internship report on sbl
TRANSCRIPT
June 10, 2008
To
Begum Khaleda Khanam
Professor, Department of Accounting & Information Systems
University of Dhaka.
Subject: Submission of Internship Report .
Dear Sir,
Here is the internship report on “Credit management & Services provided by foreign trade division of the Trust Bank Limited (TBL): Special focus on Dilkusha Corporate Branch”- the prerequisite of the three month long internship program.
The internship program has provided me with an opportunity of having an exposure to the working environment and on the job experience in Credit Management & Foreign Trade Division of the TBBL, Dilkusha Corporate Branch. I have acquired a sound knowledge and understanding on the basic operation of the Bank.
I have invested my every effort to depict the Credit management & Foreign trade division performance by the TBBL as well as the financial performance of the Bank. I have aimed this report at the academic purpose only. I will be
Forwarding Letter of Internship Program
grateful and pleased as well having any suggestions, directions and/or recommendations for further improvement of the report.
Yours faithfully,
I feel immensely pleased to have an opportunity, on the very occasion of submitting my internship report, to thank a number of individuals for their unprecedented support, cordial co-operation, objective direction and endless encouragement that have significantly contributed to the preparation of the report.
First and foremost, I would like to thank almighty Allah, the omniscient and omnipotent, who bestowed me the capability of successful completion of my internship report and the internship as well.
I would like to offer my heartfelt thank and gratitude to my internship advisor Professor Begum Khaleda Khanam. Her instructive advice and guidance have emerged as stepping-stone in making this report a fruit. This report has smelt the scent of my creativity only as she entrusted her every belief on my capability and analytical ability in preparing the report.
My pleasure turns blooming to offer thanks to Mr. Kh. Monwar Hossain, the Manager, the TBL, Dilkusha Corporate Branch for allowing me to show my practicability in an organizational area under his supervision.
I like to convey something more than thanks and usual gratitude to Mr. Mohammad Mohosin, the VP and sub-Manager, my supervisor in the Bank. His delightful co-operation, benevolent patronage, intention to make other knowledgeable, not only fascinated me but also I had had this executive in dream before joining the Bank.
ACKNOWLEDGEMENT
My heartfelt appreciation and thanks should reach the officers-Mr. Toufiq-E-Elahi Chowdhury, Assistant Vice President ; Mrs. Tahrima Begum, Executive Office; Galib Mahmood, Senior Officer; Md. Jashim Uddin, Junior Officer, Md. Riazur Rahman, who with their own accord made me one of their own in terms of both work and love.
And last but not the least; I would like to thank all the personnel working at TBL, Dilkusha Corporate Branch. They made the environment congenial and favorable for me to understand the task. Without their assistance and co-operation, this report might not have seen the light of day.
I hereby declare that the internship report titled
“Credit management & Services provided by foreign trade division
of the Trust Bank Limited (TBL): Special focus on Dilkusha Corporate Branch”
Is submitted in partial fulfillment of the requirement for the awards of the degree–
DECLARATION
Bachelor of Business Administration (BBA)
Department of Accounting and
Information Systems (AIS)
Faculty of Business StudiesUniversity of Dhaka
Is my masterpiece and not submitted for the awards of any other degree/ Fellowship/Recognition and/or the like.
In this study, a fervent appeal has been made to demonstrate and analyze the general banking practice and the subsequent outcome of the Trust Bank Ltd. (TBL), which is passing its childhood period to establish an iconic threshold in the banking arena. Despite of being born in the cantonment, the bank is no more recognized as financial dealer of the armed forces; rather in the passing years, it has aimed at reaching the folk of Bangladesh, irrespective of their caste and designation.
EXECUTIVE SUMMARY
This report has been originated as the graduation prerequisite of the BBA program at the Faculty of Business Studies, University of Dhaka. Consulting with both the internship supervisor Professor Begum Khaleda Khanam and the organizational supervisor Mr. Toufiq-E-Elali Chowdhury, assistant vice president and Mr. Mohammad Mohsin, sub-Manager, the Trust Bank Bangladesh Ltd. (TBBL), Dilkusha Corporate Branch, have selected the subject matter of the report.
The report contains (6) chapters. The first chapter of the report describes the introductory words of the internship report while the second chapter is all about the methodology used in the preparation of the report. The very third chapter contains the historical background of TBL and chapter four explains the credit management by the bank. chapter five explain services provided by foreign trade division and ends at chapter six. The concluding chapter bearing number six contains the findings during the three-month long internship period, recommendations based on the findings and the overall conclusion.
During the composition of report proper care and uninterrupted concentration has been invested. Moreover, containing some unintentional mistake and printing error is not unusual. I do hope all to be considerate in this regard.
Chapter 1
1. INTRODUCTION
1.1TITLE OF THE REPORT:
The Title of the report is - “Credit Management & Service offered by Foreign Trade Division of Trust Bank Limited
(TBL)”.
1.2BACKGROUND OF THE PROJECT:
The economic basement of Bangladesh, a developing country in south Asian region, is known as agriculture. From
the very past history of Bangladesh, it is learnt that the ultimate prospect of the country depends on agricultural
resources. But now-a-days the earlier concept is going beyond a lot. The contribution of agricultural sector to GDP
has gone down from 80% to 21% in three decades and the balance has been backed up by the manufacturing and
industrial sector. To cope up with the present trend of industrialization and development, financing the industries
and increasing saving propensity among people is a must. The banking sector, the fastest growing sector in
Bangladesh, is playing more than talked about role in this regard. It smoothens the industrialization process and
creates employment for a large mass as well. So, selecting and reporting on a member of this sector “Trust Bank
Limited” is obviously a major financial one.
1.3ORIGIN OF THE REPORT:
Now-a-days, education is not just limited to books and classrooms. In today’s world, education is a tool to
understand the real world and apply knowledge for the betterment of the society as well as business. From
education the theoretical knowledge is obtained from courses of study, which is only the half way of the subject
matter. Practical knowledge has no alternative. The perfect coordination between theory and practice is of
paramount importance in the context of the modern business world in order to resolve the dichotomy between
these two areas. Therefore, an opportunity is offered by Department of Accounting & Information systems,
University of Dhaka, for its potential business graduates to get three months practical experience in a business
organization, which is known is as “Internship Program”. Internship Program brings a student closer to the real life
situation and thereby helps to launch a career with some prior experience.
My internship program was conducted at the “Trust Bank Ltd.”, Dilkusha Corporate Branch, Dhaka. This report is
generated under the academic supervision of Begum Khaleda Khanam, Professor, Department of Accounting &
Information systems, University of Dhaka and organizational supervision of Mr. Toufiq-E-Elahi Chowdhury, Assistant
Vice President of Trust Bank Ltd, Dilkusha Corporate Branch.
