CRR & SLR

 Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with the central Bank. If the central bank decides to increase the CRR, the available amount with the banks comes down. Central bank uses the CRR to drain out excessive money from the system. Currently, commercial banks are required to maintain with the Bangladesh Bank an average cash balance, the amount of which shall not be less than 6% of the total of the Net Demand and Time Liabilities (NDTL) of them.

On the other hand, Statutory Liquidity Requirement (SLR) is the amount of liquid assets, such as cash, precious metals or other approved short-term securities, that a commercial bank must maintain in its reserves. Currently, commercial banks are required to maintain 19% of the total of the Net Demand and Time Liabilities (NDTL) in the form of cash, precious metals or other approved securities.

Hypothecation and pledge

 Pledge: A pledge is a bailment of goods as security for the payment of a debt or the performance of a promise (Section 172 of the contract Act 1872). Where bailment means the delivery of goods by one person to another for some purpose under a contract that the goods will be returned or otherwise disposed   of  according   to  the  directions   of  the  person  delivering   them  when   the  purpose  is accomplished.

Hypothecation:  hypothecation  is a charge against property  for an amount  of debt whether  neither ownership nor possession is passed to the creditor. In this case, the possession and control of goods remain with the customers. An equitable charge on the security is created by the customer in favor of the banks. In this case the customer executes an agreement called as agreement of hypothecation. Feature of hypothecation:

I.       Charge against a property for an amount of debt

II.      Goods remain in the possession of the borrower

III.     Equitable charge to the bank under documents Letter of credit

IV.     Borrower binds himself to give possession of the hypothecated goods to the bank when called upon to do so.

How can a banker discharge his responsibilities to prevent money laundering particularly in the context of the law currently force

HOW TO COMBAT MONEY LAUNDERING

One of the best methods of preventing and deterring money laundering and terrorist financing is a sound knowledge of a customer’s business and pattern of financial transactions and commitments. The adoption of “know your customer” is not only a principle of good business but is also an essential tool to avoid involvement in money laundering.

Efforts to combat money laundering largely focus on those points in the process where the launderer’s activities are more susceptible to recognition and have therefore to a large extent concentrated on the deposit taking procedures of banks i.e. the placement stage.

Institutions  and  intermediaries  must  keep  transaction  records  that  are  comprehensive  enough  to

establish an audit trail. According to the Money Laundering Prevention Act, 2012, banks should do the following to discharge his responsibilities to prevent money laundering

Money  Laundering  Prevention  Act,  2012  requires  all  reporting  agencies  to  maintain  correct  and concrete information with regard to identity of its customer during the operation of their accounts. 

A risk management system shall have to be introduced to identify risks associated with the accounts opening and operating of PEPs;

Take reasonable measures to establish the source of wealth and source of funds; Ongoing monitoring of the transactions have to be conducted; and

The FIs should observe all formalities as detailed in Guidelines for Foreign Exchange Transactions while opening accounts of non-residents;

Maintain Transaction profile of every customer.

If transaction of 10(ten) lac and above occurs in an account on a particular date the account should be reported to the AMLD, Bangladesh Bank as per prescribed format.

The accounts which scores are >=14 as per risk categorization are considered as high risk accounts. KYC

Profiles and transaction Profiles must be updated and re-approved at least half-yearly for “High Risk”

accounts.

Suspicious Transaction Report is to be submitted by financial institutions to the competent authorities.

In Bangladesh, compliance requirements for FIs, as reporting organization, are based on Money Laundering Prevention Act (MLPA), 2012, Anti terrorism (Amendment) Act, 2012 and circulars or instructions issued by BFIU.

According to section 25 of MLPA, 2012 FIs‘responsibilities to prevent money laundering are -

a)   to maintain complete and correct information with regard to the identity of its customers during the operation of their accounts

b)   to preserve previous records of transactions of any customer’s account for at least 5(five) years from the date of closure; (For details please consult Chapter no 8)

c)   to provide with the information maintained under clauses (a) and (b) to Bangladesh Bank from time to time, on its demand;

d)   if any suspicious transaction or attempt of such transaction as defined under clause (z) of section 2

is observed, to report the matter as ‘suspicious transaction report’ to the Bangladesh Bank immediately on its own accord.

