The Correspondent Banking Business of Financial Institution Department of
Standard Chartered Bank
Introduction
1.1 Name of the Project:
The Correspondent Banking Business of Financial Institution Department of Standard Chartered Bank in Bangladesh.
1.2 Rationale of the study:
The report explains the whole activities of this department, that the reader can get an idea about this department. This department is related with the trade service. And trade is one of the most efficient sector for banks. The main activities of this department are to maintain the correspondent business with other banks which are the customer of FID of Standard Chartered Bank. Correspondent business means to perform the foreign trade activities. The sales executives of this department collect L/C [local and international] from other client banks.
1.3 Objective of the Study:
1. To preset an overview of Standard Chartered Bank (SCB):The main objective of the study is to evaluate the performance of the Standard Chartered Bank and to have an overall idea on how it operates and what functions it does.
2. To apprise the activities of Financial Institution department (FID):Another objective of the study is to apprise the activities of Financial Institution Department (FID) of SCB, getting knowledge about the products and services of this department and how much efficiently this department can serve to its customers.
3. To apprise the financial performance of SCB and FID:Analyzing the growth of SCB’s assets, deposit, loan and advance and operating income, as well as analyzing the ratio of its like: return on equity, return on assets, net profit margin etc is the objective of this report. Also analyzing the financial performance of FID is the objective of this report.
4. For customer survey: The customers of Financial Institution Department are other banks which deal with export import business. So, another important objective of this study is to survey the satisfaction level on the service provided by the FI Department of SCB.
1.4 Scope of the Study:
The scope of the report was done to find the function of this department as well as the effectiveness of its activities, qualities of various services of it. The report also focused on the financial analysis of SCB in Bangladesh. Further more, the scope of this report is limited to the overall descriptions of the bank, its services, and its position in the industry, and its competitive advantage.
1.5 Methodology of the Report:
1.5.1 Sample Information:
Samples are collected from the SCB’s Financial Institution Department. Here, the samples had been picked up on a judgmental basis. For the organization part, much information had been collected from different published articles, journals, brochures and web sites. All the information incorporated in this report has been collected both from the primary sources and as well as from the secondary sources.
1.5.2 Primary Source of Data:
The method that was used to collect the primary data is as follows:
1.5.2.1 Observation Method:
Observation method may be defined as systematic viewing according to Oxford Dictionary “accurate watching, nothing of phenomena as they occur in nature with regard to cause and effect and mutual relationship”.
1.5.2.2 Interview Method:
The face-to-face interview was taken, where one person-the interviewer, asks the respondent (in this case, “one employee from the Bank Asia”), questions designed to obtained answer related to research problems. In order to get the real information and data about the Financial Institution Department’s Services, we went to different bank and took interview directly.
1.5.2.3 Other Primary Sources are:
1. Discussion with officials of SCB.
2. Face to face conversation with the clients.
3. Telephonic Interview
4. Questionnaire Survey (Attached in the Appendix).
1.5.3 Secondary Sources of Data:
The secondary data has been collected from the MIS of Standard Chartered Bank. To explain different theoretical matters, internet and different articles published in the journals & magazines have been used.
Secondary Sources are:
- Annual Reports of SCB
- Annual Publication of Export Promotion department
- Other published documents of SCB
1.6 Sample Frame of the Study:
The populations are the clients of the Financial Institution Department of Standard Chartered Bank and they were the sample frame. This department has thirty Six (36) clients out of which seventeen (17) have been selected on random basis. The
educational qualification of the sample population ranged from Bachelor’s to Masters Degree.
1.7 Research Timeline:
2007 September Research Proposal Writing
2007 September Literature Review
2007 September Data Collection Procedure
2007 October Data Analysis & Interpretation of Findings
2007 November Final Redraft of Complete Manuscript
2007 December Submission of Research Paper
1.9 Conclusion:
The whole report is divided into some parts. At first the researcher describe rational of the study, objectives, methodology & also the limitations. Than in the later part described the SCB in Bangladesh, its function & also briefly explained its services. Than explain the main part “Financial Institution Department”. In this department of SCB the researcher completed the internship program. The Financial Institution Department is the most vital and knowledge generating department. It always remains busy, among others with Letter of Credits (L/Cs) issues by different banks and receives by the beneficiary banks both local and foreign and thereby ensures financial transactions, ad confirmations, help bill negotiations, resolve disputes, etc.Before the last part the researcher analysis SCB’s ratios, performances and also give the findings. Lastly the recommendation which derived from the findings & conclusion. In appendix the researcher also gives questionnaires & references.
Literature Review
2.1 Review of Related Literature:
Banking institutions plays a vital role in international trade. International trade is an
exchange of goods between a buyer (importer) and a seller (exporter) for a pre-determined price. Trade is also called commerce. All export and import are executed through banks. Trade is the voluntary exchange of goods, services, or both. According to Johansen and Juselius-“International trade is the exchange of goods and services across national borders” (1990, p-17). In most countries, it represents a significant part of GDP. While international trade has been present throughout much of history (Silk Road, Amber Road), its economic, social, and political importance have increased in recent centuries, mainly because of Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing.