1.4RATIONALE OF THE REPORT:
This report is a part of my academic program. The BBA program having 120 credits in total contains three (3) credit
hours on the job internship program. The internship program has been set for three (3) months period. I believe this
study will be beside me in future, especially if I get myself involved in banks and other financial institutions. The
program has helped me a lot to understand the organizational atmosphere and behavior.
1.2 Objective of the study
The author of the report was assigned to work in Sonali Bank Ltd, SBL. This paved the way for the author to get familiarized with the banking activities for the first time indeed. It was an opportunity to gather experience by working in different departments of the particular branch especially in the Credit Management in Sonali Bank Ltd. The area of concentration of this report was confined to investigating different aspects of the Banking Sector as well as problems and prospects concerning Credit Management.
Specific objectives: SBL
Finding out the credit management practice by SBL
To trace the origin of the Credit Management Process of the SBL
To understand the need and objectives of Credit Management
To identify the competitive position of the Credit Scheme of SBL
To realize the practical application of Credit Management in a branch office of the SBL
To identify the shortcomings of Credit Management Process
To find if the SBL is following the Bangladesh Bank guidelines and regulations on Credit Risk
To find whether the branch office is following the rules as per the Head office directions on the issue of Loan
To make out if the SBL Credit Management procedure is strong enough to fight the loan defaulter
To spot the compatibility of the Credit Management of SBL in economic hurdles
To mention some suggestions to overcome the Shortcomings of Credit Management if any
1.3 Methodology of the Study
Making of this report has gone through the way of preparing plan, colleting data, and methods of collecting
data, determining the time horizon and ensuring the reliability of the data collected.
1. 3.1 SOURCES OF INFORMATION:
1. Primary Data:
Data has been collected primarily through correspondence with the personnel working in different desks,
personnel of the head office and other branches.
2. Secondary data:
The main source of published data is the auditors’ statements of financial affairs, which are basically used
internally by the bank and different circulars issued by the head office and Bangladesh bank. Data
regarding the Credit operations of Trust Bank Ltd. were collected from secondary sources like - Annual
Reports, Brochures, Manuals and Publication of The Trust Bank Ltd., Bangladesh Bank Library, BIBM Library,
DSE Library, News paper.
1.3.2. DETERMINATION OF TIME HORIZON:
In relation to the general banking and financial performance evolution, I have gone through records, reports
and documents used currently by TBL. For the purpose of study, the horizon of three (3) year, from 2005 to
2007, has been chosen. Over the three-year time period, the data relating to the credit management of the
TBL have been evaluated. The basic source of the data is the auditors report used internally by the bank
only.
1.3.3. METHODS OF COLLECTING DATA:
The internship report has been prepared all the basis of “on the job” experience with the Trust Bank Ltd.
Dilkusha Corporate Branch located at Dilkusha, Dhaka. In spite of the scarcity of published data, it has been
tried to make the report informative and handy. The data used in the report have been complied through
different complicated ways- direct questionnaire to executives, continuous search on the ongoing
accountant’s machine, and interview with internal auditor and external auditors report. Working with the
organization for a meager period of three month is the main aspect of acquiring data and information to
evaluate the culture, working environment and similar sort of affairs of the organization.
1.3.4. RELIABILITY OF THE DATA:
The data collected are highly reliable in the sense that all data generated in the report are used exclusively
by TBL. The auditors’ report on the financial statements and the correspondence with different desks
generate the reliable information to compose the report successfully
1.1SCOPE OF THE REPORT :
The report covers the operational and functional area of credit management & the services provided by Foreign
Trade Division of the Trust Bank Ltd. The report may be classified in three broad sections:
Organizational part
Literature part
Project part
In the organizational part the focus has nearly been given on the History and formation of the Trust Bank Ltd., its
structure, strategies and the expansion speed.
The literature part emphasizes the theoretical explanation of consumer banking and its related important
dimension like the major source of Bank’s finance, objective of the consumer banking etc.
On the project part, the prime and almost part, covers the lending procedures, terms and conditions for credit
services, applications of the rules relevant to credit management etc. & the activities of Foreign Exchange Division.
1.2LIMITATIONS OF THE STUDY:
In preparing the report, I have experienced some acute problems that have, to some extent, affected the
presentation of the report. The acute problems were-
a) Lack of information or data:
Bank is a sophisticated business sector. So the bank was not interested to provide me confidential data. As a result
in my report there is a confidential data limitation. Besides, in spite of being listed Bank as its IPO is yet to market,
it has no publicly available annual report. The only report I have had to depend on is the auditor’s reports that are
devoid of explanation and trend analysis. Moreover, the bank has no organized product publicity, documents or
leaflets for all the products.
b) Time constraint:
It is something like impossible to cover the entire credit management & Foreign Exchange phenomena exploiting a
three month time period while an employee or an officer is awarded with one or two year probationary period to do
his or her particular job. Moreover, I was not assigned for a specific task in each day. So I was not able to
understand banking activities deeply.
c) Comparison status:
I have had no opportunity to compare the credit management & Foreign Exchange system of the Trust Bank Ltd.
with that of other contemporary and common size banks. It was mainly because of the shortage of time and
internship nature.
d) Business of the bankers:
Due to the business of the bankers they were unable to give sufficient time to help me regarding the report’s
necessary information. I had to communicate with them repeatedly for the same information.
e) Limitations and restrictions of data:
In some case, it was not possible to get the exact amount and statistical record because of their safety measure.
They follow strict rules and regulations regarding these issues.
f) Lack of using statistical tools:
A satisfactory number of statistical data were not found. It was only possible to use a very few statistical tools
through out the report.
g) Secondary data:
Most of the data used in the report making was collected from the secondary sources.
In spite of all the drawbacks faced, everything has been managed well at the end. I believe the report is a quality
report on general banking and performance analysis of the Trust Bank Ltd. So readers are requested to consider
these limitations while reading and justifying any part of my study.
Chapter 22. An overview of Sonali Bank Limited
2.1 Background:
Sonali Bank is the largest state-owned commercial bank in Bangladesh. After the liberation war 1971 the branches of National Bank of Pakistan, Bank of Bhowalpur and Premier Bank branches were amalgamated to form Sonali Bank.
2.2 Launching of SBL:
Sonali Bank was established in 1972 under the Bangladesh Banks (Nationalisation) Order, through the amalgamation and nationalisation of the branches of National Bank of Pakistan, Bank of Bhowalpur and Premier Bank branches located in East Pakistan until the 1971 Bangladesh liberation war. When it was established, Sonali Bank had a paid up capital of 30 million taka. In 2001, its authorised and paid up capital were Tk 10 billion and Tk 3.272 billion respectively. The bank's reserve funds were Tk 60 million in 1979 and Tk 2.050 billion on 30 June 2000.
