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“Foreign Exchange Risk Management Sonali Bank-An Evaluate Study.’’ CHAPTER-1 INTRODUCTION 1.1 BACKGROUND OF THE STUDY All over the world the dimension of Banking has been changing, rapidly due to deregulation, Technological innovation and globalization. Banking in Bangladesh has to keep pace with the global change. Now Banks must compete in the market place both with local institution as well as foreign ones. To introduce skilled Banker, only theoretical in the field of Banking studies is not sufficient. An academic course of the study has a great value when it has practical application in real life situation.

Due to free market economy the competition among nationalized, foreign and private commercial banks and the expectation of the customers become rapidly growing concerning the banking operation & how customer service becomes more attractive. Reciprocating the sentiment, commercial banks are trying to elevate their traditional service to a better standard, to meet the challenging needs. Side by side, these banks have now concentrated their attention towards diversification of their products for better performance of their existence. Under the above circumstances, it has became necessary for Sonali Bank, a leading commercial bank, to focus its attention towards the improvement of the customer service through its multi-purposeful activities. That is why it is quite justified to make an indepth study about its operation and evaluate service provided by this bank and scope for its improvement This is the exploratory study that evaluates the lending functions of Sonali Bank. The study may help formulating policy regarding improvement of the functions of the bank. 1.2 ORGANIZATION OVERVIEW 1.8.1 Management Aspect of SBL


The Bank was established primarily as Nationalized Bank. After liberation it was nationalized and it remained so for quite a long period. Like any other business organization, the top management makes all the major decisions in SBL. The Board of Directors being at the highest level of organizational structure plays an important role on the policy formulation. The Board of Directors is not directly concern with day-to-day operation of Bank. They had delegated their authority to the Managing Director who is assist by General Manager to look after the day-to-day affairs of the Bank. The Bank is running by an excellent management team under the direct supervision of a competent Board of Directors. The Board of Directors comprises total Thirteen members headed by the Chairman. Mr. Quazi Baharul Islam is the present Chairman of the Board. The Managing Director (MD) heads management team. Under him a General Manager (GM) heads each department of the Bank. Mr. Md. Humayun Kabir is the present Managing Director and CEO of SBL. 1.3Vision and Mission of the Sonali Bank Ltd. Our Vision : Socially committed leading banking institution with global presence. Our Mission : Dedicated to extend a whole range of quality products that support divergent needs of people aiming at enriching their lives, creating value for the stakeholders and contributing towards socio-economic development of the country. continuous development of Information and Technology to meet the demand and challenges of the time. 1.4 Corporate Objectives and Aim Objectives  Growth  Value Addition  CSR  Quality Standard Aim

• •

To match Corporate Objectives, With Ownership and Accountability To increase our value by releasing each individual’s true potentials

1.5 Slogan of SBL To keep continue the growth with reputation and social responsibility, it has it’s own slogan is, “Your Trusted Partner in Innovative Banking”


1.6 Branch Network SBL is the largest Nationalized bank in Bangladesh. The bank Emerged as Nationalized Commercial Bank in 1972, following the Bangladesh Bank (Nationlisation) Order No. 1972(PO No.26 of 1972) .It has 1184 branches All over the country. Branches & Subsidiaries Total Branches Branches in Urban areas Branches in Rural areas Overseas Branches Subsidiaries

Representative Office Correspondent

:1184 :341 :841 :2 :3 : 1. Sonali Bank UK Limited having 7 (seven) branches in UK. 2. Sonali Exchange Company Incorporated (SECI) having 8 (eight) branches in USA. 3. Sonali Investment Limited (Merchant Banking) having 1 (one) branch at Motijheel, Dhaka, Bangladesh. :3 : 1(one) in Jeddah, KSA, 1 (one) in Riyadh, KSA and 1 (one) in Kuwait. :581


1.7 Hierarchy of Sonali Bank Limited

1.8 Credit Ratings Credit Rating Report (Surveillance Rating) :


Long Term

Short Term

Surveillance Rating 2008 (as Government Supported AAA Entity)

ST-1

Surveillance Rating 2008 (Stand alone Rating as BBB+ Commercial Bank)

ST-3

Surveillance Rating 2007

BBB

ST-3

Outlook

Positive

Date of Rating Declaration

15 November, 2009

AN OVERVIEW OF SBL., SAVAR BRANCH  Name of the Branch

: Savar

 Address  Branch Status

: cantonment Road,Ps:Savar 88-02-7708250 : Domestic

 Manager

: 01 (SEO)

 No. of Employee

: 35

CHAPTER-2 2. POLICIES 2.1 Introduction March 24, 2004, the Bangladesh Taka exchange rate was declared floating and the band of the central bank’s US Dollar buying selling rate were withdrawn. To adapt to the changed environment, many banks established dealing rooms and some centralized their foreign exchange and money market activities under a single functional area which is still in its rudimentary stage. But it needs to be said that Sonali Bank Limited showed its maturity in dealing with the matters of exchange rate and that’s why they haven’t incurred any loss through dealing. Whereas big names like Sonali Bank, AB Bank etc incurred a lot of loss. 2.2 Observations in Brief The following observations are made during the stay of twelve week internship period in the Dealing Room of Sonali Bank Limited:  SBL has a well equipped dealing room with Internet, Fax, Phone and all other necessary thing. It is access restricted area only the dealers and other related personnel enter into the room.


 Bangladesh Bank has advised the bank do tap the conversation of dealing – as it will prevent any mistake of rates, amount etc and it may provide hard evidence if necessary. But the conversations during dealing are not tapped. So the bank needs to take this matter into consideration.  Most of the time the deals are recorded immediately after they are completed. They are recorded both in the position blotter and deal slip.  All deals done by dealers are required to be processed by the treasury back-office for which they need to be informed of the details of the deals within a certain time. In this process dealers verbally inform to the treasury back-office within shortest possible time. Here the prescribed Time Stamp is not used. In Most of the time the timeline guided by Bangladesh Bank is not followed.  Bank has set counter party limit as asked by the Bangladesh Bank. This limit has set in the meeting of ALCO.  A stop loss limit for a product is generally a certain percentage of the organization’s prior year profit from that product. For Sonali Bank the limit is fifty percent, which is subject to rapid change.  Dealing room prepares the rate sheet. The current information is collected from the Reuter. Sonali Bank is a subscriber of Reuter. In the Reuter’s website they get the information of current rates of different currency in different banks of the world. With this context the rate committee matches the demand supply situation of the bank. Shortly this is the process of rate determination in SBL.  Judging of Rate Appropriateness is extensively done by the back office. Dealing Room prepares the rate sheet but they can only implement it after it is checked and passed by the back office. Even when any dealing is done back office sees whether the price is appropriate or not. And before giving any special price to any specific dealers’ proper permission is taken from authorized person.  In Sonali Bank trigger is set at 90 percent of Stop Loss limit. In case of profit trigger the limit is decided on the market situation.  Appropriateness of dealing is judged by both the back and mid office. Front office of dealing room conducts the dealing. Mid-office checks whether the deal is within the limit (daily dealing limit, counter party limit and stop loss order limit).Back office of dealing room usually makes the settlement.  Dealing room of Sonali bank Ltd. has specific limit for different currency. For example Two million is the daily limit for US dollar. This limit is judged by ALCO.  Dealing room tries to maintain a null outstanding limit everyday to avoid the risk of loss. If the outstanding limit stands in the profit side then the related dealer is advised to make a watch order to a counter party. The policy is to maintain a square position.  Treasury back office values all outstanding positions at the current rate to determine the current market values of these. In SBL the treasury back office gathers the market rates from independent source i.e. than dealers of the same organization, especially over telephone or internet.  After hours dealing is that which the dealers own trading room is closed. In our market the business hour is still 5 PM, any deals done by dealers after that time is considered as after hour’s deals. SBL does not trade after the banking hours.  A dealing transaction done by a dealer who is not physically located in the dealing premises, irrespective of the time of day is an off-premises deal. Of premises dealing is not practiced in Sonali Bank Ltd.


Now we will describe the observation made in Sonali Bank Ltd elaborately with critical evaluation of the matter, 2.3. Observations and Evaluation Dealing Room: Since the dealers have access to global live prices of various products through their various communication tools, their desks are access restricted. As a result, dealers are housed inside a covered room known as the “dealing room� where the access is generally restricted only to the dealers and the related personnel. In Sonali Bank Ltd. there is a separate unit in the sixth floor of the office is used as the dealing room where entry is restricted for other than related personnel. The dealing room is distinctively separated from the back office so that the dealer can do his job independently, without unnecessary intervention of back office. Taped Conversations: In SBL, the dealers conclude deals over the phone. This is because deals are done on the local market where dealers are mostly known to each other and they feel comfortable dealing by talking to other dealers over phone. In SBL the conversion with the dealers of other organization is not taped. So such deals over the phone do not have any hard evidence and in a fast dealing environment, there is risk of mistakes (of rates, amounts or value dates etc.). All telephonic conversations taking place in the dealing room are required to be taped. Taped conversations can assist in resolution of any disputes that may arise. Dealing over the mobile phones is restricted in SBL. Deal Recording: The job nature of a dealer is highly demanding and the environment of a dealing room is very active. In such an environment when a dealer continues to deal, his/ her focus remains on the market. As such there is a risk of a dealer completely forgetting about a deal or part of a deal or making mistake in recording that deal. To eliminate this risk, in Sonali bank Ltd. every dealer must record the deal immediately after it is concluded with the counterparty. The deal recording is done in two ways: Position Blotter: Immediately after a deal is done, the dealer records the deal on the position blotter and updates his position. It is of utmost importance to a dealer to remain aware of his/ her position at all times. This is required to capture any immediate opportunity or to be in a position to immediately react to any adverse situation. A sample blotter has been shown on annexure.. Deal Slip:, Record is also done on a slip or memo which is known as the deal slip or deal ticket. In SBL, the deal slips are electronic and are through inputs into their automated systems. Deal slip contains details such as, payment instruction, value date, currencies, amounts, deal rate etc. The deal slip is passed on to the treasury back-office at the earliest for their further processing of the deal. Ideally, all deal slips are pre-numbered for control reasons and the treasury back-office monitor for any breakage in sequence. Where pre-


numbered deal slips are in place, any cancelled deal slips must also be forwarded to treasury back-office for appropriate record keeping/ filling. Deal Delay: All deals done by dealers are processed by the treasury back-office for which they need to be informed of the details of the deals within a certain time. In this process dealers occasionally raise deal tickets that need to be sent across to the treasury back-office within shortest possible time. This is not the right way to minimize he risk associated with deal delay. The timeliness of raising deal slips/ inputting into the automated system as well as passing them on to the back-office is not only sound business practice but also critical for monitoring of credit risk, price risk and regulatory compliance. The following table provides guidelines of deal capture standards: Product