Abbott and Seddighi (1996, p-176)[1], for instance, estimated an import demand model for the UK using the co integration approach (Johansen and Juselius, 1990, p-128) and error correction models (Engel and Granger, 1987, p-54). They found that consumption expenditure had the largest impact on import demand followed by investment expenditure and export expenditure.
It has been found that a firm’s exporting experience has a positive effect on export performance (Madsen, 1989), the degree of internationalization (Dominguez and Sequeira, 1993, p-69), and attitudes towards future exports (Gripsrud, 1990).
A Letter of Credit is a conditional bank undertaking given by bank (issuing bank) at the request of a customer (applicant) or on its own behalf to pay a seller (Beneficiary) against predetermined documents provided all the terms and conditions of the Credit is complied with(P.H. Collin, 1999; Suresh Chandra et al, 2002). These predetermined documents are likely to include those required for commercial, regulatory, insurance or transport purposes such as commercial invoice, certificate of origin, insurance policy or certificate and a transport document of a type appropriate to the modes of transport used.
According to SCB’s “Rules & Regulations of Trade Service (2001)” book any banks may issue several types of letters of credits. It is best for importers and exporters to meet with their banking officer to determine which type of credit best suits their needs. The most common types of letters of credits are:
• Revocable
• Irrevocable
• Transferable
• Confirmed
• Unconfirmed
• Back-to-back
• Standby
• Cash advance against letter of credit
Among these Irrevocable is the most common one which is the usual LC opened and Back-to-Back Letters of Credit is the another most common one.
Back-to-back letters of credit are two individual letters of credit that together offer an alternative to a transferable letter of credit. The back-to-back letter of credit allows exporters (sellers or middlemen) who do not qualify for unsecured bank credit to use a letter of credit as security for a second letter of credit in favor of a supplier. In other words, if a foreign buyer will issue a letter of credit to an exporter, certain banks and trade finance companies will issue independent letters of credit to the exporter’s suppliers so that the required goods can be purchased. Even if the initial letter of credit is not successfully completed, the second remains valid, and the issuing bank is obligated to pay under its terms.
According to Bangladesh Bank Act (1991)[2]” A letter of credit is a legal instrument, which binds all parties according to the terms and conditions incorporated in the credit”.
There are four principal parties in a Letter of Credit:
- The Importer/Buyer/Opener:
The purchaser of the goods is called importer. Once the buyer and the seller
have agreed to the sales transactions, it is the buyers’ responsibility to initiate the
opening of the letter of credit.
- Issuing Bank/Opening Bank:
The Bank, which at the request of his customer (importer) opens a Letter of
Credit is named as Issuing Bank. The Issuing Bank is the buyer’s bank/opening bank
of the credit.
- The Seller/Exporter/Beneficiary:
The supplier of the goods is called as seller or exporter or the beneficiary. The
seller after shipping the goods as per terms of the credit presents the documents to the
negotiating bank.
- Advising Bank:
It is the correspondent bank, of the issuing bank of the credit, through which
the credit issued by the opening bank is advised at seller’s country. Advising bank
may also be a negotiating bank.
- Negotiating Bank:
The bank who negotiates/purchases/discounts the documents tendered by the exporter as per terms of the credit is known as negotiating bank.
Organizational Overview of SCB in Bangladesh
3.1 Overview of the SCB in Bangladesh:[3]
The Chartered Bank started operating in Bangladesh from 1948, opening a branch in Chittagong. The Chartered Bank opened another branch in Dhaka in 1966, where it is still headquartered. After the merger of the Chartered Bank with the Standard Bank in 1969, the Standard Chartered Bank took up a program of expansion. It increasingly invested in people; technology and premises as its business grew in relation to the country’s economy. In 1993, there was an organizational re-structuring, which led to a substantial expansion of the Bank’s business. Today the bank has in total ten branches in Dhaka apart from the Chittagong branch, including an offshore branch at the Savar Export Processing Zone.[4]
Bangladesh is under the MESA region, with the controlling office in Dubai. Standard Chartered Bank’s worldwide network facilitates convenient connections with foreign trade and remittance business. Standard Chartered Bank’s branch banking license in Bangladesh allows it to offer a full range of banking services.
Since the organizational restructuring in 1993, the amount of deposits and loans in 1997 has increased by more than five times. There is an overall increasing trend of Standard Chartered Bank’s market share in terms of deposits and advances. In 1995, the market share in terms of advances was 20%, which peaked to 29% in 1996 and fell by 3% in 1997. In the case of deposits, the market share of Standard Chartered Bank increase 16% in 1995 to 18% in 1996, and increased by another 2% in1997. In terms of profit before taxes, there is a rise from eight million BDT in 1990 to its highest amount of 750 million BDT in 1998. The largest increase of 438% took place in 1991. Although the growth rate began to decline gradually from 1993 (from a 170% to 5% in 1998) the overall increase reflects a substantial positive trend. Standard Chartered Bank’s growth in terms of profit and market share depicts an overall positive trend.