What are the different instruments used by the BB to pursue its monetary policy

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest. Monetary policy is usually used to attain a set of objectives oriented towards the growth and stability of the economy. These goals usually include stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. Instruments of Monetary Policy:

1. Target Growth in Money Supply: Money supply according to the goals of national economic growth pattern. Should be reviewed in quarterly

To set money supply at a target level BB use the following techniques:

I. Bank Rate: The bank rate is the rate of interest at which BB re-discounts the first class bills of exchange from commercial banks. Whenever BB wants to reduce credit, the bank rate is raised and whenever the volume of bank credit is to be expanded the bank rate is lowered. This is because by change in the bank rate. BB seeks to influence the cost of bank credit.

The efficacy of bank rate policy depends, to a greater extent, on its power to influence the market rates.

There is no organized money market in our country and thereby the market rates seldom respond to bank rate changes. The absence of any kind of conventional relationship between the central bank and other components of the money market further adds to the ineffectiveness of the bank rate policy.

II.Open market operation: BB can influence resources of commercial banks by buying or selling government securities in open market. If BB buys government securities in the market from the commercial banks, this increases the cash base of the commercial banks enabling them to expand credit and conversely If BB sells government securities to the commercial banks, their cash base is reduced. Thus adversely affecting the commercial banks to expand credit.

III. Credit Rationing: under this policy, during the time of stringency, BB rations credit by limiting the amount of credit available to each client and restricting the rediscount facilities to short term bills. It may involve setting limits on the individual banks credit during the specified period.

2. Statutory Reserve Requirement: (a) CRR: Cash Reserve Ratio

(b) SLR: Statutory Liquidity Reserve

A demand draft issued by you on one of your branches is lost before it reaches the payer. As a banker what procedures you will follow when the purchaser of the draft demands his money back?

If the purchaser reports to the issuing branch the loss of the draft without any endorsement, the banker may safely refuse payment of the same because of absence of any endorsement thereon, on behalf of the payee, would deemed to be forged and title of the holder would not be considered good.

If the draft is presented for payment by some one, the banker should return it with the remark “Draft reported to be lost. Payees endorsement requires verification”

a)        On  receipt  an  application  from  the  purchaser  of  the  draft  regarding  its  loss  and  issues  of duplicate one along with the copy of GD entry, the signature of the application is verified from the original application.

b)        The drawee branch is informed of the loss of draft and requested to exercise caution by letter or

telegram as desired by applicant. The telegram charges if incurred are recovered from him.

c)         On receipt of confirmation from the drawee branch that the draft is still outstanding in their books and that caution is being exercised by them. 

d)        General Banking of Head Office to be informed about the lost DD, who will circulate about the lost  instrument  to our  all  branches.  After  obtaining  confirmation  from  all  branches  that  the  DD  is not/will not paid, Duplicate may be issued after obtaining stamped indemnity bond.

e)        The  draft  is  issued  marked  Duplicate  in  red  ink,  without  altering  the  printed  number  and repeating the original number.

f)         A note to this effect is made on the original form and the drafts issue register “duplicate issued in lieu of the original”.

g)        Drawee branch is advised regarding issuance of the duplicate draft. 

What are the risk a banker is likely to face in paying a a) post dated check b)stale check and c) crossed check over the counter

Stale Cheque:-

A cheque which is issued today must be presented before at bank for payment within a stipulated period. After expiry of that period, no payment will be made and it is then called ‘stale cheque’ . It is the practice of our country not to honor cheques presents for payment after the expiry of six calendar months from their dates. This practice is born out of banker’s customer relationship and does not have any legal sanction behind it,

Post-dated Cheque:-

A cheque which bears of future date are called a post dated cheque. For example, if a cheque presented on 8th May 2003 bears a date of 25th May 2003, it is a post-dated cheque. The bank will make payment only on or after 25th May 2003. The drawee bank will not pay a post dated cheque till the date thereon arrives. The risk involved to payment of post dated cheque before the due date are the possibility of the cheque being countermanded, occurrence of customer’s death, bankruptcy etc. before the date of the cheque.

crossed check over the counter

When cheque is crossed it in effects means a request-more appropriately, an instruction by the client

not to pay the cheque directly over the counter but to a banker only for crediting the payees account with the bank. A cheque bearing such an instruction is called a ‘crossed cheque’. The crossing of a cheque is intended to ensure that its payment is made to the right payee.