2.3 Functions at a glance:
Sonali Bank performs all traditional banking functions including deposit mobilization and lending. The bank discharges the treasury
functions as the agent of the Bangladesh Bank. It collects tax, stamp duty and registration fees, operates special savings accounts,
pays salaries to the teachers of schools, madrasahs, and colleges and pension to retired government employees. The bank
provides funding to some income generating and economic development projects namely, Poverty Alleviation Credit Programme,
Female Special Credit Programme, and Agro-based Industrial Credit Programme in the rural areas. It has a large participation in
foreign exchange business and off-balance sheet activities. The total volume of foreign exchange business handled by the bank in
1979 was Tk 14.91 billion and in 2000, it was Tk 67.847 billion, 25.87% of which was related to exports, 32.2% to imports, and
41.93% to remittances. At present, the bank has correspondent relationships with 380 foreign banks/bank offices throughout the
world.
The broad economic areas in which the bank currently lends and the amount of advances to those areas up to 30 June 2000 were
agriculture and fisheries -Tk 25.526 billion, industry (small and cottage, and large and medium)-Tk 43.563 billion, retail/wholesale
trade, hotels and restaurants-Tk 10.75 billion, transport/communication and storage -Tk 175 million, special credit programmes
including poverty alleviation - Tk 2.207 billion, insurance, real estate and trade services - Tk 3.3 billion and others - Tk 70.194 billion.
Sonali Bank monitors its work through a performance budget. It has a marketing intelligence unit and conducts a programme of
human resources development through training and motivation. It introduced the Lending Risk Analysis suggested by the Financial
Sector Reform Programme. Business policies of the bank in the 1990s included fulfilling capital adequacy requirement, mobilizing
deposits in large amounts, and making investments in more profitable ways. The bank diversified its activities in off-balance sheet
items to expand its area of operations and increase non-interest based incomes[7].
The Bank employs more than twenty thousands of persons.
Corporate Profile
Name of the Company : Sonali Bank Limited
Chairman : Quazi Baharul Islam
CEO and Managing Director : S. A. Chowdhury
Company Secretary : Zaheed Hossain
Legal Status : Public Limited Company
Genesis :Emarged as Nationalised Commercial Bank in 1972, following the Bangladesh Bank (Nationlisation) Order No. 1972(PO No.26 of 1972)
Date of Incorporation : 03 June, 2007
Date of Vendor's Agreement : 15 November, 2007
Registered Office : 35-42, 44 Motijheel Commercial Area, Dhaka, Bangladesh
Authorised Capital : Taka 10.00 billion
Paid-up Capital : Taka 09.00 billion
Number of Employee : 20,766
Number of Branches : 1182
Phone-PABX : 9550426-31, 33, 34, 9552924
FAX : 88-02-9561410, 9552007
SWIFT : BSONBDDH
Website : www.sonalibank.com.bd
E-mail :[email protected]@btcl.net.bd
Vision & MissionOur 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.
Overview of the BankSonali Bank Limited, the largest & leading commercial bank of the country, came into being in 1972 immediately after the emergence of Bangladesh as an independent state. A fully state-owned enterprise, the bank has been discharging its nation-building responsibilities by undertaking government entrusted different socio-economic schemes as well as money market activities of its own volition, covering all spheres of the economy. Sonali Bank Limited singularly enjoys the prestige of being the agent of the Central Bank of Bangladesh in such places where the guardian of the money market has chosen not to act by itself.
Sonali Bank Limited is governed by a Board of Directors consisting of 9(nine) members headed by a Chairman. The Bank is headed by the Chief Executive Officer & Managing Director, who is a well-known Banker and a reputed professional. The head office of the bank along with its corporate structure is located at Motijheel, Dhaka, the main commercial center of the capital.
Some notable features of the Bank are as follows:
Capital Structure:Authorized Capital : Tk. 1000.00 Core.Paid up Capital : Tk. 900.00 Core
Branches & SubsidiariesTotal Branches : 1182Branches in Urban areas : 340Branches in Rural areas : 840Overseas Branches : 2Subsidiaries(UK/USA) : 15Representative Office : 3Exchange House : 42
SONALI BANK LIMITED
CORE DATA OF SONALI BANK LIMITED FOR THE PERIOD FROM 2000 TO 2008
(TAKA IN MILLION)
Sl.No. Particular 2000 2001 2002 2003 2004 2005 2006 2007 20081 Total Assets 237,680 254,084 271,022 266,851 292,182 337,687 352,894 461,964 492,946
2 Total Employees 26,046 25,753 25,237 24,715 24,450 23,933 23,273 22,542 21,8393 Total Deposits 202,495 215,541 222,222 230,339 252,234 277,079 302,303 328,997 364,3864 Total Investments 44,225 33,405 43,867 45,490 58,896 43,636 39,978 88,891 95,0935 Total Loans 133,281 141,993 156,113 155,197 168,283 227,010 241,029 206,348 231,1666 Financial Equity Capital 5,642 5,706 5,856 5,956 6,106 6,306 (28,444) 21,742 244,7187 Total Liabilities 232,038 248,377 265,166 260,895 286,075 331,381 381,338 440,223 468,528
8 Total Income 14871 15,883 16,628 16,145 15,758 19,864 23,131 25,710 26,6219 Total Expense 14074 15,392 15,718 15,606 14,686 15,900 20,125 20,287 25,004
10 Tangible Assets 237,680 254,084 271,022 266,851 292,182 337,687 352,894 396,221 430,70311 Intangible Assets - - - - - - - 65,743 62,243
12Non performing/Classified Loans 43,977 45,274 45,447 41,097 43,761 46,261 50,533 63,175 61,154
13% of Classified Loans to Total Loans 38.65 38.31 33.46 32.00 28.32 22.52 24.44 44.59 31.44
Organ gram
Board of Directors
CEO & Managing Director
Deputy Managing Director-1 Deputy Managing Director-2
General Managers General Managersat Head Office - 6 Field GM Office at Divisions- 7
Deputy General Managers Deputy General Managersat Divisional Head of Head Office at Field Office (GMO, PO and Corp. Br.)