Graph-3.1: Comparisons in Terms of Deposit
3.2 Functions:
It serves both Consumer and Wholesale Banking customers. Consumer Banking provides credit cards, personal loans, mortgages, deposit taking and wealth management services to individuals and small to medium sized enterprises. Wholesale Banking provides corporate and institutional clients with services in trade finance, cash management, lending, securities services, foreign exchange, debt capital markets and corporate finance. They have also some commitments to their stakeholders.[5]
3.3 Organization Structure of SCB Bangladesh:
SCB Bangladesh operates with a functional structure with sufficient flexibility to collect the benefit of matrix of organizational structure. The functional structure that relies on grouping of people on the basis of common skill and experience allows sufficient opportunity to become more specialized and productive by doing the same work repeatedly and over long coverage to the work.
At SCB, the functional structure is applied with a great deal of flexibility. That is, the bank intends to sign off the demerits of the functional structures by implementing certain flexibility and allocation of authority that enables it to gather the benefits of matrix structure. This process at SCB is achieved by greater automation of the process by using of computer technology and forming of cross- functional teams to develop new products and improve the quality of the services or address specific operational problems. SCB in Bangladesh can be broadly divided into two functional areas Business Division and Business Support Division. These two divisions can be divided into somesub-division which is shown below:
Figure-3.3: Organization Structure of SCB Bangladesh
3.3.1 Business Division:
The business division has the following departments:
Corporate Banking Group (CBG): This department deals with company deposits and loan services, trade services, financial institution services. All the accounts of corporate clients, which mainly comprise the top local and multinational companies operating in Bangladesh, are assigned a Relationship Manager (RM) who maintains regular and close contact to cater to their needs. The objective of this department is to maintain a thorough knowledge of the client’s business and to develop positive relationships with them.
Treasury (TSY): This department deals with money market investments, foreign exchange services, corporate sales, syndicated loans etc.
Consumer Banking (CB): This department deals with individual deposits and loan services, credit card services, branch networks, credit and collection etc.
Custodial Services (CUS): Headquartered in Singapore, Standard Chartered Equitor fulfils the group’s strategic commitment to the provision of custodial service in Asia. Equitor’s customers are primarily foreign global custodians and broker/dealers requiring cross border information as well as sub-custodian services. Standard Chartered Bank, Bangladesh is responsible for the planning in Bangladesh, but the overall management of the custody business is based on Equitor’s international business strategy.
Financial Institution (Fl): Financial Institution Department (former Institutional Banking) is a specialized banking unit of Standard Chartered, providing products and services to the specific needs of other banks and financial institutions. It assists the local banks by taking care of their cross-border business through the worldwide Standard Chartered Bank networking over 55 countries. It offers various services like L/C Confirmation, Negotiation, Inter and intra Bank Guarantee, Local Bill Discounting, L/C Advising, L/C Transfer, L/C amendment advising, Reimbursement Undertaking and Authorities, Fund Transfers, Export proceeds, BDT Draft Drawing, International Payments (T T’s), Account Services (Vostro Account Management).
3.3.2 Business Support Division:
The support division consists of the following departments:
Operations: This department deals with the processing activities of the business departments.
Finance: This department deals with the financials of the organization and reporting.
Human Resources: As the name indicates, this department deals with the people of the organization.
Administration: This department ensures the smooth running of the organization by providing logistic support, etc.
Legal and Compliance: This department deals ensures compliance with the local (country) and group regulations.
Corporate Affairs: The corporate affairs department deals with issues like social responsibility, sponsorship etc.
Credit: This department is responsible for credit rating and approvals of corporate clients.
IT Services: This department ensures the smooth running of the huge SCB information network and security issues.
Financial Institute
Department of SCB
4.1 Introduction:
Financial Institution Department (former Institutional Ranking) starting its business from 1995 in Bangladesh. Financial Institution is a specialized banking unit of Standard Chartered, providing products and services to the specific needs of other banks and financial institutions.
FID assists the local banks by taking care of their business through the worldwide Standard Chartered Bank networking over 55 countries[6]. FI markets Trade and Payment products through its strong Global Network. Within a short span of time Fl has tremendously increased its market share in Bangladesh. At the end 2007 Fl has expanded relationship with 35 local banks and managed approximately 50% of market share.
The department offers a variety of financial products to the banks and financial institutional clients like L/C Confirmation, Negotiation, Inter and intra Bank Guarantee, Local BilI Discounting, L/C Advising, L/C Transfer, L/C amendment advising, Reimbursement Undertaking and Authorities, Fund Transfers, Export proceeds, Account Services ( Vostro Account Management). The department also provides services under trade finance to its customers. This includes choice of correspondent banks for advising in L/C, confirming and negotiating services in export and import business. The following parts are described these services & this part was mostly collected from the SCB’s annual reports.
4.2 Establishment of new correspondent relationship:
According to Bangladesh Bank act (1991) FI-Bangladesh is responsible for promoting correspondent banking with local banks and financial institutions with a view to maximizing the overall revenues globally from each relationship. That’s why ‘Agency Arrangement” is generally initiated by relationship managers (RM’s) of FI-Bangladesh. Consideration is given to account profitability, reputation of the customer and future growth prospect of the relationship before establishing any agency arrangement.