Deal-slip raising/ System Input Deal-slip to reach Time back-office

Spot FX

Within 10 minutes

Within 25 minutes

Forward FX

Within 10 minutes

Within 25 minutes

FX Swaps

Within 15 minutes

Within 30 Minutes

Call/ Notice Money

Within 10 minutes

Within 25 minutes

Money Market Term

Within 10 minutes

Within 25 minutes

Foreign Currency Deposits

Within 10 minutes

Within 25 minutes

Treasury Bills Purchase

By 10:30 a.m. on payment day

Within 30 minutes

Repo

By 12:30 p.m.

Within 30 minutes

Reverse Repo

By 12:00 p.m.

Within 30 minutes

The guidelines as per the above table cannot be maintained properly because the deal ticket is not used regularly. So the back office of the dealing house finds it difficult to judge the proper time. Counterparty Limits: The issue of counterparty limits arises from the risk that a customer with whom an organization had a reciprocal agreement defaults. Credit risk is the risk that the counterparty to a financial transaction - here a foreign exchange contract, may become unable to perform as per its obligation. The extent of risk depends on whether the other party's inability to pay is established before the value date or is on the same value date of the foreign exchange


contract. In Sonali Bank counter party limit is determined by the board of directors. In determining the limit board considers the creditworthiness and relationship of counter party. If the limit can not judge properly bank will have to face following risks, Settlement risk: The risk on the settlement day that one counterparty pays funds or delivers a security to fulfill its side of the contractual agreement, but the other counterparty fails on its side to pay or deliver. This occurs when items of agreed upon original equal values are not simultaneously exchanged between counterparties; and/or when an organization’s funds are released without knowledge that the counter value items have been received. Typically the duration is overnight/ over weekend, or in some cases even longer i.e., until the organization receives the confirmation of receipt of funds. The risk is that the organization delivers but does not receive delivery. In this situation 100% of the principal amount is at risk. The risk may be greater than 100% if in addition there was an adverse price fluctuation between the contract price and the market price. Pre-settlement risk: The risk that a client defaults on its agreement with the organization before the settlement day. Whilst the organization has not paid away any funds, it still has to replace the contract at the current market rates, which might have moved against it. In this case the organization is exposed to possible adverse price fluctuations between the contract price and the market price on the date of default or final liquidation. The organization’s loss would then be the difference between the original contract price and the current market price on the date of default. All banking organizations must have appropriate counterparty limits in place for their treasuries. The limit structure will depend on each organization’s credit risk appetite based on their credit risk policies as well as target market criteria. All such credit risk limits should be set by the organization’s credit risk approving unit, which is independent of the treasury dealing function. In judging the credit worthiness of the counterparty SBL uses the credit reports of D&B and other authentic sources. Sometimes the rating of the counterparty from the Bankers almanac is also used. Stop Loss Orders: A stop loss limit for a product is generally a certain percentage of the organization’s prior year profit from that product. For example if an organization’s FX trading revenue for the year 2002 was USD A, the management/ market risk management unit may decide to accept a maximum of 10% loss of that during the current year. In that case the stop loss limit for that organization for 2003 would be A X 10%. In managing the business within the stop loss limit, treasuries running overnight positions (within their overnight limits) must leave appropriate overnight watch orders. In Sonali Bank Ltd. the limit is fifteen percent. So this year whenever the amount of loss reaches to 15% of the profit of the year 2003, the stop loss order will come. So Sonali Bank is conservative in the trading. As a representative of third generation bank SBL did not get the chance to take part in big deals in the previous years. So the amount of the profit is not significant for the foreign exchange market. Fifteen percent of this profit is very much insignificant in the


market. This conservatism in stop loss order limit prevents SBL to operate in the foreign exchange market with its full capacity. Triggers: A trigger is a level of a position at which an organization decides that the management should be made aware of. This may be in terms of a market value of a position or an unusual trading volume etc. This is a predetermined level given by the management. In SBL ALCO determines the trigger. When a trigger is hit, the management needs to be informed of the same. Upon advised of a trigger, the management usually decides on closer monitoring of the particular situation. In cases of a loss trigger, the amount is generally set at a lower level than the stop loss limit (at which the position has to be unwinded). In Sonali Bank trigger is set at 90 percent of Stop Loss limit. When the loss becomes 90 percent of stop loss limit then the management is informed to take decision. In case of profit trigger the limit is decided on the market situation. Appropriateness of Dealing: While transacting with a client, a dealer of SBL generally aware of the counterparty’s dealing style & product mix and assess (prior to concluding a deal) whether the customer is dealing in an “appropriate” manner. A dealer has the responsibility to ensure that the volumes of activity and types of products transacted by a client are appropriate for that particular client and the risks of these transactions are clearly understood by them. Prior to conclusion of a deal, a dealer needs to assure that the counterparty is authorized to enter into such transaction (both from counterparty’s internal and regulatory perspective). Here dealer is working as the front office of the dealing room. Appropriateness of dealing is judged by both the back and mid office. Front office of dealing room conducts the dealing. Mid-office checks whether the deal is within the limit (daily dealing limit, counter party limit and stop loss order limit).Back office of dealing room usually makes the settlement. Rate Sheet Production: Every day SBL Dealing Room has to produces rate sheet with the following features: a. Rate for Import bill payment. b. Rate for export bill negotiation for sight/usance. c. Rate for inward and outward remittance. d. Rate for TC and Cash note. e. Indicative rate for internal transaction This rate sheet is produced in those currencies for which SBL maintains Nostro a/c. i.e. USD, EURO, GBP, JPY, SGD. USD/BDT rate is to calculate on the basis of prevailing free floating rate in the inter-bank. On the other hand cross rate of other 4 (four) currencies is to obtained from Reuters Money 2009 and published in the rate sheet after maintaining sufficient margin. Through this rate sheet treasury maintains daily profitability with our branches and subsequent customers there on. For Corporate Customers treasury may customize this rate but keeping in view the profitability of the bank. Apart from exchange rates the following foreign currency interest rate is to be incorporated. a. LIBOR for US Dollar in different tenor. b. NFCD/ RFCD rates for USD deposit.


Rate Appropriateness: This exercise is carried out by the treasury back-office to check for whether all deals have been dealt at market rates. Any deals done at off-market rates must be raised to the respective dealer for a satisfactory explanation bringing this to the notice of the chief dealer. In case of a non-acceptable justification provided by the dealer, the organization may decide to engage in further investigation. This monitoring process is placed to guard against application of any inappropriate rates. Treasury front office primarily uses Reuters for pricing of its products and treasury operations also collect most of the data for their independent verification process from the same source. Following is a guide that is followed in the process of independent verification of prices for various products/ instruments: Instrument

Source

Frequency of Update

Spot FX

Reuters / National Newspapers

Once Daily Pages: AFX=, FXXZ, BD(F9)

Forward FX/ Reuters Swaps

Once Daily Pages: AFX=, FXXZ, BD(F9), LIBOR01, GBPF=, EURF=, JPYF=, CHFF= etc.

Cross Currency

Reuters

Once Daily Pages: FX=

Foreign Currency Deposits

Reuters

At Booking Pages: DEPO, GBPF=, EURF=, JPYF=, CHFF= etc.

Money

National Newspapers

Page: BD (F9)

Treasury Bills Purchase

Note

In absence of an interbank USD/BDT forward market, banks should use spreadsheets to determine tenor-wise forward premiums that should be used for the verification of USD/BDT forward rates.

Independent price verification can not be performed for this since


the same is purchased from Central Bank only on primary auctions. On bids from different banks, central bank decides the cut-off point yield. There is no secondary market, at the moment and when a secondary market develops, this should be reviewed. Repo

Reuters/ National Newspapers

Once Daily on days transactions take place Page: BD (F9)

repo

Reverse Repo Reuters/ National Newspapers LCY Term MM

Once Daily on days transactions take place Page: BD (F9)

repo In absence of an interbank term money market, this can not be judged against a market information. However, for clarity, all term borrowings/ placements should have sign-off from one level higher authority from the dealer doing the transaction.

For the information to determine the rate related with foreign exchange dealing Reuter is the main source. SBL is a subscriber of Reuter; the dealing room has the opportunity to visit the pay site of Reuter. The rate band for each instrument is fixed depending on the market liquidity and volatility for each of them. An indication of the rate bands that is used by Treasury Operations of SBL for their independent price verification process is shown in the following table. Here we see that for spot rate both in Inter-bank and customer the band is wider than in the case of forward rate and FCY borrowing. In forward rate there is more risk associated because bank has to judge future trend for this rate determination. For call money bank has to consider the present situation, so bank has the opportunity to make the band little wider i.e. 1% of the mid-rate of the market. Instrument

Rate Band


Spot Inter-bank

For currencies other than BDT, for contracts with USD FX on one side, a 1% on each sides of the mid market rate can be taken as guidance. For BDT it can be within 5 paisa on either side of the base rate.

Spot Customer

For Spot Customer FX, the band can be 2% on either FX side.