Assistant General Managers Assistant General Managersat Head Office at Field Office
Other Executives Other ExecutivesSEO, EO, SO, Officer at Head Office SEO, EO, SO, Officer at Field Office
Other Staffs Other Staffsat Head Office at Field Office
Head Office
General Manager’s Office General Manager’s OfficeAt Head Office - 06 At Field Divisions and Local Office - 07
Divisions at HO - 32 Corporate Branch - 22 Principal Office – 42Regional Office - 19
Overseas Branch-2 Branch -1158
Board of Directors
Sl No. Name Designation
1. Mr. Quazi Baharul Islam Chairman
2. Mr. Md. Shafiqur Rahman Patwari Director
3. Dr. Nasreen Khundker Director
4. Mr. A.S.M. Nayeem, FCA, FCCA Director
5. Mr. M. Lutfur Rahman Khan Director
6. Mr. K.M. Zaman Romel Director
7. Mr. Kashem Humayun Director
8. Mr. Shaimum Sarwar Kamal Director
9. Mr. Advocate. Sattayendra Chandra Bhakta Director
10. Jannat Ara Henry Director
11. Mr. Suvas Singho Roy Director
12. Mr. Md. Anwar Shahid Director
13. Mr. S.A. Chowdhury CEO & MD
Head Office
General Manager’s Office General Manager’s Office
At Head Office - 06At Field Divisions and Local Office -
07
Divisions at HO - 32 Corporate Branch - 22 Principal Office – 42Regional Office - 19
Overseas Branch-2 Branch -1158
SIRAJUDDIN AHMED CHOWDHURY(S. A. CHOWDHURY)
Chief Executive Officer and Managing Director
Ancillary ServicesSonali Bank Limited offers multiple special services with its network of branches throughout the country in addition to its normal banking operations.
Collection: Gas bills. Electricity bills.
Telephone bills.
Water/Sewerage bills.
Municipal holding Tax.
Passport fees, visa fees and Travel tax.
Customs & Excise duties.
Source tax and VAT.
Jakat fund.
Hajj deposit.
Land development tax.
Payment: Pension of employees of Government and other Corporate Bodies. Bangladesh Bank employees pension.
Army pension.
British pension.
Students' stipend/scholarship.
Govt. & Non-Govt. Teachers' salary.
Food procurement bill on behalf of the Govt.
Social Services: Old age allowances. Widows, divorcees and destitute women allowances.
Freedom Fighters' allowances.
Rehabilitation allowances for acid survival women.
Maternal allowances for poor women.
Disability allowances.
Sale & Encashment/Purchase: Savings Certificates. ICB Unit Certificates.
Prize Bonds.
Wage Earner's Development Bonds.
US Dollar Premium & Investment Bond.
Lottery tickets of different Semi-Govt. and Autonomous Bodies.
Sanchaypatra.
Public Service Commission's application form.
Judicial Service Commission's application form.
Exchange of soiled / torn notes.
Misc. Services: Bank a/c information of tax payee client according to demand of NBR. Local Governance Support Project.
Enlist of Non Government Insurance company.
Ready Cash
Features : Sonali Bank Ready Cash Card is a Debit Card.
Cardholder can easily pay utility bills like - Water, Telephone, Gas etc.
It is easy to remit funds among the participating branches of the Bank.
Transaction beyond working hours.
It is a riskless Cash Carrying facility.
Cashless purchase can be made form specific merchandise points.
Only computerized Branches of Dhaka City will deal Ready Cash Card.
Branches of other Cities and Towns will introduce Sonali Bank Ready Cash Card in due course.Locker ServiceSecured Locker Service is provided in some branches of Sonali Bank Limited. Customers may avail
this service and secure their valuables.
Locker size Yearly Charge (Tk.) Security Deposit (Tk.)
Small 1,200.00
2,000.00 (refundable)Medium 1,500.00
Large 2,000.00
Locker Service is available in the following branches of Sonali Bank Limited:
Total Branch : 54
ATM Service
ATM service is available in the following branches of Sonali Bank Limited:
Branch Phone no.
1. Local Office. 7170217
2. Ramna Corporate Br. 7162074
3. Prime Minister's Office Br. 9116043
4. Dhaka Cantonment Corporate Br. 9899975,9860068
5. Narayangonj Corporate Branch 9716685
Divisions of SBL
Departmentalization for any bank is important for any organization in order to run it smoothly and effectively to reach the goal. In other cases, hap hazardous departmentalization will cause the whole organizational chain inactive and there will be lack of interrelationship among different divisions. Cooperation will not be there because of improper departmentalization. Sonali Bank Limited has overcome these hurdles. SBL has a large number of divisions and it has been maintaining a pretty good cooperation among them. It has total of 32 divisions and the key divisions related with the credit management are described here.
AGRO-BASED PROJECT FINANCING DIVISION (APFD)
This division deals with granting loans in agricultural sector. Large poultry farm, food processing industry, frozen food exporting farm, fish cultivation farm etc are granted loan under these division. They check the project viability and approve loan.
Central Accounts Division (CAD)
CAD mainly deals with the account side of the Bank. It deals with all the Head Office transactions with its branches and other Banks. This division’s activities are described under the following heads:
a. Income, Expenditure posting: Income and expenditures are maintained and posted under these heads.
b. Cash Section: Cash section generally handles cash expenditure for office operations and miscellaneous payments.
c. Bills Sections: This section is responsible for inland bills only.
d. Salary and Wages of the Employees: Salary and wages of the Head Office executives, officers and employees are given in this department.
e. Maintenance of Employee Provident Fund: Employee provident fund accounts are maintained here.
MICRO CREDIT DIVISION
The main function of this division is to grant small amount of loan at lower rate and including exclusive advantages regarding the interest amount and interest payment schedule. This division’s functions are such:
a. Receiving proposals
b. Proposing and appraising
c. Getting approval
d. Communicating and sanctioning
e. Monitoring and follow-up
f. Setting price of the credit and ensuring effectiveness of it
g. Preparing various statements for onward submission to Bangladesh Bank
RURAL CREDIT DIVISION (RCD)
This division mainly deals with sanctioning loan in rural area. As SBL have a large number of branches in rural areas it is important to maintain proper documentation and proper investigation. To manage all rural credit related functions this department does the followings:
FOREIGN REMITTANCE MANAGEMENT DIVISION (FRMD)
The objective of this division is to assist management to make international dealing decisions and after decision is made, guide branches in their implementation. Its functional areas are as follows:
a. Maintaining correspondence relationship
b. Monitoring foreign rate and exchange dealings
c. Maintaining Foreign Currency Account (FC), Non Resident Foreign Currency Deposit (NFCD) A/C, Resident Foreign Currency Deposit (RFCD) A/C and reconciliation
d. Authorizing of signing and test key
e. Monitoring foreign exchange returns and statements
f. Sending updated exchange rates to the concerned branches
GENERAL ADVANCES DIVISION (GAD)
This division deals with the short term loan categorized as General Advance (GA). They set the interest rate and the related collateral in this case. They also set the time horizon for the recovery of the advances and verify them to ensure the liquidity of the bank.
INDUSTRIAL PROJECT FINANCING DIVISION (IPFD)
All the industrial loan sanctioning and project viability testing measures are done by this division. They fix the interest rate for different industry by examining the project riskiness. They classify the industry project into short term and long term and impose credit terms into them. They ensure the Bangladesh Bank guidelines to ensure the priority industry’s growth in Bangladesh.
LOAN RECOVERY AND CLASSIFICATION DIVISION (LRCD)
This department monitors the entire recovery rate and classifies all the loans outstanding into different categories. Set different technique to recover the outstanding credits.