According to SCB “Agency Arrangement” means establishment of correspondent relationship between two separate banks situated in two different countries. Agency arrangement is established in order to channelise foreign exchange transactions of the two banks under the arrangement with ultimate goal to ease and promote the business of the banks, in broader sense, of the two countries involved. Common business transactions done through agency arrangement are-
1. Establishment of L/C
2. Collection Items
3. L/C Reimbursement
4. Add Confirmation of L/Cs
5. Credit Lines etc.
While approving the setting up of a new correspondent relationship with another institution, it is the responsibility of the local FI RM to confirm the genuine existence and regulated status of the concerned institution. After receiving a formal request from the customer, an assigned RM negotiates the terms & conditions with the prospective customer. These agreed terms and conditions are then incorporated in the agency agreement, which also outlines the manner of the arrangement.
Following documents are also collected from the customer which are kept in safe custody by FI-Bangladesh:
1. Copy of Bank’s License.
2. Article and Memorandum of Association.
3. Certificate of Incorporation.
4. Copy of the Statute.
5. List of authorized signatories (Signature Booklet).
The signature booklets are also distributed to major SCB branches after consulting with the customer. FI, RM may waive any one of the above documents if he is otherwise satisfied about the other documents of the new correspondent. Telegraphic test Keys and SWIFT Authenticator Keys (BKE) are to be established once agency arrangements are finalized. FI-Bangladesh will request Agency Arrangement, London to issue Text keys or swift Authenticator Keys for mutual use and to forward keys directly to the customer.
4.3 Use of SWIFT:
SCB uses their own Society for Worldwide Inter-bank Fund Transfer (SWIFT) to serve the local bank needs. For example: a customer which is a bank or any other financial institution can maintain a Vostro account and can remit fund through the network of SCB’s branches and correspondent banks. Group branches and subsidiaries provide full clearing and payment services in the UK, USA, Hong Kong and in other far East Asian regions. Such worldwide payments and receipts are facilitated by SWIFT system.
4.4 The key products of Financial Institution Department are divided into two categories:
Risk Products:
¨ L/C Confirmation
¨ Negotiations
¨ Inter and intra Bank Guarantee
¨ Local Bill Discounting
Non-Risk Products:
¨ L/C Advising
¨ L/C amendment advising
¨ Reimbursement Undertaking and Authorities
¨ Fund Transfers
¨ Export proceeds
¨ Account Services
4.4.1 RISK PRODUCTS:
4.4.1.1 L/C Confirmation:
When the beneficiary or the seller receives the letter of credit from the issuing bank he wants to be sure that he must get paid after delivering the goods. In this case the seller wants the confirmation of payments from the advising bank. Standard Chartered Bank, when acts as an advising bank gives the add confirmation to the seller that this letter of credit is authenticate and the payments will be made after full filling all the terms and conditions of the letter of credit, so Standard Chartered is prepared to add its confirmation to the letter of credits advised through its network, subject to credit and country limits being available.
4.4.1.2 Negotiation:
As the letter of credit is a freely negotiable financial instrument, any bank in the seller’s country can be a negotiating bank. Negotiation of a letter of credit mean after delivering the goods to the buyers and full filling all the terms and conditions of the letter of credit, the seller presents the documents to a bank, like Standard Chartered. Then, it will examine all the documents as per the letter of credit. If the documents are correct and up to date the negotiating bank pays the seller or its like just purchases the documents from the seller. Standard Chartered advising and negotiation fees for each market are based on local practices and applicable regulatory guidelines. This is subject to periodic review and revision.
4.4.1.3 Inter and Intra bank guarantee:
By the risky product SCB gives facilities to both the local and international corporate customers. This types of inter and intra bank guarantees gives the buyers a certainty over receiving pre-agreed payments if a suppliers fails to meet its contractual obligations. SCB’s Financial Institution Banking issues guarantees and advance payments guarantees against counter guarantees received from correspondent banks worldwide.
4.4.1.4 Local Bill Discounting:
SCB understands the working capital needs of a company and offers Discounting of letter of credit at when a seller gets an usance or deferred letter of credit from a buyer, the seller may wants to get the money for acquiring goods in advance or production cost earlier than the credit expires.
SCB’s Financial Institution banking offers discounting of bills of exchange/drafts that have been accepted by the letter of credit issuing bank under local letter of credit. By this type of service Standard Chartered facilitates the manufactures or suppliers to manage their cash flow more effectively and get access to bank easy finance.
4.4.2 Non-Risk Products:
4.4.2.1 L/C Advising:
When a corporate customer process a letter of credit from a local bank favoring the buyers in the different country the letter of credit has to be advised to the sellers or beneficiary. It means after the contract between the buyer and seller, the buyer issues a letter of credit from his bank to the seller’s bank to notify that he wants to buy the goods. But, in this case the seller’s bank does not know the buyer’s bank. When the buyers and sellers are in the different countries, the risk of the non-payment is high and the accuracy of the letter of credit also major issue. In this situation international or global banks or any other nominated banks, like Standard Chartered Banks takes the responsibility to advise the letter of credit to the sellers or seller’s bank. The beneficiary receives the letter of credit on time and the accuracy is checked though the seller can start the process to deliver the goods right in time to the buyers.