Forward

25 pips on either side of the base swap rate for currencies inter-bank FXagainst USD other than JPY. 25 bps on either side of the Swaps base swap rate for JPY.

FCY Borrowing

25 bps on either side of the base rate (quoted on Reuters Lending for the particular tenor) for on and off-shore deals 1% on either side of mid rate of range reported on Reuters BD page/ newspaper

Call/Notice Money

Treasury of SBL always tries to maintain the rate according to the above table. But in operation some deviation is occurred for unavoidable market forces. SBL treasuries publish a rate sheet for retail FX transactions for various types of customer related transactions in various currencies. Buy and sell rates for all currencies for all types of transactions that are covered in the rate sheet is based on sufficient spreads taken from the bid/ offer of central bank's quote on USD/BDT for the day as well as spreads on cross currencies available from Reuters. It is primarily designed to cover retail and small corporate FX transactions. Correctness in preparation of rates for these transactions must be covered through maker-checker control (as well as the automated banking system through defined bands in the system). However, for certain customers, transaction rates might differ from the published rates. In these instances there should either be standing instruction issued by the head of treasury or the relevant rate exception signed by treasury personnel. On customer FX, the rate bands are higher to accommodate higher spreads. However, since all customer transactions are based on a principle of a positive spread, negative spreads for such transactions must be highlighted as exceptions for explanations and approvals. Deals Outstanding Limit: . In SBL Dealing room tries to maintain a null outstanding limit everyday to avoid the risk of loss. If the outstanding limit stands in the profit side then the related dealer is advised to make a watch order to a counter party. Here the watch order is given to that counter party who is in his banking hour. So the party can affect the deal within the operating time. This policy minimizes the risk of the open position.


It is a good practice to monitor the total deals outstanding of the treasury. This exercise is carried out by the treasury back office to check against any unusual volumes of activity. For example, in a fast dealing environment, a dealer may make a mistake and execute a deal with an additional zero that would make the dealt amount much higher than intended. If a “deal outstanding” monitoring (by an independent unit) process is in place, this would be highlighted and brought to the attention of the senior management for any appropriate action. Daily Treasury Risk Report: The treasury back-office summarizes all daily positions particularly the end-of-day positions on a report format for the information of the senior management. Such report is ideally contain information about outstanding open position against limit, different currency-wise outstanding exchange position (against limits if applicable), outstanding foreign exchange forward gaps in different tenors, tenor-wise MCO report, interest rate exposures of the balance sheet, counterparty credit limits usage, day’s P&L against trigger & stop loss limit etc. Code of Conduct: Due to the special nature of job that dealers engage in, they are expected to act in a professional and ethical manner.] Conversation Language: All dealing related conversations taking place in the treasury is in an acceptable language for operational clarity. To elaborate, all conversations on the Reuters Dealing System is in English and all conversions over telephone is restricted to either in Bengali or in English. Mandatory Leave: The dealing functions are extremely sensitive involving wholesale and large amounts with exposures to adverse market movements. There is also risk of mistakes not being unearthed. As a result, for a particular dealer’s functions to be run by a different dealer, all dealers are required to be away from their desks for a certain period of time at one stretch during a year. During this period, dealers are not expected to be in contact with their colleagues in the treasury area. Typically, this period is defined as a continuous two weeks period. In Sonali Bank Ltd. the provision of mandatory leave has started from this year. Position Reconciliation: All dealers’ positions are reconciled with the positions provided by the treasury back-office. This must be done daily prior to commencement of the day’s business. Unreconciled positions may lead to real differences in actual positions exposing the organization to adverse market changes and real losses. In Sonali bank treasury back office reconciled position daily. NOSTRO Account Reconciliation: Banks maintain various nostro accounts in order to conduct operations in different currencies including BDT. The in charge of the international Division set limits for handling nostro account transactions that include time limits for the settlements of transactions over the


various nostro accounts and the time and amount limits for items that require immediate investigation after receipt of the account statements. In defining these limits, consideration is given to the transit and processing times of the various types of transactions. The time and amounts limits, if exceeded, require referral to the in charge of International Division for appropriate action. Persons reconciling nostro accounts is independent of originating, responding to, authorizing or booking transactions and must not reconcile the same accounts for a continuous period of more than twelve months. However, after the lapse of at least the next monthly reconcilement process immediately following the twelve month period, these persons can be reassigned the same duties. The process of matching open items must be performed each time statements are received and must ensure a true match (e.g. dates, amounts and transaction identity). All matches must be cross-referenced between “our accounts” and the statement. Entries that make up a partial or incomplete match are suitably cross-recorded so that a clear audit trail is provided. The current “our account” records and statements are to be maintained under control and custody of persons in charge of reconcilements. As frequently as deemed necessary but not less than once a month, a “reconcilement balancing report” is prepared for each “our account” which must include the “our account” balance, the related statement balance and a listing of all open items (all differences and unprocessed items). Tracers are sent if the open item exceeds the established time or amount limits. The operations manager review all reconcilement balancing reports to evaluate the status and progress of eliminating open items and to ensure that investigation and follow-up efforts are satisfactory and tracers are sent on a timely basis. The operations manager establishes limits for monthly accrual of interests on overdrafts in “our accounts” maintained with other branches and correspondents. Overdraft interest for “our accounts” must be calculated for each day the branch is in overdraft in accordance with its records. The operations manager sets the time and amount limits for liquidation of open items or differences found unreconcilable. These items are investigated as far as is practicable and if they are found unreconcilable, the operations manager may authorize liquidation through appropriate entries as established as per their accounting policies. However, the items in question must be amply identified and corrective steps taken to prevent recurring differences. Quarterly, a comprehensive review of all “our accounts” is made by an officer independent of transaction processing and authorization functions to ensure that each account continues to be operated with a valid business purpose and that reconciliation and other controls continue to be in place and are effective. The following table shows the maximum time limit after which unmatched items is referred to the operations manager: Type of Transaction L/C payments

Transit Time 3 days, ACU - 7 days


Foreign exchange settlements TC encashments Outward remittances Draft payments ACU cover funds sent through Bangladesh Bank Credits to our accounts with insufficient details Correspondent bank charges recoverable from our customers or otherwise Any other credits to our accounts, where we have not passed corresponding debit entry Any other transactions where we have debited, but they do not credit Any other transactions where they have debited, but we do not credit Any other transactions where we have credited, but they do not debit

Nil. Immediately notify respective department if settlement does not occur on value date 21 days 3 days 30 days 7 days 20 days 30 days 7 days 7 days 7 days 4 7 days

After-hours Dealing: After-hours dealing is that which initiated when the dealer’s own trading room is closed. For specific business reasons, an organization may decide to allow its treasury to engage in afterhours dealing. In such cases the organization must have properly laid down procedures detailing the extent to which they want to take risk during after-hours and which dealers to have dealing authority and upto what limits they can deal during after-hours. For example, if in our market the business hour is till 5 PM, any deals done by dealers after that time would be considered as after-hour deals. An organization must also have detailed laid down procedures for the accounting of the afterhour deals bearing in mind that during these times there would not be any treasury backoffice staff available. Sonali Bank Ltd. does not trade after the banking hours. It is because SBL does not have adequate work force and logistic support to continue the business after the office hours. As we are few hours ahead of USA or any other developed western country the bank missed the opportunity to trade with the large and famous dealer of the world. Off-premises Dealing: A dealing transaction done by a dealer who is not physically located in the dealing premises (irrespective of the time of day) is an off-premises deal. An off-premises deal needs to be treated separately from a deal done from within the dealing room due to it being done using communication tools that are not as special as those of the dealing room. For example, an offpremises deal done on the phone is generally not recorded and thus there is no record in case of any future dispute. Also, deals done from within the dealing room get recorded


immediately updating positions and allowing the treasury back-office to take immediate actions (confirmation, settlement etc.), which is not the case for off premises deals. As such, an organization must have detailed laid down procedures for the off-premises deals describing how these deals would be accounted for with least possible delay. Typically, organizations would designate particular dealer(s) with the authority for offpremises dealings in case they decide to carry out such activity for some specific business reason/ justification. Sonali Bank Ltd. does not trade after the banking hours. It is because SBL does not have adequate work force and logistic support to continue the business after the office hours. Mark-to-Market: This is a process through which the treasury back-office values all outstanding positions at the current market rate to determine the current market value of these. This exercise also provides the profitability of the outstanding contracts. In SBL the treasury back office gathers the market rates from an independent source i.e. other than dealers of the same organization which is required to avoid any conflict of interest. Valuations: The process of revaluing all positions at a pre-specified interval is known as valuation. Though this exercise, an organization determines that if they are to liquidate all the positions at a given time, at what profit or loss they would be able to do so. This function is carried out by the treasury back-office of SBL by gathering revaluation rates. Ideally, the treasury back-office should gather such rates from sources other than from the dealers of the same organization to avoid any conflict of interest. Dealers’ are required to have their own P&L estimate which must be tallied with the ones provided by the treasury back-office. Any unacceptable difference between these two must be reconciled to an acceptable level. Internal Audit: Considering the complexities of the foreign exchange business, a process for an internal audit has widely been accepted as a check point to review the adequacy of the key control issues. This function can include checking for adherence to various limits, compliance requirements, statutory management etc. In addition to regular audits at specified intervals, a concurrent audit process put in place to ensure the treasury’s functioning in an appropriate manner on a day-to-day basis in SBL. 2.4 SWOT ANALYSIS: Sonali Bank Ltd. is operating in foreign exchange market from the very beginning of its inception. In operating the bank has developed individual policy based on its strength and


