Internship Report
On
Overall Banking Banking System
Submitted by
WWW.ASSIGNMENTPOINT.COM
All the aspects of risk management decision, credit and foreign exchange risk management of a bank are vital since the profitability and future growth of a financial organization is directly affected by such decision. Hence, proper care and attention need to provide while determining credit and foreign exchange risk and manage it.
Risk is inherent in all aspects of a commercial operation; however for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms.
Again 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. So foreign exchange risk is also a vital factor for a financial institution like bank that deal with foreign exchange.
To discuss these problem of credit and foreign we have taken a sample bank Mercantile Bank Limited and tried of discuss what policy option they are doing in managing credit and foreign exchange risk.
1.3 Objective of the report
The main objective of the study to evaluate the performance in the area of credit and foreign exchange risk management based on Khatungonj branch. This practical orientation gives us a chance to co-ordinate our theoretical knowledge with practical experience. Objectives of this practical orientation in banks are as follows:
General objectives: -
· To fulfill the requirement of BBA program.
· To learn desk-wise activities in the bank branch.
· To gather knowledge about the functions of different departments of bank branch.
· To know the organizational behavior.
Specific objectives: -
The Principal objective of the study is to evaluate of the risk management practice of Mercantile Bank Limited (MBL). To accomplish this objective following objectives have been cover:
a. To highlight the policies and strategies of Mercantile Bank limited for managing risk associated with banking operations.
b. To identify the factors influencing risk associated with banking operations.
c. To evaluate credit risk management practice of Mercantile bank
i. Risk determination.
ii. Strategy.
iii. Implementation.
d. To evaluate foreign exchange risk management of Mercantile Bank Limited.
e. To suggest some policy measures for the improvement of risk management program of Mercantile Bank Limited.
1.4 Scope of the report
The major area covered in this report are: -
1. Foreign Exchange department and
2. Credit department.
1.5 Methodology of the Study:
All the information incorporated in this report has been collected both from the primary sources, internal sources and secondary sources.
Primary Source of Data
Collecting data directly from the practical field is called primary source of data. The method that was used to collect the primary data is as follows:
Ø Discussion with officials of MBL;
Ø Practical work experience in different desks;
Ø Information that are collected through questionnaire;
Ø Face to face conversation with the clients;
Internal Sources of Data
Ø Circular of Bangladesh Bank that keep as internal record of the branch.
Ø Circular of Mercantile Bank Limited.
Ø Internal record of branch.
Secondary Sources of Data
The data which have collected for some other different purpose rather than this and which have passed through the statistical process. The method that was used to collect the primary data is as follows:
Ø Annual Review of MBL.
Ø Various publications MBL
Ø Brochures of different product of MBL
Ø Various books related with the subject.
1.5 Desk Covered During Practical Orientation.
Job Schedule that assigned by the Bank Management MBL Khatungonj Branch as given as:
Job Desk / Job Description / DurationDispatch / Dispatch & Receipt of letters
Maintenance of Inward and Outward mail registers. / 07 days
Management of Cash & Cash items / Receipts and Payments of Cash & Maintenance of Cash Book etc. / 15 days
Account Opening / From Desk Services of the branch
Operating of various types of accounts including CD, SB, STD, FDR and all types of Scheme Accounts
Issuance of cheque books & maintenances of concerned registers. / 15 days
Remittance / Issuance of TT, DD, PO, PS, OBC, IBC etc & maintenance of concerned registers.
Issuance of IBCA, IBDA, & maintenance of concerned registers. / 07 days
IT Operation / Server maintenance trouble shoot in ser operation, day start, day end, month end, process and user maintenance, different types of report on banking operation. / 03 days
Financial Administration / Preparation of daily vouchers & posting thereof.
Preparation of various statements/returns related to Head Office & Bangladesh Bank and preparation of statement of affairs. / 15 days
Clearing / All sorts of job related to clearance of negotiable instruments.
Preparation of concerned vouchers, posting thereof & maintenance of registers etc. / 15 days
Risk Management / Processing of various credit proposals, Viz CC, SOD loan, CCS, SLS, etc.
Preparation of CIB, execution of loan documentation & related works against loan & disbursement thereof.
Monitoring of various credit accounts & preparation of concerned statements. / 03 days
Foreign Trade / Preparation of various Letter of Credit proposals including BTB LCs, opening & checking of LC for import of goods including preparation of related vouchers Maintenance of concerned registers.
Creation of PAD/Lodgments etc.
Securitization/ checking of export documents & relate4d works
Administration & General Services / Processing of leave, Maintenance of leave record register, attendance register, stationery items, deadstock articles & concerned registers.
All other administrative job.
1.6 Limitation of the Study:
Limitation of the study can be given as:
1. Limited time period of 3 months is not enough for covering all aspect of the Bank.
2. It was not possible to know about all ins and outs of credit and foreign exchange.
3. Bank secrecy was the major problem to collect all sorts of data and disclose it.
1.7 Organization of the study:
This report has been divided into the following chapters:
Ø The chapter contains introduction of the report.