Describe the reasons for huge amount of non-performing loans in banks of Bangladesh

Pro approval phase (Controllable Variables):

1.      Defectiveness in selection of potential borrower

2.      Mistake in selection of business where to finance/not to finance

3.      Long-drawn appraisement /approval process

4.      Poor appraisal technique

5.      End use/purpose not properly tracked

6.      Defective structuring of credit

7.      Under/over financing

8.      Imprudent judgment/wrong conception about sectoral viability/ volatility

9.      Unusual attachment of importance on collateral security

10.    Wrongly conceived projections and not supported by adequate assumptions

Post approval phase: 

1.      Poor Monitoring

2.      Improper/inadequacy in loan documentation

3.      Poor MIS

4.      Un favorable Investment Climate

5.      Economic Recession

6.      Inconsistent and erratic govt. fiscal policy

7.      Credit Culture promote loan default

Bill of lading and bill of entry

BILL OF LADING:  In international trade Bill of lading occupies an importing place as a mode of transport. Bill of Lading is a quasi negotiable instrument issued by shipping company which is a document of title to the goods described in it. A thorough bill of lading involves the use of at least two different modes of transport from road, rail, air, and sea. The term derives from the verb "to lade" which means to load a cargo onto a ship or other form of transportation.

A bill of lading renders the following three functions:

1)           It is an evidence of contract of carriage.

2)           It is a receipt for the goods received by the carrier, and

3)           It is a document of title to goods.

The Bill of Lading must contain the following information:

1)         The name of shipper, consignee and name and address of notify party.

2)         Description of goods.

3)         Identifying marks and number of B/L with date.

4)         The port of shipment and discharge.

5)         Evidence that the goods have been loaded on board.

6)         The name of the carrying ship.

7)         Amount of freight paid or unpaid.

8)         The date of shipment.

9)         The number of original Bill of Lading issued.

10)        Flag of nationality.

11)       Gross/net/tare weight; and

12)        Freight rate/measurements and weighment of goods/total freight. 

TYPES OF BILL OF LADING:

01)         Claused Bill of Lading: A bill of Lading that bears a clause or notation either in writing, typed or stamped stating that the goods or package is in a defective condition. Such bill of lading should not be negotiated/purchased or discounted.

02)         Clean Bill of Lading: When the bill of lading states that goods received on board the ship are in good condition  and free from any clauses  or indication suggesting  damage to the goods covered  / defective condition such as "boxes broken", "drums leakage", or "straps damaged" etc. is called clean bill of lading.

A clean bill of lading is one which states that the cargo has been loaded on board the ship in apparent good order and condition. Such a BL will not bear a clause or notation which expressively declares a defective  condition  of goods and/or the packaging.  Thus,   BL that reflects  the fact that the carrier received the goods in good condition. The opposite term is a soiled bill of lading. It reflects that the goods were received by the carrier in anything but good condition.

BILL OF ENTRY:  A bill of entry is a formal declaration describing goods which are being imported or exported. The bill of entry is examined by customs officials to confirm that the contents of a shipment confirm to the law and to determine which taxes, tariffs and restrictions may apply to the shipment. This document must be prepared by the nominated agent of the importer and exporter. When the importer submits the exchange control copy of bill of entry, its particulars should be mat ched and checked with those in the IMP form and invoice to see that the goods for which remittance was made had been duly received in Bangladesh.

This bill of entry after proper checking should be matched with the duplicate copy of the relative IMP form previously retained by the bank and kept in relative L/C file for inspection of Bangladesh Bank, Audit team. If the importer does not submit the bill of entry within 04 months, the matter should be taken up with the concerned importer and also reported to Bangladesh Bank, Foreign Exchange policy Department for further necessary action against the defaulting importer.

What do you understand by loan classification, Describe the various types of classification with example

Classification means segregation/separation/the act of forming into classes. In the context of banking investment, classification is the process to identify the invested amount into classes or status of loan as per  formula  given by BB considering  their  nature,  transaction  or turnover,  repayment  process  and qualitative judgment.

The purposes of loan classification are:

I.       To segregate the loan accounts into classes to take appropriate steps. II.      To strengthen the loan discipline of every bank

III.     To increase the recovery of outstanding loan.

IV.     To suspend the loan of interest from classified loan accounts into income account. V.      To maintain actual/accurate provision against probable loss of classified loan

VI.     To determine the proper capital adequacy on the basis of risk weighted assets

VII.    To establish transparency of the bank’s account

VIII.   To determine the accurate profit for payment of tax and distribution of profit to the stakeholders.

ii. Describe the various types of classification with example

Categories of Loans and Advances: 

All loans and advances will be grouped into four (4) categories for the purpose of classification, namely- (a) Continuous Loan (b) Demand Loan (c) Fixed Term Loan and (d) Short-term Agricultural & Micro- Credit.