weakness. I try to point out Sonali Bank Ltd.’s internal strengths and weaknesses, and external opportunities and threats as I have explored in foreign exchange trading, Strength  Sonali Bank has a strong foreign exchange reserve with compare to other private bank. This strength comes from the export business of the bank. In 2003, total export made through SBL is TK.15, 250.60 million which is 75% of the total import. In that time the total export is only 67% of the total import. So from its sound export business SBL generates a well developed foreign exchange reserve, which is crucial in dealing foreign exchange.  The Bank mobilized total deposits of Tk.16, 287.46 million as of December 31, 2003 as compared to Tk. 15,150.42 million in 2002. Competitive interest rates, deposit mobilization efforts of the Bank and confidence reposed by the customers in the Bank contributed to the notable growth in deposits. So the bank has the liquidity which is important in trading both in money market and foreign exchange market.  The bank has a well equipped dealing house which is operated by some well groomed talented and trained officers and executives. They have excellent academic and professional experience and fine tuned by the directions of the management.  Beside Bangladesh Bank manual the Bank has developed its own guideline for foreign exchange risk management. So the treasury department is always prepared for any kind of situation.  Bank has a sound relationship with other financial institution both in the inside and outside the country. The credit worthiness of the bank is quite good. In the bank almanac SBL has the rating of 2160 which is quite good. This sound image contributes in getting favorable limit from other bank. Weakness  In operation in the foreign exchange market bank is conservative. So the bank cannot increase its business with its full capacity. As a representative of third generation bank SBL did not get the chance to take part in big deals in the previous years. So the amount of the profit is not significant for the foreign exchange market. Fifteen percent of this profit is very much insignificant in the market.  In operation bank has some flaws. For example Dealers do not use time stamp or deal ticket , so the back office find it difficult to settle the deal in proper time. Opportunity  Government Support: Government of Bangladesh has rendered its full support to the banking sector for a sound financial status of the country, as it has become one of the vital sources of employment in the country now. Such government concern will facilitate and support the long-term vision of Sonali Bank Ltd.  For its extensive foreign trade the bank able to make a special relationship with many foreign bank. Sound relationship with the foreign bank will open new area of the dealing business. Threats


 Poor Telecommunication Infrastructure of the country is a threat in the business of foreign exchange. The world is advancing e-technology very rapidly. Though Sonali Bank Ltd. has taken effort to join the stream of information technology, it is not possible to complete the mission due to the poor technological infrastructure of our country.  Frequent Currency Devaluation is another threat. Frequent devaluation of Taka and exchange rate fluctuations and particularly South-East Asian currency crisis adversely affects the business globally. From the observation we see that the bank follow the guide line of Bangladesh bank in trading in the foreign exchange market. Besides SBL has its own guide line formulated by the Asset Liability Committee (ALCO). Any dispute arise in the deal time is settled by the guidelines of Bangladesh Bank and ALCO. Board of Directors determine the daily deal limit, stop-loss order limit and counter party limit with the help of the management. Treasury department can be divided in three parts, front office, mid office and back office. Front make the deal and determine the rate. Back office makes the settlement and mid office supervise the job of both front and back office. In observation we see that Sonali Bank has a suitable position for its foreign exchange reserve, liquidity position and relationship with financial institution. But the bank can not operate with its full capacity for its conservative nature. CHAPTER- 3 Sonali Bank ltd Cash Flow Statement July-June’ 09

July-

July - June '07

June’ 08 Tak a Cash Flows from Operating Activities Interest receipts 4,722,271,139 Interest payments (2,855,867,955) Dividend receipts 95,967,212 Fee and commission receipts 763,609,770 Recoveries on loans previously 27,751,374 written off Payments to employees (597,374,920) Payments to suppliers (76,205,068) Income taxes paid (1,184,164,366) Receipts from other operating 2,902,947,746 activities Payments for other operating (578,255,851) activities Operating profit before 3,220,679,082 changes in operating assets & liabilities Increase/decrease in operating assets and liabilities Loans and advances to (6,726,291,117) customers

Taka

july - June '06 Taka

Taka

4,344,556,503 (3,242,768,477) 15,732,850 973,308,979 41,921,228

2,386,325,527 (1,449,946,458) 88,851,722 338,361,691 14,835,218

2,210,737,918 (1,543,378,261) 12,830,850 625,420,721 26,934,025

(540,049,570) (51,158,207) (821,687,185) 1,467,317,365

(300,383,284) (41,237,229) (946,337,465) 2,056,027,033

(299,478,615) (30,617,402) (694,181,641) 813,660,334

(388,765,306)

(314,163,957)

(199,105,550)

1,798,408,180

1,832,332,797

922,822,379

(6,113,498,152)

(4,826,232,678)

(1,960,145,085)


Other assets (3,838,862,791) 337,301,145 (2,077,363,457) 537,662,465 Deposits from other banks 208,376,472 (638,646,441) 275,542,472 (2,010,511,441) Deposits from customers 2,737,575,467 7,555,691,026 1,599,035,998 2,801,691,050 Trading liabilities (short-term 4,964,327,417 1,752,673,992 4,519,113,144 2,616,290,671 borrowings) Other liabilities 1,165,510,275 150,204,029 (860,274,558) (359,286,323) (1,489,364,276) 3,043,725,599 (1,370,179,079) 1,625,701,337 Net cash flow from operating 1,731,314,805 4,842,133,779 462,153,718 2,548,523,716 activities (a) Cash Flows from Investing Activities (Purchase)/ sale of government (1,610,983,965) (1,254,281,471) (1,189,876,938) (833,500,343) securities (Purchase)/ sale of trading 2,517,069,033 (1,703,595,618) 3,228,528,956 (1,080,060,875) securities, shares, bonds, etc. (Purchase)/ sale of property, (517,244,324) (102,983,448) (451,066,764) (12,212,151) plant and equipment Net cash used in investing 388,840,743 (3,060,860,537) 1,587,585,253 (1,925,773,369) activities (b) Cash Flows from Financing Activities Increase/(decrease) of long-term (853,504,152) 707,604 (853,504,152) borrowings Dividend paid Net cash (used in)/flow from (853,504,152) 707,604 (853,504,152) financing activities (c) Net increase in cash (a+b+c) 2,120,155,549 927,769,090 2,050,446,575 (230,753,805) Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at 9,451,710,422 7,590,716,540 9,521,419,396 8,749,239,435 beginning of the period Cash and cash equivalents at 11,571,865,971 8,518,485,630 11,571,865,971 8,518,485,630 end of the Period (*) (*) Cash and cash equivalents: Cash 546,492,547 500,460,958 546,492,547 500,460,958 Prize bonds 2,946,400 3,764,300 2,946,400 3,764,300 Money at call and on short 489,616,000 940,129,849 489,616,000 940,129,849 notice Balance with Bangladesh Bank 5,961,075,285 4,127,752,318 5,961,075,285 4,127,752,318 and its agent bank(s) Balance with other banks and 4,571,735,739 2,946,378,205 4,571,735,739 2,946,378,205 financial institutions 11,571,865 8,518,485,630 11,571,865,971 8,518,485,630 ,971

Analysis: From the cash flow statement of sonali bank ltd we have seen that total operating Activities has increased from 922,822,379 in 2006 to 3,220,679,082 in 2009 (71.35%). We have also


seen that Net cash flow from operating activities also increased from 2,548,523,716 in 2006 to 1,731,314,805 in 2009(32.06%). Also we have seen that Net cash used in investing activities increased from (1,925,773,369) in 2006 to 388,840,743 in 2009(120.2%). From the above statement found that Net cash (used in)/flow from financing activities from (853,504,152) in 2006 and there is no financing activities in 2009. Cash and cash equivalents at end of the Period from 8,518,485,630 2006 to 11,571,865,971 in 2009 (35.85%). Cash and cash equivalents at the end of the period increased from 8,518,485,630 in 2006 to 11,571,865,971 in 2009 (35.84%). CHAPTER-4 4.0 FOREIGN EXCHANGE MARKET 4.1. Introduction On March 24, 1994 the Bangladesh Taka was declared convertible for current account transactions in terms of Article VIII of the IMF Articles of Agreement and the band of the central bank’s US Dollar buying selling rate were withdrawn. The declaration symbolized a turning point in the country’s exchange management and exchange rate systems. The period preceding this declaration saw an intensification of reforms undertaken by Bangladesh Bank to ease controls on foreign payments and exchange rate arrangements. . The Bangladesh Taka, which is the domestic currency of Bangladesh and the country’s foreign exchange, had been strictly regulated until the early 1990s. At that time, Bangladesh Bank used to regulate the local currency’s parity against the international currencies. The cross border movement of currencies was also regulated. Bangladesh Bank used to publish a daily foreign exchange rate sheet that had two sets of rates; one being the rates for commercial banks to transact with their customers and the other being rates for the commercial banks to transact with Bangladesh Bank. The year of 1994 saw a significant shift in the country’s foreign exchange regulatory policies and the Bangladesh Taka (BDT) was declared convertible in the current account. Most restrictions related to current account activities were relaxed where commercial banks were given the responsibility to ascertain genuineness of the transactions and the central bank’s prior approval requirements in these regards were withdrawn. The responsibility of exchange rate quotation was left to the commercial banks where Bangladesh Bank only committed support to the commercial banks to plug any net foreign currency gaps in the market at their pre-specified buying and selling rates. Now Bangladesh Bank is given the freedom to the commercial market to decide their exchange rate. As the Foreign Exchange Rate is now floating total market has changed. To adapt to the changed environment, many banks established dealing rooms and some centralized their foreign exchange and money market activities under a single functional area which is still in its rudimentary stage. This report’s purpose is to see how well prepared Sonali Bank Limited is to adapt to this changed situation.