4.4.2.2 L/C Amendment[7]:
Parties involved in a L/C, particularly the seller and the buyer can not always satisfy
the terms and conditions in full as expected due to some obvious and genuine reasons. In such a situation, the credit should be amended.
In case of favorable credit, it can be amended or cancelled by the issuing bank at any moment and without prior notice to the beneficiary. But in case of irrevocable credit, it can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank (if any) and the beneficiary. Amendment of a L/C is required for the following reasons:
i) If the value of the L/C has been increased or decreased.
ii) If the expiry date of the L/C has been extended.
iii) If the name of reimbursing bank mentioned wrongly, etc.
4.4.2.3 Reimbursement Undertaking and Authorities:
On the other side the buyer is also concern that when and how to pay the seller. Letter of Credit Reimbursement helps the buyer simplify a complex trade finance problem; how to settle payment when the issuing bank is not a correspondent of the beneficiary bank. When the sellers opens a letter of credit, incorporate a reimbursement instruction into the terms of the letter of credit allowing a beneficiary bank anywhere in the world to claim payments from the Standard Chartered branches in the country where the issuing bank has established its account relationship.
When the buyer uses a letter of credit along with that simply send a separate reimbursement Authorization to Standard Chartered to effect reimbursement, preferably in a written paper. Standard Chartered Bank offers the flexibility to specify an exact or an approximate amount, as well as choosing whether the claim may or may not be restricted. On the receipt of a claim from any bank from the beneficiary, Standard Chartered will be processed on the day received or on the following day depending on the agreement.
4.4.2.4 Export proceeds:
To an exporter it is very important to keep control over his goods until he is confident enough that he is going to receive payments from the buyers or importers. SCB
Export proceeds collection service take charge of the process document transfer adding greater whole transaction.
In this process Standard Chartered will collect all the documents from the exporter and arrange for them to be held at the exporter’s disposal during the transaction period. Once the process is complete Standard Chartered will interact with the buyer’s bank on behalf of the exporter, arrange the documents to be transfer to that bank and collect the payment.
4.4.2.5 Account Services:
F.I offers the full range of services available under Trade Finance to its customers. The Standard Chartered Bank network in China, the Far East, the Middle East, and the Indian sub-continent, Africa, UK and USA makes SCB the natural choice of correspondents for advising, confirming, and negotiating their letters of credit in these regions. Standard Chartered Bank maintains two accounts for fulfilling its purpose:
i) Vostro Accounts:
Financial Institution Department, Bangladesh maintains Vostro Accounts of banking and financial institutions worldwide, customer maintaining such account can submit funds throughout the country through the Standard Chartered Bank branch network as well as through- Chartered Bank’s local correspondent relationships.
ii) Nostro Accounts:
In order to increase and promote the correspondent banking business worldwide, F.I uses Nostro accounts to Bangladeshi banks and financial institutions in almost all across the Standard Chartered Bank global network. Group branches and sides provide full clearing and payment services in the UK, USA, Hong Kong, Malaysia, Singapore and many African countries. Worldwide payments services are facilitated by a network of branches supported by electronic cash management (available in select locations), fund transfer system and membership of SWIFT.
4.5 Operational Process of Products:
4.5.1 Issuing a Letter of Credit (L/C):
Before issuing a L/C, the buyer and seller located in different countries, concludes a ‘sales contract’ providing for payment by documentary credit. As per requirement of the seller, the buyer then instructs the bank-the issuing bank-to issue a credit in favour of the seller (beneficiary). Instruction/Application for issuing a credit should be made by the buyer (importer) in the issuing bank’s standard form. The credit application which contains the full details of the proposed credit, also serves as an agreement between the bank and the buyer. After being convinced about the ‘necessary conditions’ contained in the application form and ‘sufficient conditions’ to be fulfilled by the buyer for opening a credits the opening bank then proceeds for opening the credit to be addressed to the beneficiary.
4.5.2 Reimbursement Authorities:
Reimbursement authorization means an instruction or authorization, independent of the credit, issued by an Issuing Bank to a Reimbursing Bank to reimburse a claiming Banker if so requested by the issuing bank, to accept and pay a time draft drawn on the reimbursing Bank. In fact, FI of Standard Chartered Bank Dhaka acts as a corresponding bank of Reimbursing Bank i.e. Standard Chartered Bank, New York. Performing as the corresponding bank of Reimbursing Bank (SCB, New York), the FI of SCB, Dhaka, acts on the instruction and under the authority of the Issuing Bank.
In case of Reimbursement Authority, these should be a reimbursement claim from the Claiming Bank to the Reimbursing Bank (SCB, New York). Except as provided by the terms of its Reimbursement undertaking, a Reimbursing Bank (SCB, New York) is not obligated to honor a Reimbursement Claim.