PROJECT MONITORING AND REVIEW DIVISION (PMRD)
This division’s key function is to check the project’s viability in different times and collect up to date data about the project and review the entire project’s current position and any changes thereof. They alter the payment method and interest rate according to the economic condition of the country and the economy as whole.
INFORMATION TECHNOLOGY DIVISION (ITD)
SBL operates and keeps records of its assets and liabilities in computers by using integrated software to maintain client ledger and general ledger. The main function of this division is to provide required hardware and software. The functions of this division are:
i. Designing software to support the accounting operation
ii. Updating software, if there is any lagging
iii. Improving software to get best possible output from them
iv. Hardware and software trouble shooting
v. Maintaining connectivity through LAN, internet and Intranet
vi. Providing updated CD’s of online accounts to the branches
vii. Routine checking-up of computer of different branches
HUMAN RESOURCE DEVELOPMENT DIVISION (HRDD)
HRD performs all kind of administrative and personnel related matters. The broad functions of the division are as follows:
i. Selection and recruitment of new personnel
ii. Preparation for all formalities regarding appointment and joining of the successful candidates
iii. Placement of manpower
iv. Dealing with the transfer, promotion and leave of the employees
v. Training and development
vi. Termination and retrenchment of the employees
vii. Keeping records and personal file of every employee of the bank
viii. Employee welfare fund running
ix. Arranging workshops and training for employee and executives
INSPECTION AND AUDIT DIVISION (I & AD)
SBL has two Inspection and Audit divisions as it is the largest commercial bank of Bangladesh it requires a large number of internal audit. This division ensures proper accounting of deposits and credits in different sectors. It also ensures the proper documentation regarding every loan. The officers of this division randomly go to different branches examine the necessary documents regarding each account. If there is any discrepancy, they inform the authority concerned to take care of that. They help the bank to comply with the rules and regulation imposed by the
Bangladesh Bank. They inform the Bangladesh Bank about the current position of the rules and regulation followed by the bank.
VIGILANCE AND CONTROL DIVISION (VCD)
This department acts as the vigilant body to the entire bank. They verify the other division’s activities and check the reports and the compliance to the rules and regulations of the Bangladesh Bank. If they find any flaw and sluggishness in any other division’s assigned jobs they take action against the division and suggest necessary solution. They control the other division’s activities by applying the bank’s rules and regulations. They suggest the management different necessary rules, regulations, policies to smooth the banking activities.
Besides above divisions there are also some divisions which are equally contributing in the entire banking activities. These are like:
Board Division (BD)
Common Services Division (CSD)
Disciplinary and Appeal Division (DAD)
Employees Welfare and Transport Division (EWTD)
Establishment and Engineering Division (EED)
Legal Matters Division (LMD)
Managing Director’s Secretariat (MDS)
Marketing and Development Division (MDD)
MIS and Statistics Division (MSD)
Modernization and Restructuring Division (MRD)
Personnel Management Division (PMD)
Public Relations Division (PRD)
Reconciliations Division (RD)
Treasury Management Division (TMD)
Sonali Bank Staff College (SBSC)
Small and Medium Entrepreneurs Division (SME)
Branches and Offices
Type Number Place
General Manager’s Office 6 Dhaka, Chittagong, Rajshahi, Khulna, Barisal, and Sylhet.
Overseas Branches 2 Kolkata and Siliguri.
Representative Office 3 Jeddah, Riyadh, Kuwait.
RMS Facilitate Branches 103 Allover Bangladesh.
Sonali Bank (UK) Limited 7 London, Birmingham, Luton, Bradford, Manchester, Camden.
Sonali Exchange Company Incorporated (SECI)
9 Manhattan, Brooklyn, Jackson Heights, Astoria, Los Angels, Atlanta, Michigan, Paterson and Dhaka.
PRODUCTS AND SERVICES OF SBL
SBL is now offering various depository products for mobilizing the savings of the general people. There are also accounts for force saving from the exporter that is called Reserve Margin from the export bill. To get the deposit from the little saver portion of the country, SBL has recently started SDS, EDS, MDS, MES, MSS, RDS, DBS Deposit Scheme which by this time gained high popularity among the depositors. These are mentioned below.
1. Deposits:
i. Savings A/C
ii. Daily Profit A/C
iii. FDR A/C
iv. Foreign Currency Account (FC) A/C
v. Non Resident Foreign Currency Deposit (NFCD) A/C
vi. Resident Foreign Currency Deposit (RFCD) A/C
2. Deposit Schemes:
Sonali Deposit Scheme Education Deposit Scheme Medicare Deposit Scheme
Monthly Earning Scheme Marriage Savings Scheme Rural Deposit Scheme
Double Benefits Scheme
CREDIT SCHEMES AND LOAN PRODUCTS
Consumer Credit Special Small Credit IT Credit
Other Credit Scheme: Probasi Karmosangsthan Rin Prokolpa
Loan for Diagnostics Center
Core Business Area of SBL
i. Corporate Banking
ii. Project Finance
iii. SME Finance
iv. Consumer Credit
v. International Trade
vi. Trade Finance
vii. Loan Syndication
viii. Foreign Exchange Dealing
ix. Rural and Micro credit
x. NGO-Linkage Loan
xi. Investment
xii. Government Treasury Function
xiii. Money Market Operation
xiv. Capital Market Operation
xv. Remittance
Rural Credit
Bangladesh is Primarily an agricultural country. A major portion of her population (about 85%) lives in the rural areas. About 75% of the active rural population depends on agriculture as the main source of their livelihood. Agriculture contributes about 22% to the GDP. Majority of the farmers are either small or marginal. So Credit plays a paramount role to augment the capital base to support agriculture production. With this end in view. Sonali Bank Limited the largest state owned commercial bank has been playing a vital role in the socio-economic development & poverty alleviation since 1973. Keeping in view that Credit is one of the many inputs that complete the cycle of agricultural production Sonali Bank extending rural credit through 1180 branches over the country.
Sonali Bank Limited introduced indirect rural credit in 1973 through the then IRDP (Now BRDB) there after continuing lending in the following programs:
01) Crop Loan (Special Agricultural Credit Program: As per Government decision this program was introduced in 1977 to increase crop production (credit to subsistence and marginal farmers as well as share-croppers for raising seasonal crops). Now this program is continuing through 707 branches among the farmers of 1639 unions. Recently Sonali Bank Limited introduced Revolving Crop Credit Limit System from one branch of each district.
02) Special Investment Program: This program was introduced in 1993 for creating self employment by establishing small & medium farms (Poultry, Dairy & Fishery) through bank finance. Under this program credit is extended through 236 selected branches over the country. Maximum ceiling of loan is Tk. 5.00 Lac.