4.2. Foreign Exchange Market The foreign exchange market has played a vital role in the last decade or so in guiding the purchase and sale of goods, services and raw materials globally. The market directly affects each country’s bond, equities, private property, manufacturing and all assets that are available to foreign investors. The market is a stabilizing factor in the world system of monetary exchange and was created not by design but necessity. There is in excess of one trillion dollars of average daily turnover in the global foreign exchange market. Fifty one percent is in spot transactions followed by thirty two percent in currency swaps and forward outright transaction represents another five percent of the daily turnover. Foreign exchange rates play a major role in the protection of balance of payments. When the balance of payments deficit of any country is sufficiently wide and chronic, a rationing of foreign exchange among various competing demands is one of the measures to correct the imbalances. Flight of the capital from the country can be curbed by foreign exchange control. Foreign exchange rates can also be used to protect home industry. If certain industries are facing stiff competition from similar industries abroad, the government may desire to protect the home industry. Imports of the commodities produced by foreign industries may be restricted so that the local industries are allowed to grow. This paves the way for better utilization of the country and also conserves its foreign exchange reserves. Foreign exchange rates also play a major role in determining who finances government deficits, which buys equities in companies and literally effects and influences the economic scenario of every nation to cope with the foreign exchange risk in an open market economy. The market has its own momentum and therefore it is crucial to follow a universal time tested policy to tackle the forces behind the free market system with minimal risk involvement. 4.3 Foreign Exchange Risk With the demise of the foreign currency exchange rates during the 1970’s and after the collapse of the Bretton Woods Agreement, the world economy has undergone drastic changes. This has signaled an increase in currency market volatility and trading opportunity. In simple words, the risk of suffering losses because of changes in exchange rates are known as Foreign Exchange Risk. More precisely, the risk that a long or short position in a foreign currency might have to be closed out at a loss due to an adverse movement in exchange rates is known as Foreign Exchange Risk. Another type of definition saysThe risk that the amount of a commitment in a foreign exchange currency will vary between the time the commitment was entered into and the date at which the commitment is to be settled or brought to account in the local currency is the foreign exchange risk.


The foreign exchange market has witnessed frequent bouts of excessive volatility. At times it has seemed too many businesses that they have been helpless in the fight to control the associated risks which arise when exporting or importing goods and services. Future cash flow projections, profitability, competitiveness and the ability to service debt can all be impacted by foreign exchange volatility when paying or receiving foreign currency. Exchange rates movements generate business risks of many types, often complex and sometimes hidden. All businesses trading overseas and increasingly in domestic markets will have some exposure to exchange rate movements either directly or indirectly. Whilst exposure to exchange rate movements may be an inevitable part of everyday activity, the risk arising from such exposure can be controlled. 4.4. Risk Involved in Foreign Exchange Operation: All financial activities involve a certain degree of risk and particularly, the financial institutions of the modern era are engaged in various complex financial activities requiring them to put proper attention to every detail. The success of the trading business depends on the ability to manage effectively the various risks encountered in the trading environment, and the organization’s policies and processes require development over time to ensure that this is done in a controlled way. The key risk areas of a financial institution can be broadly categorized into: - Credit risk - Market risk and - Operational risk In view of the significance of the market risk and in order to aggregate all such risks at a single department and to bring expertise in such functions, the concept of TREASURY has evolved. Today’s financial institutions engage in activities starting from import, export and remittance to complex derivatives involving basic foreign exchange and money market to complex structured products. All these require high degree of expertise that is difficult to achieve in the transaction originating departments and as such the expertise is housed in a separate department i.e. treasury. The main risks treasuries have to manage in the financial markets are credit risk i.e. the settlement of transactions and market risk, which includes liquidity risk and price risk. Some of the risks that are to be monitored and managed by a treasury can be defined as follows: 4.4.1.

Credit risk

Credit Risk arises from an obligor’s failure to perform as agreed. Interest rate risk - Arises from movements in interest rates in the market. The interest rate exposure is created from the mismatches in the interest re-pricing tenors of assets and liabilities of an organization. This risk is generally measured through Earnings at Risk


Measures (EAR) i.e. the potential earning impact on the balance sheet due to interest rate shifts in the market (detailed in annexure – I). Liquidity risk - Arises from an organization’s inability to meet its obligations when due. The liquidity exposure is created by the maturity mismatches of the assets and liabilities of the organization. This risk is measured through tenor wise cumulative gaps. Price risk - Arises from changes in the value of trading positions in the interest rate, foreign exchange, equity and commodities markets. This arises due to changes in the various market rates and/ or market factors. Compliance risk - Arises from violations of or non-conformance with laws, rules, regulations, prescribed practices, or ethical standards. Strategic risk - Arises from adverse business decisions or improper implementation of them. Reputation risk or franchise risk - Arises from negative public opinion. 4.4.2. Market Risk Market risk is defined as the potential change in the current economic value of a position (i.e., its market value) due to changes in the associated underlying market risk factors. Trading positions are subject to mark-to-market accounting, i.e., positions are revalued based on current market values and, for on-balance sheet positions, reflected as such on the balance sheet; the impact of realized and unrealized gains and losses is included in the income statement. Market Factors: A market factor is defined as a variable (i.e., a market price or rate, such as a spot FX rate or an interest rate) that can impact the economic valuation of a contractual position. All relevant market factors must be identified and taken into consideration in the establishment of the independent market risk limit frameworks. They also must be specified at a sufficient level of detail so that distinct types of market risks to which a risk-taking unit is exposed are separately identified. It is a part of the market risk management activity to identify and specify all relevant market factors for each risk-taking unit and to take them into consideration in the establishment of the independent market risk limit frameworks. It is the responsibility of the trading units to notify the market risk management of any new activities that may give rise to market factors not previously identified or defined. 4.4.3. Operational Risk: Operational Risk arises from the day to day operations. The foreign exchange market directly affects each country’s bond, equities, private property, manufacturing and all assets that are available to foreign investors. Foreign exchange risk is the risk that the amount of a commitment in a foreign exchange currency will vary between the time the commitment was entered into and the date at which the commitment is to be settled or brought to account in the local currency. The success of the trading business depends on the ability to manage effectively the various risks encountered in the trading environment, and the organization’s policies and processes require development over time to ensure that this is done in a controlled way.


The key risk areas of a financial institution can be broadly categorized into: Credit risk, Market risk and Operational risk. In view of the significance of the market risk and in order to aggregate all such risks at a single department and to bring expertise in such functions, the concept of Treasury has evolved. In the following Chapter we will about the Bangladesh scenario and factors affecting the foreign exchange market in Bangladesh. CHAPTER-5 5. Techniques & strategy used in Foreign Exchange Risk Management : 5.1 Introduction March 24, 2004, the Bangladesh Taka exchange rate was declared floating and the band of the central bank’s US Dollar buying selling rate were withdrawn. To adapt to the changed environment, many banks established dealing rooms and some centralized their foreign exchange and money market activities under a single functional area which is still in its rudimentary stage. But it needs to be said that Sonali Bank Limited showed its maturity in dealing with the matters of exchange rate and that’s why they haven’t incurred any loss through dealing. Whereas big names like Sonali Bank, AB Bank etc incurred a lot of loss. 5.2 Observations in Brief The following observations are made during the stay of twelve week internship period in the Dealing Room of Sonali Bank Limited:  SBL has a well equipped dealing room with Internet, Fax, Phone and all other necessary thing. It is access restricted area only the dealers and other related personnel enter into the room.  Bangladesh Bank has advised the bank do tap the conversation of dealing – as it will prevent any mistake of rates, amount etc and it may provide hard evidence if necessary. But the conversations during dealing are not tapped. So the bank needs to take this matter into consideration.  Most of the time the deals are recorded immediately after they are completed. They are recorded both in the position blotter and deal slip.  All deals done by dealers are required to be processed by the treasury back-office for which they need to be informed of the details of the deals within a certain time. In this process dealers verbally inform to the treasury back-office within shortest possible time. Here the prescribed Time Stamp is not used. In Most of the time the timeline guided by Bangladesh Bank is not followed.  Bank has set counter party limit as asked by the Bangladesh Bank. This limit has set in the meeting of ALCO.  A stop loss limit for a product is generally a certain percentage of the organization’s prior year profit from that product. For Sonali Bank the limit is fifty percent, which is subject to rapid change.  Dealing room prepares the rate sheet. The current information is collected from the Reuter. Sonali Bank is a subscriber of Reuter. In the Reuter’s website they get the information of current rates of different currency in different banks of the world. With


 

  

 

this context the rate committee matches the demand supply situation of the bank. Shortly this is the process of rate determination in SBL. Judging of Rate Appropriateness is extensively done by the back office. Dealing Room prepares the rate sheet but they can only implement it after it is checked and passed by the back office. Even when any dealing is done back office sees whether the price is appropriate or not. And before giving any special price to any specific dealers’ proper permission is taken from authorized person. In Sonali Bank trigger is set at 90 percent of Stop Loss limit. In case of profit trigger the limit is decided on the market situation. Appropriateness of dealing is judged by both the back and mid office. Front office of dealing room conducts the dealing. Mid-office checks whether the deal is within the limit (daily dealing limit, counter party limit and stop loss order limit).Back office of dealing room usually makes the settlement. Dealing room of Sonali bank Ltd. has specific limit for different currency. For example Two million is the daily limit for US dollar. This limit is judged by ALCO. Dealing room tries to maintain a null outstanding limit everyday to avoid the risk of loss. If the outstanding limit stands in the profit side then the related dealer is advised to make a watch order to a counter party. The policy is to maintain a square position. Treasury back office values all outstanding positions at the current rate to determine the current market values of these. In SBL the treasury back office gathers the market rates from independent source i.e. than dealers of the same organization, especially over telephone or internet. After hours dealing is that which the dealers own trading room is closed. In our market the business hour is still 5 PM, any deals done by dealers after that time is considered as after hour’s deals. SBL does not trade after the banking hours. A dealing transaction done by a dealer who is not physically located in the dealing premises, irrespective of the time of day is an off-premises deal. Of premises dealing is not practiced in Sonali Bank Ltd.