Local bank’s branches in Bangladesh send reimbursement authorizations (RAs) to FI Unit at Dhaka. These RAs are either collected by nominated courier service or sent directly by the branch. On many occasions FI peon collects RAs from branches of customer banks. All RAs are to be signed by two authorized signatories of the concerned bank branch. Signatures appearing in the RAs are to be verified by any Group Signatory using Authorized Signature Booklet of the banks and/or List of Authorized Signatories received from branches.
RAs should contain L/C number, L/C Expiry, Amount, Charges, the account to be debited and in some occasion the name of the claiming bank. Prior to process/forwarding, FI clerk checks these details and in case of any clarification, contacts the concerned branch.
As it is a legal requirement that all Reimbursement Authorizations and Reimbursement Amendments must be issued in the form of a genuine tele-transmission that’s why RAs are usually sent to respective network offices by Swift/Telex. RAs are sent through swift MT 799. RAs are also sent by courier.
4.5.3 Processing of RA:
Where courier service is used for onward transmission of RAs:
Original copies are sent to receiving group office e.g. SCB NY, Attn. Trade Reimbursement Dept. And copies are retained for future reference.
Where RAs are sent by SWIFT:
· FI- ops clerk prepares the reimbursement authority in MT 1999 on behalf of the local bank.
· FI-Ops officer verifies the message.
· Any of the Relationship Managers authenticates & sends the message.
· The following morning FI receives the original copies of the SWIFT message.
· Clerk sends a copy of the message to the concerned bank.
· Another copy of the transmitted message is filed along with the original RA received from the local bank.
4.5.4 Fund Transfer:
Fund Transfer or payment Instruction means an instruction issued by an Issuing Bank to a Reimbursement Bank to debit its respective account directly on the value date mentioned in it. Payment services are facilitated by this product of FI. In case of fund transfer there need not to be claimed. On the value date the instruction of the issuing bank is executed.
Local banks branches in Bangladesh send Fund Transfer (FT) Instructions to FI Unit at Dhaka. These FTs are either collected by our nominated courier service or sent directly by the branch. On many occasions FI peon collects FTs from branches of customer banks. All FTs are signed by two authorized signatories of the concerned bank branch.
Signatures appearing in the FTs are to be verified by any FI-Ops Staffs using Authorized Signature Booklet of the banks and / or List of Authorized Signatories received from branches.
The FTs contain L/C number, Amount, Value date, Beneficiary details, ordering customer, Charges, the account to be debited etc. FI clerk checks the FTs for all these details and in case of any incomplete information/clarification; he/she contacts the concerned branch. Any following amendments are made through an authorized signatory of the concerned bank and this is further verified at our end. After completed all of the above, the clerk inputs the Fund Transfer-Connect paying particular attention to the amount, currency, value date and other beneficiary details
Transaction Flow
Figure-4.6: Transaction Flow of Fund Transfer
|
MT202 Book TRF
Chips
4.5.5 Processing of Fund Transfer:
Where FT’s are sent by SWIFT-
· The FT’s are putted in SWIFT format MT 202.
· FI-Ops officer verifies the message.
· Any of the Relationship Managers authenticates the message and sends it.
· The following morning FI receives the original/copies of the swift message.
· Clerk sends a copy of the message to the concerned bank.
· Another copy of the transmitted message is filled along with the original FT Instruction received from the local bank.
4.6 Risks:
The main purpose of a Confirmation is to remove the Bank and Country Risk associated with the transaction from the beneficiary, with the Confirming Bank undertaking these risks. A Confirmation also gives the beneficiary the opportunity to obtain non-recourse, post-shipment finance against compliant documents. Accordingly, the exporter should request the establishment of an irrevocable, Confirmed Documentary Letter of Credit.
The main risks that SCB undertakes with this product are summarized as follows:
4.6.1 Country Risk:
This is the risk that SCB undertakes on the country of the L/C Issuing Bank once the Credit has been issued and confirmed. Formal approval of the associated Bank and Country risks must always be obtained from the centre responsible for providing such approvals prior to the customer being advised that SCB has added its confirmation to the transaction.
4.6.2 Bank Risk:
This is the risk that SCB undertakes on the L/C Issuing Bank once the L/C has been issued and confirmed. Confirmation of a sight L/C is considered lower risk than confirming a usance L/C of similar value, similar total duration and issued by the same Issuing Bank.
4.6.3 Operational Risk:
Where SCB is the Confirming Bank it has a duty to check the documents and ensure their conformity with the L/C; in other words, SCB is exposed to Documentary risks, and any payment effected is “without recourse” to the beneficiary once SCB certifies the documents as clean. Procedures for handling the checking of documents must be in accordance with existing operational processes and internal guidelines. There is a risk that a Confirmation could be issued without approval when approval is required. All Service Delivery areas must ensure that approval to confirm L/Cs is requested and obtained on case by case basis in accordance with procedures and relevant Group Instruction Circulars.