a) Continuous Loan: The loan accounts in which transactions may be made within certain limit and have an  expiry  date  for  full  adjustment  will  be  treated  as  Continuous  Loan.  Examples  are:  Cash  Credit, Overdraft, etc.

b) Demand Loan: The loans that become repayable on demand by the bank will be treated as Demand Loan. If any contingent or any other liabilities are turned to forced loan (i.e. without any prior approval as regular loan) those too will be treated as Demand Loan. Such as: Forced Loan against Imported Merchandise, Payment against Document, Foreign Bill Purchased, and Inland Bill Purchased, etc.

c) Fixed  Term Loan:  The loans,  which  are repayable  within  a specific  time  period  under  a specific

repayment schedule, will be treated as Fixed Term Loan.

d) Short-term Agricultural & Micro-Credit:  Short-term Agricultural Credit will include the short-term credits as listed under the Annual Credit Programme issued by the Agricultural Credit and Financial Inclusion Department (ACFID) of Bangladesh Bank. Credits in the agricultural sector repayable within 12 (twelve) months will also be included herein. Short-term Micro- Credit will include any micro-credits not exceeding an amount determined by the ACFID of Bangladesh Bank from time to time and repayable within 12 (twelve) months, be those termed in any names such as Non-agricultural credit, Self-reliant Credit, Weaver's Credit or Bank's individual project credit.

Holder for value and holder in due course

Holder for value: Person in possession of a negotiable instrument for which value has been given 

Holder in due course: "Holder in due course" means any person who for consideration became the possessor  of  a  promissory  note,  bill  of  exchange  or  cheque  if  payable  to  bearer,  or  the  payee  or indorsee thereof, if payable to order, before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect  existed in the title of the person from whom he derived his title.

Holder in due course: Essentials

A "bona fide holder for value" is the "holder in due course".

•Essentials:

1.  Must be holder for consideration.

2. The Negotiable Instrument transferred to him before it becomes payable (overdue).

3. Must be transferred in good faith.

4. Should have no reason to believe that there existed any defect on the title of the person transferring it to him (transferor).

5.  An executor of a will cannot be a holder in due course

Holder in due course: Rights

The holder in due course gets better title even if there was defect in title of transferor. In fact all defects are cleansed when the bill goes in the hands of holder in due course except in case where signature of endorser or maker or drawee was forged.

Hence the holder in due course has following advantages and protections:

(a) A person who had signed an inchoate instrument is liable to holder in due course for full value as provided under Section 20.

(b) Every prior party to the instrument is liable to holder in due course (section 36).

(c) Even if drawer is fictitious, acceptor is liable to holder in due course if signature of drawer and endorser as appearing in the bill tallies (section 42).

(d) Parties to instrument are liable to holder in due course or against subsequent holder even if it was an accommodation bill but the liability stands only to the consideration paid by him and not the full amount (section 43).

(e) Even if Bill of Exchange was delivered conditionally or for a specific purpose and not for purpose of transferring property in the bill absolutely, the holder in due course is still entitled for the amount of the Bill (section 46 para 3).

(f) Even if Bill was lost or was obtained from maker/acceptor/holder by offence or fraud for unlawful consideration the holder in due course is still entitled to get full amount of bill (Section 58).

(g) In a suit by holder in due course, maker of promissory note, drawer of bill of exchange or cheque and acceptor of bill for honour of drawer cannot deny validity of the instrument as originally drawn (Section

120).

(h) In a suit filed by holder in due course, maker of promissory note and acceptor of bill payable to order can not deny payee’s capacity to indorse the promissory note or bill (Section 121).

(i) Endorser can not deny signature or capacity of any prior party to the instrument (Section 122).

Core capital and supplementary capital

 Core Capital/ Tier-1 Capital

'Core Capital' also known as Tier-1 Capital of a commercial bank comprises of highest quality of capital elements like –

a) Paid up capital

b) Non-repayable share premium account c) Statutory reserve

d) General reserve

e) Retained earnings

f) Minority interest in subsidiaries

g) Non-cumulative irredeemable preference shares h) Dividend equalization account

Supplementary Capital/ Tier-2 Capital

'Supplementary Capital' also known as Tier-2 capital represents other elements which fall short of some of  the  characteristics   of  the  core  capital  but  contribute  to  the  overall  strength  of  a  bank   - a) General provision

b) Revaluation reserves

Revaluation reserve for fixed assets Revaluation reserve for securities Revaluation reserve for equity instrument c) All other preference shares

d) Subordinated debt