03) Farming & off farming program:This program was introduced in 1994 to involve unemployed rural people in income generating activities (Poultry, Dairy, Fishery, Horticulture, Nursery, Beef fattening) by establishing small & medium farms through bank finance. Credit is extended through all branches over the country. Maximum ceiling of loan is Tk.15.00 Lac.
04) Krishi Khamar Rin Karmasuchi (Proiect):This program was introduced is 1993 for creating new employment, increase national income & Socio economic development by establishing medium & big project (Poultry, Dairy & Fishery) through bank finance.
05) Pond Fisheries credit Program: This program was designed to extend bank credit for pisciculture in derelict ponds/Tanks/water bodies in 1977 Credit is extended through 200 branches over the country. Maximum ceiling of loan is Tk.5.00 Lac.
06) Fertilizer Dealers Credit Program: This program was introduced to extend bank credit among the approved fertilizer dealers operating at primary distribution point of BADC for lifting their quota of Fertilizer from BADc for ultimate distribution among the farmers in 1981.
07) Sugarcane production loan program in mill Zone area: This program was introduced in 1975 to increase sugar production. Under this program credit is extended to 11 (eleven) sugar mills for ultimate disbursement among their affiliated farmers.
08) Social Afforestation Program: This program was introduced in 2004 to increase forestation and to reduce greenhouse affect. Credit is extended through all branches over the country. Maximum ceiling of this program is Taka 5.00 lac.
Microcredit
Poverty alleviation has appeared to be the focal point of all policy formulation and development issues of the nation. As such, it has been globally accepted as an effective strategy for poverty alleviation in one hand and generating employment opportunities on the other.
In commitment to reduce poverty in urban, semi-urban and rural areas, Sonali Bank Limited has started functioning in Micro Credit through a full pledged micro credit division in its Head Office in the year 2003. Presently, 32 projects/programs are being run under the control and supervision of this Division.
Among all others programs, Bank-NGO Linkage program and Credit for Urban Women Micro Enterprise Development (CUMED) in Dhaka City, Goat rearing, Lamb rearing, Fruit, Herbal, Medicinal and Nursery Project, Micro- enterprise program- ‘Unmesh’ in Moulavibazar district, MSFSCIP in Kurigram district, Loan for Disable Persons etc. deserve special mention for channelizing the financial resources into the various potential avenues of microfinance.
Sonali Bank Limited jointly with Swanirvar Bangladesh, BRDB and ADB has been providing huge investible funds into the different Upazillas within the country. 152 Upazillas have been covered by the Rural Livelihood Program (RLP). Further, this Division has provided taka 179.09 crore to 68 NGO’s under its widely
accepted Bank-NGO Linkage Program on whole sale basis and whose recovery rate is 100%.
Specially, for the disable people Disable Loan Program has been undertaken to bring the disable section of the people under the micro credit facilities. The Goat Rearing Program undertaken by this Division has been running with a remarkable impact in reducing the rate of massive- scale rural poverty. Sonali Bank has already disbursed 46.47 crore up to 31 December, 2007.
Further, in order to create employment opportunities and to generate income of the rural people two loan schemes under the name and style “Rural Small Farming Loans scheme " and "Rural Small business loan" scheme have been introduced in-2004 . In both the programs there is a provision of collateral free loan up to Tk. 50,000/- .
In 2006 a new program has been introduced named ‘‘Daridra Bimochane Sahayta Karmasuchi’’for the extremely ‘Monga’ affected rural people. Moreover, in 2007 a special program has been introduced for SIDR affected 12 areas in which there is a provision of collateral free loan up to TK.20,000/-.
Up to December 2007, Tk. 3299.47 crore has been disbursed under various project/ programs of this Division where as this disbursement figure was Tk. 3056.63 crore up to December 2006.
The key features of some running projects/Programs of Micro Credits given as follows:
SL. Project/Programs Target group Loan size in Tk. Rate of Interest
1 Swanirvar Credit Program Poor Landless people 1,000-15,000 9%
2 Crop Godown Credit Project Small & Medium Farmers
Highest 10,000 9%
3 Sonai Bank -BARD, Comilla Priogik Gabesana Rin Prokalpa
Bittahin rural male & female
Highest 10,000 9%
4 Sonai Bank- RDA, Bogra Priogik Gabesana Rin Prokalpa
Bittahin rural male & female
Highest 10,000 9%
5 Marginal and Small Farms System Crop Intensification program(MSFSCIP)
Marginal, Poor & Small Farmers
Highest 10,000 9%
6 Herbal & Forestry, Medicinal Plant & Nursery Development Credit program
Bittahin, Poor Energetic Youth
5,000-25,000 9%
7 Grameen Khudra Babsa Rin Karmasuchi Poor People Highest 50,000 10%
8 Daridra Bimochane Sahayta Rin Karmasuchi
Hard Core Poor People 5,000-10,000 8%
9 Loans to Disable People Disabled People 25,000-50,000 10%
10 Unmesh Credit Program Micro Entrepreneurs 50,000-2,00,000 9%
11 Goat Rearing Credit Program Small &Medium Entrepreneurs
Highest 50,000 8%
12 Credit for Urban Women Micro Enterprise Development (CUMED)
Urban Women Entrepreneurs
Highest 5,00,000 10%
13 Bank-NGO linkage Credit Program Poor People Highest 5000-50,000(Loan Wholesaling to NGOs)
11%
14 Khudra Khamar Rin Karmasuchi Small Entrepreneurs Highest 50,000 9%
15 Salt Production Credit Program Actual Salt Producer 5,000-12,500 9%
16 Individual Irrigation / Agriculcural Equipment Credit Program
Small, Marginal & Medium Farmers
10,000-16,500 9%
17 BRDB Crop Credit Program Small, Marginal & Medium Farmers
8,000-15,000 8%
18 BRDB Integrated Rural Development Program
Co operative Poor Male & Female Member
1,500-20,000 8%
19 BRDB Rural Livelihood Program Small, Marginal & Medium Farmers
5,000-20,000 6.25%
20 BRDB -Shrimp Culture Credit Program Small, Marginal & Medium Farmers
2,333-28,000 8%
21 Special Loan for SIDR affected Area SIDR affected People Highest 20,00 8%
Personal BankingSonali Bank Limited extends all the major personal banking facilities and services to its customers with its skilled manpower and largest network of around 1180 branches covering all the urban and remote rural areas of Bangladesh. Sonali Bank Limited provides Local & Foreign Remittance in quickest possible time. Foreign remittance is available in both T.C. & Taka draft.