Now we will describe the observation made in Sonali Bank Ltd elaborately with critical evaluation of the matter, 5.3. Observations and Evaluation Dealing Room: Since the dealers have access to global live prices of various products through their various communication tools, their desks are access restricted. As a result, dealers are housed inside a covered room known as the “dealing room” where the access is generally restricted only to the dealers and the related personnel. In Sonali Bank Ltd. there is a separate unit in the sixth floor of the office is used as the dealing room where entry is restricted for other than related personnel. The dealing room is distinctively separated from the back office so that the dealer can do his job independently, without unnecessary intervention of back office. Taped Conversations: In SBL, the dealers conclude deals over the phone. This is because deals are done on the local market where dealers are mostly known to each other and they feel comfortable dealing by talking to other dealers over phone. In SBL the conversion with the dealers of other organization is not taped. So such deals over the phone do not have any hard evidence and in


a fast dealing environment, there is risk of mistakes (of rates, amounts or value dates etc.). All telephonic conversations taking place in the dealing room are required to be taped. Taped conversations can assist in resolution of any disputes that may arise. Dealing over the mobile phones is restricted in SBL. Deal Recording: The job nature of a dealer is highly demanding and the environment of a dealing room is very active. In such an environment when a dealer continues to deal, his/ her focus remains on the market. As such there is a risk of a dealer completely forgetting about a deal or part of a deal or making mistake in recording that deal. To eliminate this risk, in Sonali bank Ltd. every dealer must record the deal immediately after it is concluded with the counterparty. The deal recording is done in two ways: Position Blotter: Immediately after a deal is done, the dealer records the deal on the position blotter and updates his position. It is of utmost importance to a dealer to remain aware of his/ her position at all times. This is required to capture any immediate opportunity or to be in a position to immediately react to any adverse situation. A sample blotter has been shown on annexure.. Deal Slip:, Record is also done on a slip or memo which is known as the deal slip or deal ticket. In SBL, the deal slips are electronic and are through inputs into their automated systems. Deal slip contains details such as, payment instruction, value date, currencies, amounts, deal rate etc. The deal slip is passed on to the treasury back-office at the earliest for their further processing of the deal. Ideally, all deal slips are pre-numbered for control reasons and the treasury back-office monitor for any breakage in sequence. Where prenumbered deal slips are in place, any cancelled deal slips must also be forwarded to treasury back-office for appropriate record keeping/ filling. Deal Delay: All deals done by dealers are processed by the treasury back-office for which they need to be informed of the details of the deals within a certain time. In this process dealers occasionally raise deal tickets that need to be sent across to the treasury back-office within shortest possible time. This is not the right way to minimize he risk associated with deal delay. The timeliness of raising deal slips/ inputting into the automated system as well as passing them on to the back-office is not only sound business practice but also critical for monitoring of credit risk, price risk and regulatory compliance. The following table provides guidelines of deal capture standards: Product

Deal-slip raising/ System Input Deal-slip to reach Time back-office

Spot FX

Within 10 minutes

Within 25 minutes

Forward FX

Within 10 minutes

Within 25 minutes


FX Swaps

Within 15 minutes

Within 30 Minutes

Call/ Notice Money

Within 10 minutes

Within 25 minutes

Money Market Term

Within 10 minutes

Within 25 minutes

Foreign Currency Deposits

Within 10 minutes

Within 25 minutes

Treasury Bills Purchase

By 10:30 a.m. on payment day

Within 30 minutes

Repo

By 12:30 p.m.

Within 30 minutes

Reverse Repo

By 12:00 p.m.

Within 30 minutes

The guidelines as per the above table cannot be maintained properly because the deal ticket is not used regularly. So the back office of the dealing house finds it difficult to judge the proper time. Counterparty Limits: The issue of counterparty limits arises from the risk that a customer with whom an organization had a reciprocal agreement defaults. Credit risk is the risk that the counterparty to a financial transaction - here a foreign exchange contract, may become unable to perform as per its obligation. The extent of risk depends on whether the other party's inability to pay is established before the value date or is on the same value date of the foreign exchange contract. In Sonali Bank counter party limit is determined by the board of directors. In determining the limit board considers the creditworthiness and relationship of counter party. If the limit can not judge properly bank will have to face following risks, Settlement risk: The risk on the settlement day that one counterparty pays funds or delivers a security to fulfill its side of the contractual agreement, but the other counterparty fails on its side to pay or deliver. This occurs when items of agreed upon original equal values are not simultaneously exchanged between counterparties; and/or when an organization’s funds are released without knowledge that the counter value items have been received. Typically the duration is overnight/ over weekend, or in some cases even longer i.e., until the organization receives the confirmation of receipt of funds. The risk is that the organization delivers but does not receive delivery. In this situation 100% of the principal amount is at risk. The risk may be greater than 100% if in addition there was an adverse price fluctuation between the contract price and the market price. Pre-settlement risk: The risk that a client defaults on its agreement with the organization before the settlement day. Whilst the organization has not paid away any funds, it still has to replace the contract at the current market rates, which might have moved against it. In this case the organization is exposed to possible adverse price fluctuations between the contract price and the market price on the date of default or final liquidation. The organization’s loss would then be the difference between the original contract price and the current market price on the date of default.


All banking organizations must have appropriate counterparty limits in place for their treasuries. The limit structure will depend on each organization’s credit risk appetite based on their credit risk policies as well as target market criteria. All such credit risk limits should be set by the organization’s credit risk approving unit, which is independent of the treasury dealing function. In judging the credit worthiness of the counterparty SBL uses the credit reports of D&B and other authentic sources. Sometimes the rating of the counterparty from the Bankers almanac is also used. Stop Loss Orders: A stop loss limit for a product is generally a certain percentage of the organization’s prior year profit from that product. For example if an organization’s FX trading revenue for the year 2002 was USD A, the management/ market risk management unit may decide to accept a maximum of 10% loss of that during the current year. In that case the stop loss limit for that organization for 2003 would be A X 10%. In managing the business within the stop loss limit, treasuries running overnight positions (within their overnight limits) must leave appropriate overnight watch orders. In Sonali Bank Ltd. the limit is fifteen percent. So this year whenever the amount of loss reaches to 15% of the profit of the year 2003, the stop loss order will come. So Sonali Bank is conservative in the trading. As a representative of third generation bank SBL did not get the chance to take part in big deals in the previous years. So the amount of the profit is not significant for the foreign exchange market. Fifteen percent of this profit is very much insignificant in the market. This conservatism in stop loss order limit prevents SBL to operate in the foreign exchange market with its full capacity. Triggers: A trigger is a level of a position at which an organization decides that the management should be made aware of. This may be in terms of a market value of a position or an unusual trading volume etc. This is a predetermined level given by the management. In SBL ALCO determines the trigger. When a trigger is hit, the management needs to be informed of the same. Upon advised of a trigger, the management usually decides on closer monitoring of the particular situation. In cases of a loss trigger, the amount is generally set at a lower level than the stop loss limit (at which the position has to be unwinded). In Sonali Bank trigger is set at 90 percent of Stop Loss limit. When the loss becomes 90 percent of stop loss limit then the management is informed to take decision. In case of profit trigger the limit is decided on the market situation. Appropriateness of Dealing: While transacting with a client, a dealer of SBL generally aware of the counterparty’s dealing style & product mix and assess (prior to concluding a deal) whether the customer is dealing in an “appropriate” manner. A dealer has the responsibility to ensure that the volumes of activity and types of products transacted by a client are appropriate for that particular client and the risks of these transactions are clearly understood by them. Prior to conclusion of a


deal, a dealer needs to assure that the counterparty is authorized to enter into such transaction (both from counterparty’s internal and regulatory perspective). Here dealer is working as the front office of the dealing room. Appropriateness of dealing is judged by both the back and mid office. Front office of dealing room conducts the dealing. Mid-office checks whether the deal is within the limit (daily dealing limit, counter party limit and stop loss order limit).Back office of dealing room usually makes the settlement. Rate Sheet Production: Every day SBL Dealing Room has to produces rate sheet with the following features: f. Rate for Import bill payment. g. Rate for export bill negotiation for sight/usance. h. Rate for inward and outward remittance. i. Rate for TC and Cash note. j. Indicative rate for internal transaction This rate sheet is produced in those currencies for which SBL maintains Nostro a/c. i.e. USD, EURO, GBP, JPY, SGD. USD/BDT rate is to calculate on the basis of prevailing free floating rate in the inter-bank. On the other hand cross rate of other 4 (four) currencies is to obtained from Reuters Money 2000 and published in the rate sheet after maintaining sufficient margin. Through this rate sheet treasury maintains daily profitability with our branches and subsequent customers there on. For Corporate Customers treasury may customize this rate but keeping in view the profitability of the bank. Apart from exchange rates the following foreign currency interest rate is to be incorporated. c. LIBOR for US Dollar in different tenor. d. NFCD/ RFCD rates for USD deposit. Rate Appropriateness: This exercise is carried out by the treasury back-office to check for whether all deals have been dealt at market rates. Any deals done at off-market rates must be raised to the respective dealer for a satisfactory explanation bringing this to the notice of the chief dealer. In case of a non-acceptable justification provided by the dealer, the organization may decide to engage in further investigation. This monitoring process is placed to guard against application of any inappropriate rates. Treasury front office primarily uses Reuters for pricing of its products and treasury operations also collect most of the data for their independent verification process from the same source. Following is a guide that is followed in the process of independent verification of prices for various products/ instruments: Instrument

Source

Frequency of Update

Spot FX

Reuters / National Newspapers

Once Daily Pages: AFX=, FXXZ, BD(F9)

Note


Forward FX/ Reuters Swaps

Once Daily Pages: AFX=, FXXZ, BD(F9), LIBOR01, GBPF=, EURF=, JPYF=, CHFF= etc.

In absence of an interbank USD/BDT forward market, banks should use spreadsheets to determine tenor-wise forward premiums that should be used for the verification of USD/BDT forward rates.

Cross Currency

Reuters

Once Daily Pages: FX=

Foreign Currency Deposits

Reuters

At Booking Pages: DEPO, GBPF=, EURF=, JPYF=, CHFF= etc.