4.6.4 Credit Risk:
SCB’s obligor under this program is the accepting bank SCB normally has no recourse to the corporate customer, except in the event of fraud alteration of bills etc. Transactions should reflect the size of the customers business and the terms of trade. Local practice should be to introduce nominal credit ceilings for borrowing customers but these should not be advised to customers. For non-borrowing corporate customers, the value of “Accepted draft” per transaction must not to exceed USD 250, 000. Any exceptions must be approved by the SCO.
4.6.5 Market Risk:
There may also be a basis risk due to movements between the reference rate for interest charges for the product and the bank’s actual cost of funds. The product should, wherever possible, be match funded to remove this risk.
4.6.6 Other Risk:
SCB also faces natural risk when it adds confirmation to a L/C where the reimbursement clause states that the Issuing Bank only agrees to reimburse the Confirming Bank to receipt of compliant documents at its own counters. SCB can choose either not to confirm, or confirm the L /C subject to conditions agreed with the beneficiary. If the Confirming Bank fails to spot any adverse terms or ambiguous clauses in the L/C, the Bank may not be able to obtain payment from the Issuing Bank. Therefore, the Confirming Bank should ensure that the L/C is scrutinized for any ambiguities before Confirmation is agreed.
Financial Analysis&
Findings
5.1 Introduction:
The whole analysis part has been divided into three parts. At first the study would analyzing the financial ratios like- return on equity, return on asset, net profit margin net operating margin etc. Then performance analysis- it has been shown the number of LC issued, number of LC processed, comparison between export & import etc. And lastly in the questionnaire survey some basic questions have been prepared and distributed among the clients.
5.1.1 Ratio Analysis:[8]
5.1.1.1 Return on Equity (ROE):
ROE = Net Income[9] / Shareholders Equity
Table-5.1.1.1: Return on Equity
(BDT)
| Year | Net Income | Shareholders Equity | ROE |
| 2005 | 2,879,241,028 | 8,769,360,197 | 32.83% |
| 2004 | 2,483,554,006 | 6,325,101,188 | 39.27% |
| 2003 | 1,953,674,738 | 4,582,908,961 | 42.63% |
The figure shows that the rate of change of Return on Equity (ROE) declined to 32.83% in 2005 from 42.63% in 2003. The ratio declined because the rate of growth of equity was much higher than the rate of growth of net income. It can be inferred that Standard Chartered Bank retained this amount in order to increase investment and thus income from it.
5.1.1.2 Return on Assets (ROA):
ROA = Net Income / Total Asset
Table-5.1.1.2: Return on Assets
(BDT)
| Year | Net Income | Total Asset | ROA |
| 2005 | 2,879,241,028 | 72,989,604,245 | 3.94% |
| 2004 | 2,483,554,006 | 62,547,942,384 | 3.97% |
| 2003 | 1,953,674,738 | 57,376,039,295 | 3.41% |
The figures for ROA were almost similar over the three years. The ratio slightly increased in 2004 and did not improve in the next year. The total asset increased in 2005 from in 2003 but the net income did not increase that much. That is the rate of increase of net-income could keep pace with that of assets leaving less scope for leverage.
5.1.1.3 Net profit Margin:
Net profit Margin = Net profit after tax / Total operating Income[10]
Table-5.1.1.3: Net Profit Margin
(BDT)
| Year | Net Profit After Tax | Total Operating Income | Net Profit Margin |
| 2005 | 2,879,241,028 | 6,383,798,650 | 45.10% |
| 2004 | 2,483,554,006 | 5,455,783,822 | 45.52% |
| 2003 | 1,953,674,738 | 4,883,145,296 | 40.01% |
The ratio reflects effectiveness of expense management and cost control. The net profit margin of standard Chartered Bank is quite good and showing steady increasing trend. It increased from 40.01% in 2003 to 45.52% in 2004 and remained almost same in 2005.
5.1.1.4 Net Bank Operating Margin:
Net Bank Operating Margin = (Operating Income – Operating Expenses) / Total Asset
Table-5.1.1.4: Net Bank Operating Margin
(BDT)
| Year | Operating Income | Operating Expenses | Total Asset | Net Profit Margin |
| 2005 | 6,383,798,650 | 1,980,343,961 | 72,989,604,245 | 6.03% |
| 2004 | 5,455,783,822 | 1,484,863,933 | 62,547,942,384 | 6.35% |
| 2003 | 4,883,145,296 | 1,358,282,373 | 57,376,039,295 | 6.14% |
The ratio says how effectively management is running its operations by using assets to generate income and expenses. The ratio increased slightly in 2004 but could not show a significant growth in the next year 2005. The ratio 6.03% in 2005 can be due to the higher growth of total asset from 2004 to 2005.
5.1.1.5 Tax Management Efficiency;[11]
Tax management efficiency (%) = Net income after taxes / Net income before taxes.
Table-5.1.1.5: Tax management efficiency
(BDT)
| Year | Net Income After Tax | Net Income Before Tax | Tex management Efficiency |
| 2005 | 2,879,241,028 | 3,783,798,650 | 76.09% |
| 2004 | 2,483,554,006 | 3,455,783,822 | 74.86% |
| 2003 | 1,953,674,738 | 2,883,145,296 | 65.76% |
This ratio reflects that the company’s efficient use of tax management tools (such as buying tax exempt Govt. bonds) and thus controlling the tax effect to boost net income. This ratio for Standard Chartered Bank was relatively stable in 2004 &2005, but decreased in 2003. It can be inferred that since earning before taxes increased by 65% in 2003, Standard Chartered Bank fell in the higher tax bracket and thus paid higher taxes.