1. Transfer of fund from one branch to another by
- Demand Draft Savings A/C
- Mail Transfer Daily Profit A/C
- Telegraphic Transfer FDR A/C
2. Transfer of fund on Standing Instruction Arrangement. Trade Finance
3. Collection of cheques through Clearing House/beyond Clearing House.
4. Issuance of Payment Order / Call Deposit.
5. Locker facilities for safe keeping of valuables
6. Corporate Client Services with computerized system at selective branches.
International FinanceSonali Bank Limited expertise in International Banking has a record of in-house growth over more than half a century. Its pioneer role in handling foreign trade and foreign exchange transactions ever before independence of the country still remains unchallenged. With wide network of branches at home and also a large number of correspondent banks world-wide it is singularly handling the largest volume of export-import business including home-bound remittances.Products & Services:
Export Credit (Pre-shipment & Post shipment) Facilitating Supplier's Credit
LCs (Letters of Credit)
Guarantees in Foreign Currency- Bid Bond- Performance Guarantee- Advance Payment Guarantee.
Bill Purchasing/Discounting
Remittance, collection, purchases & sales of Foreign Currency & Traveller's Cheques.
NRAT (Non-Resident Account in Taka)
NFCD A/c (Non-Resident Foreign Currency Deposit)
RFCD A/c (Resident Foreign Currency Deposit)
Convertible and Non-convertible Taka Account
Forward contracts
Correspondent Banking Relations
Import Finance:
Sonali Bank Limited supports its customers by providing facilities throughout the import process to ensure smooth running of their business. The facilities are:a. Import Letter of Credit.b. Post Import Financing (LIM,LTR etc).c. Import collection services & Shipping Guarantees.Interest rate: 12.00% to 14.00%Export Finance :Sonali Bank Limited offers extra cover to its
customers for whole export process to speed up receipt of proceeds.The facilities are:a. Export Letters of Credit advising.b. Pre-shipment Export Financing.c. Export documents negotiation.d. Letter of Credit confirmation.Interest rate: 7.00% + 1.00% Service Charge
Industrial FinanceCredit Schemes:Long term loan for setting up new industrial units and BMRE of existing units including working capital finance are extended by Sonali Bank Limited to cottage industries, small-medium-large scale industries and also to self-employed persons with a view to creating employment opportunities, deployment of resources, increasing GDP and over-all industrial development of the country. Currently the following credit schemes are on offer by the bank:Some of the main Credit Schemes:
Industrial Financing for Thrust Sectors. Sonali Bank Industrial Credit Scheme.
Special Investment Scheme for Cottage and Small Industries.
Financing Large Scale Industries through Banks' Consortium.
Financing Software Development and Data Processing.
Designated Branches:About 100 branches including all the corporate and district headquarters branches are designated to handle industrial credit. Thrust Sectors: Besides the traditional and oft-trodden sectors, Sonali Bank Limited has also come up with very low rate of interest to finance the following thrust sectors of the economy as identified by the Government:
Software development and data processing. Agro-based industries (excepting cold storage for preservation of potatoes).
Manufacture of artificial flowers.
Frozen foods.
Gift items (preferably export oriented).
100% export oriented finished leather goods.
100% export oriented jute goods.
Jewelry and Diamond cutting and polishing.
Oil and Gas.
Sericulture and silk industries.
Stuffed Toys (preferably export oriented).
100% export oriented textile industry (excepting garments manufacturing industries).
Other Viable Industrial Sectors: Composite textile (woven & knit fabrics). Textile / Acrylic Spinning.
Sweater Industry .
Garments Accessories & Washing Plant.
Denim Fabrics (export oriented).
Tourism / Hotel and Resort facilities.
Hospital & Clinics.
Other Export linkage industries.
Power Generating Plant.
LPG, CNG Filling & Conversion plant.
Pharmaceutical Ind.
Plastic Ind.
Tannery/Rubber Foot wear.
Other highly rewarding appropriate technology based projects.
Interest Rates: Project/Term Loan : 12.00% to 13.00% Working Capital : 13.00%
Schemes
Consumers' CreditWith the steady development of the industrial and the service sectors in Bangladesh, the level of personal consumption has recorded progressive growth. To cater to the growing demand for consumer durables, Sonali Bank Limited has launched the "Consumers' Credit Scheme", with the following features:Eligibility: Permanent employees with 5 years service in Govt., Semi-Govt. organization and Autonomous & recognised bodies.
Loan Limit: Maximum Tk. 1.00 lac. Debt-equity ratio:75:25 Interest rate(w.e.f. 01, September 2009):14.00%
Mode of repayment: Monthly installment.
Period of loan: Maximum 3 years.
Security:
a) Hypothecation of consumer goods to be purchased.b) Letter of guarantee from the employer.c) No objection certificate & salary certificate from employer.d) Lien on provident fund/gratuity.
Designated Branches: All district branches and the corporate branches
IT Finance
IT Project Financing
For growing international markets for software and data processing this scheme provides long term and short term credit facilities on easier terms to set up and run IT based projects.
Eligibility:
Entrepreneurs of them at least two with recognized degree/diploma in Computer Science or Electrical Engineering / Telecommunication / Applied Physics & Electronics, forming a private limited company may apply. Experience in the related field will be preferred.
Loan Limit:
Maximum Tk. 1.50 million. In deserving cases, up to Tk.10.00 million may be considered. Debt-equity ratio:80:20
Period of loan:
Maximum 6 years including 1 year grace period.
Security::
In case of Rented premises collateral of immovable at least covering prayed loan is needed. in case of project with own land & building no collateral security other than the personal guarantee of the loanees is required. Entrepreneurs offering collateral security will be preferred.
Or Loan may be consider with personal guaranty of worthy person(s) (Third party) and in such case original certificates on academic achievements of the sponsor are required. Interest rate(w.e.f. 01, September 2009):11.00%
IT Export Financing
For export of software and processed data short term finance is extended to existing IT projects.
Eligibility:
Feasibly implemented and properly staffed IT projects with export L/C or firm contract in hand may apply. Export through settlite, BTTB confirmation required.
Loan Limit: Tk. 1.00 million. For larger contract higher amount may be considered. Debt-equity ratio:90:10
Period of loan: L/C or Contract period plus 21 days but not exceeding 180 days from the date of disbursement.
Security: L/C or Contract period plus 21 days but not exceeding 180 days from the date of
disbursement. Interest rate (w. e. f. 01, September 2009):11.00%
Loan facility for Diagnostic Center
Sonali Bank Limited has launched a new loan scheme for "Diagnostic Center" to promote medical facilities. The salient features of the scheme are as follows:
Nature of loan : Cash Credit (Hypothecation).
Debt-equity ratio : 60:40
Interest rate(w.e.f. 01, September 2009)
: 14.00%
Primary Security : Stock of Chemicals, X-ray papers, Injection Syringe, Medicine etc.
Collateral Security : Collateral security twice the value of the loan is required.
Period of Loan : One Year.