Money

National Newspapers

Page: BD (F9)

Treasury Bills Purchase

Repo

Independent price verification can not be performed for this since the same is purchased from Central Bank only on primary auctions. On bids from different banks, central bank decides the cut-off point yield. There is no secondary market, at the moment and when a secondary market develops, this should be reviewed. Reuters/ National Newspapers

Once Daily on days transactions take place Page: BD (F9)

repo

Reverse Repo Reuters/ National Newspapers LCY Term MM

Once Daily on days transactions take place Page: BD (F9)

repo In absence of an interbank term money market, this can not be


judged against a market information. However, for clarity, all term borrowings/ placements should have sign-off from one level higher authority from the dealer doing the transaction. For the information to determine the rate related with foreign exchange dealing Reuter is the main source. SBL is a subscriber of Reuter; the dealing room has the opportunity to visit the pay site of Reuter. The rate band for each instrument is fixed depending on the market liquidity and volatility for each of them. An indication of the rate bands that is used by Treasury Operations of SBL for their independent price verification process is shown in the following table. Here we see that for spot rate both in Inter-bank and customer the band is wider than in the case of forward rate and FCY borrowing. In forward rate there is more risk associated because bank has to judge future trend for this rate determination. For call money bank has to consider the present situation, so bank has the opportunity to make the band little wider i.e. 1% of the mid-rate of the market. Instrument Spot Inter-bank

Rate Band For currencies other than BDT, for contracts with USD FX on one side, a 1% on each sides of the mid market rate can be taken as guidance. For BDT it can be within 5 paisa on either side of the base rate.

Spot Customer

For Spot Customer FX, the band can be 2% on either FX side.

Forward

25 pips on either side of the base swap rate for currencies inter-bank FXagainst USD other than JPY. 25 bps on either side of the Swaps base swap rate for JPY.

FCY Borrowing

25 bps on either side of the base rate (quoted on Reuters Lending for the particular tenor) for on and off-shore deals 1% on either side of mid rate of range reported on Reuters BD page/ newspaper

Call/Notice Money

Treasury of SBL always tries to maintain the rate according to the above table. But in operation some deviation is occurred for unavoidable market forces.


SBL treasuries publish a rate sheet for retail FX transactions for various types of customer related transactions in various currencies. Buy and sell rates for all currencies for all types of transactions that are covered in the rate sheet is based on sufficient spreads taken from the bid/ offer of central bank's quote on USD/BDT for the day as well as spreads on cross currencies available from Reuters. It is primarily designed to cover retail and small corporate FX transactions. Correctness in preparation of rates for these transactions must be covered through maker-checker control (as well as the automated banking system through defined bands in the system). However, for certain customers, transaction rates might differ from the published rates. In these instances there should either be standing instruction issued by the head of treasury or the relevant rate exception signed by treasury personnel. On customer FX, the rate bands are higher to accommodate higher spreads. However, since all customer transactions are based on a principle of a positive spread, negative spreads for such transactions must be highlighted as exceptions for explanations and approvals. Deals Outstanding Limit: . In SBL Dealing room tries to maintain a null outstanding limit everyday to avoid the risk of loss. If the outstanding limit stands in the profit side then the related dealer is advised to make a watch order to a counter party. Here the watch order is given to that counter party who is in his banking hour. So the party can affect the deal within the operating time. This policy minimizes the risk of the open position. It is a good practice to monitor the total deals outstanding of the treasury. This exercise is carried out by the treasury back office to check against any unusual volumes of activity. For example, in a fast dealing environment, a dealer may make a mistake and execute a deal with an additional zero that would make the dealt amount much higher than intended. If a “deal outstanding� monitoring (by an independent unit) process is in place, this would be highlighted and brought to the attention of the senior management for any appropriate action. Daily Treasury Risk Report: The treasury back-office summarizes all daily positions particularly the end-of-day positions on a report format for the information of the senior management. Such report is ideally contain information about outstanding open position against limit, different currency-wise outstanding exchange position (against limits if applicable), outstanding foreign exchange forward gaps in different tenors, tenor-wise MCO report, interest rate exposures of the balance sheet, counterparty credit limits usage, day’s P&L against trigger & stop loss limit etc. Code of Conduct: Due to the special nature of job that dealers engage in, they are expected to act in a professional and ethical manner.] Conversation Language:


All dealing related conversations taking place in the treasury is in an acceptable language for operational clarity. To elaborate, all conversations on the Reuters Dealing System is in English and all conversions over telephone is restricted to either in Bengali or in English. Mandatory Leave: The dealing functions are extremely sensitive involving wholesale and large amounts with exposures to adverse market movements. There is also risk of mistakes not being unearthed. As a result, for a particular dealer’s functions to be run by a different dealer, all dealers are required to be away from their desks for a certain period of time at one stretch during a year. During this period, dealers are not expected to be in contact with their colleagues in the treasury area. Typically, this period is defined as a continuous two weeks period. In Sonali Bank Ltd. the provision of mandatory leave has started from this year. Position Reconciliation: All dealers’ positions are reconciled with the positions provided by the treasury back-office. This must be done daily prior to commencement of the day’s business. Unreconciled positions may lead to real differences in actual positions exposing the organization to adverse market changes and real losses. In Sonali bank treasury back office reconciled position daily. NOSTRO Account Reconciliation: Banks maintain various nostro accounts in order to conduct operations in different currencies including BDT. The in charge of the international Division set limits for handling nostro account transactions that include time limits for the settlements of transactions over the various nostro accounts and the time and amount limits for items that require immediate investigation after receipt of the account statements. In defining these limits, consideration is given to the transit and processing times of the various types of transactions. The time and amounts limits, if exceeded, require referral to the in charge of International Division for appropriate action. Persons reconciling nostro accounts is independent of originating, responding to, authorizing or booking transactions and must not reconcile the same accounts for a continuous period of more than twelve months. However, after the lapse of at least the next monthly reconcilement process immediately following the twelve month period, these persons can be reassigned the same duties. The process of matching open items must be performed each time statements are received and must ensure a true match (e.g. dates, amounts and transaction identity). All matches must be cross-referenced between “our accounts” and the statement. Entries that make up a partial or incomplete match are suitably cross-recorded so that a clear audit trail is provided. The current “our account” records and statements are to be maintained under control and custody of persons in charge of reconcilements. As frequently as deemed necessary but not less than once a month, a “reconcilement balancing report” is prepared for each “our account” which must include the “our account” balance, the related statement balance and a listing of all open items (all differences and unprocessed items). Tracers are sent if the open item exceeds the established time or amount limits. The operations manager review all reconcilement balancing reports to evaluate the status and progress of eliminating open items and to ensure that investigation and follow-up efforts are satisfactory and tracers are sent on a timely basis.


The operations manager establishes limits for monthly accrual of interests on overdrafts in “our accounts” maintained with other branches and correspondents. Overdraft interest for “our accounts” must be calculated for each day the branch is in overdraft in accordance with its records. The operations manager sets the time and amount limits for liquidation of open items or differences found unreconcilable. These items are investigated as far as is practicable and if they are found unreconcilable, the operations manager may authorize liquidation through appropriate entries as established as per their accounting policies. However, the items in question must be amply identified and corrective steps taken to prevent recurring differences. Quarterly, a comprehensive review of all “our accounts” is made by an officer independent of transaction processing and authorization functions to ensure that each account continues to be operated with a valid business purpose and that reconciliation and other controls continue to be in place and are effective. The following table shows the maximum time limit after which unmatched items is referred to the operations manager. Type of Transaction L/C payments Foreign exchange settlements TC encashments Outward remittances Draft payments ACU cover funds sent through Bangladesh Bank Credits to our accounts with insufficient details Correspondent bank charges recoverable from our customers or otherwise Any other credits to our accounts, where we have not passed corresponding debit entry Any other transactions where we have debited, but they do not credit Any other transactions where they have debited, but we do not credit Any other transactions where we have credited, but they do not debit

Transit Time 3 days, ACU - 7 days Nil. Immediately notify respective department if settlement does not occur on value date 21 days 3 days 30 days 7 days 20 days 30 days 7 days 7 days 7 days 4 7 days

After-hours Dealing: After-hours dealing is that which initiated when the dealer’s own trading room is closed. For specific business reasons, an organization may decide to allow its treasury to engage in after-


hours dealing. In such cases the organization must have properly laid down procedures detailing the extent to which they want to take risk during after-hours and which dealers to have dealing authority and upto what limits they can deal during after-hours. For example, if in our market the business hour is till 5 PM, any deals done by dealers after that time would be considered as after-hour deals. An organization must also have detailed laid down procedures for the accounting of the afterhour deals bearing in mind that during these times there would not be any treasury backoffice staff available. Sonali Bank Ltd. does not trade after the banking hours. It is because SBL does not have adequate work force and logistic support to continue the business after the office hours. As we are few hours ahead of USA or any other developed western country the bank missed the opportunity to trade with the large and famous dealer of the world. Off-premises Dealing: A dealing transaction done by a dealer who is not physically located in the dealing premises (irrespective of the time of day) is an off-premises deal. An off-premises deal needs to be treated separately from a deal done from within the dealing room due to it being done using communication tools that are not as special as those of the dealing room. For example, an offpremises deal done on the phone is generally not recorded and thus there is no record in case of any future dispute. Also, deals done from within the dealing room get recorded immediately updating positions and allowing the treasury back-office to take immediate actions (confirmation, settlement etc.), which is not the case for off premises deals. As such, an organization must have detailed laid down procedures for the off-premises deals describing how these deals would be accounted for with least possible delay. Typically, organizations would designate particular dealer(s) with the authority for off-premises dealings in case they decide to carry out such activity for some specific business reason/ justification. Sonali Bank Ltd. does not trade after the banking hours. It is because SBL does not have adequate work force and logistic support to continue the business after the office hours. Mark-to-Market: This is a process through which the treasury back-office values all outstanding positions at the current market rate to determine the current market value of these. This exercise also provides the profitability of the outstanding contracts. In SBL the treasury back office gathers the market rates from an independent source i.e. other than dealers of the same organization which is required to avoid any conflict of interest. Valuations: The process of revaluing all positions at a pre-specified interval is known as valuation. Though this exercise, an organization determines that if they are to liquidate all the positions at a given time, at what profit or loss they would be able to do so. This function is carried out by the treasury back-office of SBL by gathering revaluation rates. Ideally, the treasury back-office should gather such rates from sources other than from the dealers of the same organization to avoid any conflict of interest.


