentary credit. They must however be within the same country. Contact details (Like phone and fax numbers) may be disregarded – and if stated they need not be as in the credit. An exception to this is where the address and the contact details are used in transport documents as part of the consignee or notify party. In that case 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 accept the document as presented if its content appears to fulfill the function of the required document and otherwise complies with sub

Article 14(d).’ Both sub-articles provide an element of subjectivity and so the responsibility will be on the applicant and issuing bank to ensure that the credit specifically deals with anything that is specifically required. [13]

Under these circumstances, 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 and the bank had already paid the money due. So in this case, it’s not the bankers fault that the money was sent rather the buyer mistake of not informing the bank on time or not taking action on due time. The bank did its job according to the book but in doing so the client faced hassles and lost money.


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 making mistakes is very common. But these common mistakes might cost some one very dearly. But the mistakes done by the bankers are not always due to their faults. Sometimes they are bound by the law or sometimes it’s their bad luck that mistakes occur. Bankers are bound by many limits 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 sole fault that clients suffer mistakes. If a banker follows all the procedures according to the law and even after that mistakes occur then it’s not due to their fault. In the case of sanctioning a loan to an individual the bankers collected all legal documents needed for verifications of the potential client everything came out clean. The client’s intentions were wrong but he presented the banker with all real legal documents to support his loan. Then in the case of syndicated loan everything was checked by multiple bankers there was no chance of a mistake occurring but unfortunate events made the loan a loss project. Though it’s the banker’s duty to keep their clients information confidential when requested by higher authorities they have to violet their client’s rights in order to fulfill their duty as an employee of the bank. In the case of LC the bankers performed his duties it was not his fault that the good shipped were faulty and he had to pay the exporter thigh his client had to suffer a loss. So these situations tell us that situations are not in our control mistakes will take place but it’s not always the bankers fault.


  1. Article on syndicated loans, available from [accessed on 2 Dec 2011]
  2. Banking laws, available from [accessed on 2nd Dec 2011]
  3. Banking laws, retrieved from
  4. Bank company, available from
  5. . Bank holdings company, available from
  6. . Letter of credit available from [accessed on 3Ded 2011]
  8. . Retrieved from [accessed on 3 Dec 2011]
  9. Retrieved from
  10. Retrieved from [accessed on Dec 2011]
  11. See banking regulation, available from
  12. See
  13. Wikipedia , retrieved from [accessed on 1 DEC 2011]

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[1]Wikipedia , retrieved from [accessed on 1 DEC 2011]

[3]See banking regulation, available from

[4]  Banking laws, available from [accessed on 2nd Dec 2011]

[6] Article on syndicated loans, available from [accessed on 2 Dec 2011]

[8] See

[9]  Bank company, available from

[10] Bank holdings company, available from

[12]  Letter of credit available from [accessed on 3Ded 2011]

[13]  Retrieved from