Ø The second chapter contains policies and strategies of Mercantile Bank Limited for managing risk associated with banking operations.
Ø The third and forth chapter contain the factors influencing risk and evaluating risk management practice of MBL.
Ø In chapter five it is discussed the policy options that can be taken for managing risk more appropriately.
Chapter Two
2.1 Different Areas of Risk of a Financial Organization:
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
2.1.1 Credit risk: - 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:
Credit risk Arises from an obligor’s failure to perform as agreed.
(a) Interest rate risk - Arises from movements in interest rates in the market. The interest rate exposure is created from the mismatches in the interest reprising 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.
(b) 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.
(c) 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.
(d) Compliance risk - Arises from violations of or non-conformance with laws, rules, regulations, prescribed practices, or ethical standards.
(e) Strategic risk - Arises from adverse business decisions or improper implementation of them.
(f) Reputation risk or franchise risk - Arises from negative public opinion
2.1.2 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.
2.1.3 Operational risk:
The risk associated with operating certain type’s business activities is known as operational risk. This is the risk of operating business activities. This risk may be country risk i.e. risk of operating activities in a specific country and so on.
2.2 Policy Guidelines For Credit Risk Management (Lending) In MBL:
This section details fundamental credit risk management policies that are recommended for adoption by all banks in Bangladesh. The guidelines contained herein outline general principles that are designed to govern the implementation of more detailed lending procedures and risk grading systems within individual banks. MBL is following this guideline in managing credit risk.
2.2.1 Lending Guidelines: -
All banks should have established Credit Policies (“Lending Guidelines”) that clearly outline the senior management’s view of business development priorities and the terms and conditions that should be adhered to in order for loans to be approved. The Lending Guidelines should be updated at least annually to reflect changes in the economic outlook and the evolution of the bank’s loan portfolio, and be distributed to all lending/marketing officers. The Lending Guidelines should be approved by the Managing Director/CEO & Board of Directors of the bank based on the endorsement of the bank’s Head of Credit Risk Management and the Head of Corporate/Commercial Banking.
Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided. Approval of loans that do not comply with Lending Guidelines should be restricted to the bank’s Head of Credit or Managing Director/CEO & Board of Directors.
The Lending Guidelines should provide the key foundations for account officers/relationship managers (RM) to formulate their recommendations for approval, and should include the following:
§ Industry and Business Segment Focus
The Lending Guidelines should clearly identify the business/industry sectors that should constitute the majority of the bank’s loan portfolio. For each sector, a clear indication of the bank’s appetite for growth should be indicated (as an example, Textiles: Grow, Cement: Maintain, Construction: Shrink). This will provide necessary direction to the bank’s marketing staff.
§ Types of Loan Facilities
The type of loans that are permitted should be clearly indicated, such as Working Capital, Trade Finance, Term Loan, etc.
§ Single Borrower/Group Limits/Syndication
Details of the bank’s Single Borrower/Group limits should be included as per Bangladesh Bank guidelines. Banks may wish to establish more conservative criteria in this regard.
§ Lending Caps
Banks should establish a specific industry sector exposure cap to avoid over concentration in any one industry sector.
§ Discouraged Business Types
Banks should outline industries or lending activities that are discouraged. As a minimum, the following should be discouraged:
- Military Equipment/Weapons Finance
- Highly Leveraged Transactions
- Finance of Speculative Investments
- Logging, Mineral Extraction/Mining, or other activity that is Ethically or Environmentally Sensitive
- Lending to companies listed on CIB black list or known defaulters
- Counterparties in countries subject to UN sanctions
- Share Lending
- Taking an Equity Stake in Borrowers
- Lending to Holding Companies
- Bridge Loans relying on equity/debt issuance as a source of repayment.
§ Loan Facility Parameters
Facility parameters (e.g., maximum size, maximum tenor, and covenant and security requirements) should be clearly stated. As a minimum, the following parameters should be adopted:
- Banks should not grant facilities where the bank’s security position is inferior to that of any other financial institution.
- Assets pledged as security should be properly insured.
- Valuations of property taken as security should be performed prior to loans being granted. A recognized 3rd party professional valuation firm should be appointed to conduct valuations
§ Cross Border Risk
Risk associated with cross border lending. Borrowers of a particular country may be unable or unwilling to fulfill principle and/or interest obligations. Distinguished from ordinary credit risk because the difficulty arises from a political event, such as suspension of external payment
- Synonymous with political & sovereign risk
- Third world debt crisis
2.3 Policy guidelines for Foreign exchange risk management:
All foreign exchange transactions invariably involve two or more parties and two or more currencies. Commercial banks act as intermediaries for settling payments between parties located in different countries. Commercial bank dealing in foreign exchange has a specialized department know as the Foreign Exchange Department, manned by one or more senior officials who are specialists in this purpose. The function of this department is primarily to convert foreign currency into home currency and vice versa for customers and for other banks with which the bank concerned my enter into deals for certain business purposes.