5.1.1.5 Capacity Ratio:
Capacity Ratio (%) = Net loans and advances / Total assets.
Table-5.1.1.6: Capacity Ratio
| Year | Net Loans & Advances | Total Asset | ROA |
| 2005 | 15,905,400,769 | 72,989,604,245 | 22.80% |
| 2004 | 13,349,200,000 | 62,547,942,384 | 21.34% |
| 2003 | 16,953,674,738 | 57,376,039,295 | 29.55% |
This is a negative liquidity indicator because loans and advances are most illiquid assets of a bank. In 2004and 2005 it was an average of 22.07% and in 2003 it was an average of 29.5%. It means that their liquid asset is going down which might be alarming in case of short-term necessity.
5.1.1.6 Equity Multiplier:
This ratio reflects the leverage or financing policies; the sources chosen to fund the assets of SCB. The percentage growth rate of assets, liabilities and equities are given below:
Table-5.1.1.7: Equity Multiplier
| % increase of | 2002-2003 | 2003-2004 | 2004-2005 |
| Assets | 18.56 | 36.56 | 88.82 |
| Liabilities | 18.87 | 38.88 | 90.50 |
| Equity | 14.91 | 8.29 | 62.52 |
From the table we can see that equity accounts for less than 20% in financing assets. This is a common issue for all the banks. Since banks lend the same fund what they borrow from the savers, liability contributes most in financing assets. Since the liability is higher risk is also higher. It gives the management high pressure to make good loans. Because, if they have to write off a loan, they write it off from the equity portion. So there may be a chance to have a negative equity which may put the bank under strict control and regulations adopted by the Central Bank.
5.1.1 Performance Analysis:
5.1.2.1 Volume of Different types of L\C Issued:
The graph is based on the volume of different types LC according to security provided by the bank. This classification made from the LC opened from January 2006 to June 2006. The graph shows the percentage of LCs. From the graph we can see the irrevocable LC’s is the most common LC. Irrevocable gives the beneficiary more confidence in exporting. This system is very popular in all over the world. And then revocable& confirmed are in 25% & 30% respectively.
5.1.2.2 Number of L/C issued:
Table-5.1.2.2: Number of L/C Issued
(BDT)
| Year | 2003 | 2004 | 2005 |
| Letter of Credit issued | 7,440 | 7,411 | 5,681 |
| Back to Back L/C | 4,239 | 4,283 | 929 |
Source: Trade Service Department, SCB.
Graph-5.2.1: Number of L/C Issued
The above table showed the number of L/C issued and back to back L/C in the year 2003 to 2005. From the table and graph we can see that the issuance of total number of L/C is decreasing though the year 2003 to2005. At the year 2003, the bank had 7440 L/C issued but the figure significantly dropped to 5681 at the end of the year 2005. In that issued L/C the part of back to back L/C issued is almost half of the total L/C issued in 2003 and 2004 and number of back to back L/C issued dropped significantly in 2005.
5.1.2.3 Number of L/C processed:
Table-5.1.2.3: Number of L/C Processed
Source: Trade Service Department, SCB.
| Year | 2003 | 2004 | 2005 |
| L/C Advised | 33,534 | 27,470 | 22,936 |
| L/C Amendment | 39,963 | 36,046 | 35,400 |
| L/C Transfer | 10,075 | 8,745 | 8,699 |
Graph-5.1.2.3: Number of L/C Processed
The graph shows the categories for processing letter of credit by Standard Chartered Bank. From the graph we can see the proportion of amendment and of L/C compared to the total number of L/C advised. The number of L/C amendment is very high because of various changes in the L/C’s terms and conditions like change of name & address of beneficiary, data of shipment, quantity of goods etc.
5.1.2.4 Comparison between Export & Import:
Table-5.1.2.4: Comparison between Export & Import
(BDT)
| Year | 2003 | 2004 | 2005 |
| Total Export | 837,520 | 2,302,234 | 567,321 |
| Total Import | 612,406 | 782,347 | 797,365 |
The above table shows the data for both export and import amount for Standard Chartered Bank. From the table we can compare the figures for import and export and for a better look the following graph depicts the figures for the past three years.
Graph-5.2.3: Comparison between Export & Import
The graph shows that the year 2004 has a much better performance than other two years 2003and 2005. The export for 2004 was the highest among the three years but in 2005 the amount has fallen drastically. The performance for export was quit well compared to the import. The import figure did not fall or rise drastically but showed a positive trend over the three years. And we can say that the global trade service of Standard Chartered Bank works quit efficiently.
5.1.2.5 LC opened in Bangladesh and in SCB, Dhaka:
There are two time series analysis of the SCB[12] and Bangladesh[13]. Here we showed one of them which is from January to June, 2005.