Dealers’ are required to have their own P&L estimate which must be tallied with the ones provided by the treasury back-office. Any unacceptable difference between these two must be reconciled to an acceptable level. Internal Audit: Considering the complexities of the foreign exchange business, a process for an internal audit has widely been accepted as a check point to review the adequacy of the key control issues. This function can include checking for adherence to various limits, compliance requirements, statutory management etc. In addition to regular audits at specified intervals, a concurrent audit process put in place to ensure the treasury’s functioning in an appropriate manner on a day-to-day basis in SBL. 5.4 SWOT ANALYSIS Sonali Bank Ltd. is operating in foreign exchange market from the very beginning of its inception. In operating the bank has developed individual policy based on its strength and weakness. I try to point out Sonali Bank Ltd.’s internal strengths and weaknesses, and external opportunities and threats as I have explored in foreign exchange trading, Strength  Sonali Bank has a strong foreign exchange reserve with compare to other private bank. This strength comes from the export business of the bank. In 2003, total export made through SBL is TK.15, 250.60 million which is 75% of the total import. In that time the total export is only 67% of the total import. So from its sound export business SBL generates a well developed foreign exchange reserve, which is crucial in dealing foreign exchange.  The Bank mobilized total deposits of Tk.16, 287.46 million as of December 31, 2003 as compared to Tk. 15,150.42 million in 2002. Competitive interest rates, deposit mobilization efforts of the Bank and confidence reposed by the customers in the Bank contributed to the notable growth in deposits. So the bank has the liquidity which is important in trading both in money market and foreign exchange market.  The bank has a well equipped dealing house which is operated by some well groomed talented and trained officers and executives. They have excellent academic and professional experience and fine tuned by the directions of the management.  Beside Bangladesh Bank manual the Bank has developed its own guideline for foreign exchange risk management. So the treasury department is always prepared for any kind of situation.  Bank has a sound relationship with other financial institution both in the inside and outside the country. The credit worthiness of the bank is quite good. In the bank almanac SBL has the rating of 2160 which is quite good. This sound image contributes in getting favorable limit from other bank. Weakness


 In operation in the foreign exchange market bank is conservative. So the bank cannot increase its business with its full capacity. As a representative of third generation bank SBL did not get the chance to take part in big deals in the previous years. So the amount of the profit is not significant for the foreign exchange market. Fifteen percent of this profit is very much insignificant in the market.  In operation bank has some flaws. For example Dealers do not use time stamp or deal ticket , so the back office find it difficult to settle the deal in proper time. Opportunity  Government Support: Government of Bangladesh has rendered its full support to the banking sector for a sound financial status of the country, as it has become one of the vital sources of employment in the country now. Such government concern will facilitate and support the long-term vision of Sonali Bank Ltd.  For its extensive foreign trade the bank able to make a special relationship with many foreign bank. Sound relationship with the foreign bank will open new area of the dealing business. Threats  Poor Telecommunication Infrastructure of the country is a threat in the business of foreign exchange. The world is advancing e-technology very rapidly. Though Sonali Bank Ltd. has taken effort to join the stream of information technology, it is not possible to complete the mission due to the poor technological infrastructure of our country.  Frequent Currency Devaluation is another threat. Frequent devaluation of Taka and exchange rate fluctuations and particularly South-East Asian currency crisis adversely affects the business globally. From the observation we see that the bank follow the guide line of Bangladesh bank in trading in the foreign exchange market. Besides SBL has its own guide line formulated by the Asset Liability Committee (ALCO). Any dispute arise in the deal time is settled by the guidelines of Bangladesh Bank and ALCO. Board of Directors determine the daily deal limit, stop-loss order limit and counter party limit with the help of the management. Treasury department can be divided in three parts, front office, mid office and back office. Front make the deal and determine the rate. Back office makes the settlement and mid office supervise the job of both front and back office. In observation we see that Sonali Bank has a suitable position for its foreign exchange reserve, liquidity position and relationship with financial institution. But the bank can not operate with its full capacity for its conservative nature. CHAPTER-6 6. Problems With Foreign Exchange Risk Management: 1. It show profit records make promises and almost brag about how easy it is to make money with this robot.


2. Aside from these benefits online foreign exchange trading is also equipped with various tools that make your business easier to handle, and get more info about Problems With Foreign Exchange Risk below. 3.Also awareness of practical applications would possibly not be enough as the Currency exchange is highly Unpredictable 4. there are a few external factors for example political issues inspiring the flow of finances in the market. Sure scalping is one of the best but there are a lot of others out there that you can find all over forums blogs and in chat rooms. 5.To trade with consistency then he/she can start to focus on finding the most dependable trading system that will make him the most money. 6. SBL enjoy educating itself and hope it start making money on the Forex. This means that when a change in Forex exchange rate simply compensates for differences in inflation rates the relative prices of one. 7. See more on Problems With Foreign Exchange Risk and Amex Foreign Currency Charge. See more on Problems With Foreign Exchange Risk. While the business may be promising success only happens when SBL allot some time to get to know it much better. 8. the foreign exchange trading arena is such a great cash cow to serious and part time traders alike. Foreign investing is considered by many investors as a way to either diversify an investment portfolio or seek a larger return on investment(s) in an economy believed to be growing at a faster pace than investment(s) in the respective domestic economy. 9. Foreign Exchange trading In reality it’s not quite this simple because there will be costs involved in this transaction but this does demonstrate the principle of profiting when the exchange rate moves up. 10. SBL ever wondered how it could trade the FOREX while controlling and/or reducing the risks involved? Has the fear of losing in a big way kept SBL from entering this fast-growing market?, also see more on Problems With Foreign Exchange Risk. 11. There are hundreds and thousands of factors which play a dominant role in influencing the merit of a currency against another. A customer in the forward market will be able to protect himself against the anticipated flows of foreign currency in terms of foreign currency. Recommendation regarding SBL: Sonali Bank is the largest Nationalized Bank in the country. Though it is observed that credit management of the bank is quite satisfactory, the following recommendations could be taken into consideration to make it more effective. • Bangladesh Bank should monitor regularly and observe closely the lending activities of Sonali Bank. • It is to be noted here that it is a nationalized bank and various rules regulations, office norms and working environment of the bank is still in manual system like other


nationalized banks of our country. Sonali Bank has to come out from that footing and be organized like some reputed private sector banks, which are doing very well. Loan Application forms of the customers remain erroneous and full of wrong information. It has been observed that the information given by the customer regarding business, property holding, inventory, bio data of entrepreneur do not tally on ground. Even after that the Banker provides these customers with loans after doing necessary correction in the customer’s application form. Close monitoring and supervision has to be ensured by the bank authority in this regards.

After assessing 3-4 years record it is found that near about half of the loans and advances have become classified. Moreover 4-5% of that classified loans became substandard or doubtful. Almost all the amount of classified loan is bad/loss percentage of which is 95%. But not shows these loans as Bad, rather Carrying forward of these loans have made the figure of the net profit of the bank an inflated one which is quite misleading. Some bad/loss loans with long outstanding period have to be written off.

Analyzing the last five years credit statement of the Bank, it is found that recovery rate of classified loans are only 10% to 15% which is very much alarming. Though it slightly increased last year, a coordinated effort has to be undertaken by the bank to increase the recovery rate.

Credit Information Bureau (CIB) should act more efficiently. All the necessary and correct information of a prospective borrower should be available to the bank authority also. Here Sonali Bank should use upgraded computer software for this purpose.

The Bank itself should be much more cautious before sanctioning loan. The bank authority should strictly follow the loan appraisal procedure, and also ensure that all the information provided by the clients are correct.

Long outstanding cases filed in the insolvency court should be resolved as early as possible with greater priority. For its own interest bank should employ well-reputed lawyers to settle all the outstanding cases.

More emphasis should be given on foreign exchange transactions. Timely collection of export proceeds has to be ensured. The Bank should strictly follow all the means and ways to check the fraudulent activities if any, in case of foreign exchange trade.

Opening an L/C involves a lot of paper works which is time consuming. Moreover, Officers and employees are not well conversant with the rules and policies of foreign exchange. They need to be trained up regarding the matter and the whole system has to be computerized so that chance of mistakes are less and it will take less time to open an L/C.

Due to non-availability of affiliation, negotiation becomes difficult with some of the Foreign Banks. For this some prospective exporters and importers are discouraged to do their business with all those particular countries. To expand the business activities,


Sonali Bank should make an endeavor to increase the affiliation with more number of Foreign Banks. Normally in our country most of the report does not see the light, they remain in pen and paper. Even if it is published, the recommendations are not implemented. It is nice to observe that Government has already promulgated some rules basing on those recommendations. So the recommendations should be implemented despite of any hindrance for the betterment of Banking sector Bibliography o Annual Report Sonali Bank Ltd. By the Year 2008 --- 2009. o Books and Authors Syed Asraf Ali Foreign exchange and risk management Raymond V. Lesikar, Richard D.Irwin Basic Business Communication, 7th Edition Gordon, E and Natarajan, K Banking: Theory, Law and Practice Himalaya Publication House Varshney, P.N. Banking Law and Practice Sultan Chand and Sons o Web address or URL http://www.sonalibank.com.bd http:// www.bangladeshbank.org

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