Investment Bond
1. Wage Earner's Development Bond
2. US Dollar Investment Bond
3. US Dollar Premium Bond
4. Govt. Treasury Bill and Bond
FUNDAMENTALS OF CREDIT
DEFINITION OF CREDIT
The word “Credit” is derived from the Latin word “Creditum” meaning “I believe”. The term may be defined broadly or narrowly. More generally the term credit is used narrowly for debt finance. Credit is simply opposite of debt. Debt is obligation to make future payment. Credit is the claim to receive the payments. Both are created in the same act of borrowing and lending.
Speaking broadly, credit is finance made available by one party (lender, seller, or shareholder/owner) to another (borrower, buyer, corporate or non-corporate firm). Credit can also be defined as the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay
or return those resources (or material(s) of equal value) at a later date. In a simple sentence, it is any form of deferred payment.
MODES OF CREDIT
Loans and advances primarily have been divided into two major groups. One is continuous credit and another is fixed term loans. Continuing credits are the advances having no fixed repayment schedule, but have an expiry date at which it is renewable on satisfactory performance. Fixed term loans are the advances made by the bank with fixed repayment schedules. The term loans are defined as follows:
Short term: Up to 12 months.
Medium term: More than 12 up to 36 months.
Long term: More than 36 months.
As initiated by Bangladesh Bank BCD Circular NO. 8 dated 25.04.94 different kinds of lending were subdivided into 7 categories for fixation of rates of interest by the individual banks on competitive basis depending on the cost of funds, prevailing market condition and monetary policy of the country.
I. Agriculture:
Loans to primary producers engaged in farming, fishing, forestry or livestock and loans to input dealers/distributors fall under this category. Loans to processors or traders of agricultural products are not to be categorized as agricultural loans.
Agricultural loans may include short, medium and long-term loans as well as continuing credits. As such it may fall under the head Loan (Gen.), Hire-purchase, Lease financing.
II. Term Loan for Large and Medium Scale Industry:
This category of advances accommodate the medium and long term financing for capital structure formation of new industries of the existing units who are engaged in manufacturing goods and services. Term financing to tea gardens may also be included in this category depending on the nature and size.
As the financing under this category have fixed repayment schedule it falls under the head Loan (Gen.), Hire-purchase, Lease Financing.
III. Term Loans to Small and Cottage Industries:
Small industries is presently defined as those establishment whose total investment in fixed capital such as land, building, machinery and equipment excluding taxes and duties does not exceeded 30 million taka and investment in machinery and equipment excluding taxes and duties does not exceed 10 million taka. Cottage industries also fall within this definition. Medium and long-term weaver credits are also included under this category.
Bangladesh Bank gives interest subsidy at 3% to the Banks on loans extended under this category. No short term or continuing credits is to be included in this category. Like the Large and Medium Scale Industry it is also allowed in the form of Loan (Gen.), Hire-purchase, Lease Financing.
IV. Working Capital:
Loans allowed to the manufacturing units to meet their working capital requirements irrespective of their size big, medium or small fall under this category. These are usually continuing credits and as such fall under the head Cash Credit.
V. Export Credit:
Credit facilities allowed facilitating export of all items against Letter of Credit (L/C) or confirmed export orders fall under this category. It is accommodated
under the head Export Cash Credit (ECC), Packing Credits (PC), Foreign Documentary Bill Purchased (FDBP), and Local Export Bill Purchased etc.
VI. Commercial Lending:
Short term loans and continuing credits allowed for commercial purposes other than export fall under this category. It includes import financing, financing for internal trade, service establishment etc. no medium and long-term term loans are accommodated here. These categories of advances are allowed in the form of:
Loan against import merchandise (LIM)
Payment against import documents (PAD)
Secured overdrafts (SOD)
Cash Credit (CC)
Loan (Gen.)
VII. Others:
Any loan that does not fall in any of the above categories is considered under the category “Others”. It includes:
Transport equipment
Construction works including housing (commercial / residential)
Work order finance
Personal loans etc.
CREDIT MANAGEMENT OF SONALI BANK LIMITED
Credit Planning
Credit planning implies efficient utilization of scarce (loanable fund) to generate earning for the bank. Constituents of credit planning are forecasting of deposit
collecting sources, forecasting of loanable fund, allocation of fund in a prudent way, taking decision about the collateral, setting interest rate, decides time limits for different loans.
Credit planning has got a serious importance because loanable fund comes out of deposit mobilized from the people. So safety of people’s money should be ensured carefully and efficiently. Unplanned lending may create hazard in two ways. Firstly, excess lending may create liquidity crisis for the bank. Finally, too much conservative lending may make the loanable fund idle. But cost-bearing fund again incurs operating cost for the bank.
Excess liquidity led by unplanned inadequate lending push the profitability to decline. Planned credit helps to maintain conformity with the national priority.
Unplanned credit may upset the total economic stability from macro economic point of view either by making inflation or deflation. The recent banking failure in USA was primarily due to credit default. Credit default or credit crunch causes from the mismanaged credit systems.
PORTFOLIO MANAGEMENT OF CREDIT
Portfolio management of credit implies the deployment of loanable fund among alternative opportunities through proper allocation. The objective of portfolio management of credit is the best and efficient management of loan to ensure profitability. Designing the size and pattern of loan portfolio with accuracy is a tough job. Even then, a prudent loan portfolio management can be done by careful consideration of the factors mentioned in the following:
Bank’s Capital Position
Deposit mix (Tenure of deposit)
Credit environment
Influence for monetary and fiscal policies
Credit needs of the respective commanding area
Ability and experience of the bank personnel to handle the loan portfolio
In designing a loan portfolio, nine things should be decided. These are given below:
i. Assessing the credit culture of an institution
ii. Setting portfolio objectives and risk tolerance limits
iii. Establishing a portfolio management information system
iv. Formulating portfolio segmentation and risk diversification objectives
v. Analyzing adequately loans originated by other lenders
vi. Establishing aggregate policy and underwriting exceptions systems
vii. Subjecting portfolios to stress tests
viii. Maintaining independent controls
ix. Analyzing portfolio risk-reward trade-offs
With each and every coin of loan, there is an involvement of risk. So the quantum of risk should be spread over the various types of loan though diversification. Diversification of credit can be made by extending credit to different sectors, to different geographical area, to different line of product or business and allocating the loanable fund into different type of credit.
Again the construction of credit into a particular sector or area, product or business should also be observed carefully. If credit is already been concentrated to a particular streamline mentioned earlier that should be avoided.
Finally, the type and tenure of deposit should be analyzed carefully in determining the loan portfolio of a bank. How much quantum of fund will be earmarked for long term lending and how much for short term depends to a large extent on the deposit structure.
LENDING FUNCTION AND OPERATION
Preliminary Screening of a Credit Proposal
Screening means critical diagnosis of a credit proposal at the very initial stage. It should be made carefully just after the proposal comes to the bank. At the time of screening of a credit proposal the preliminary screening should be done on the following premises:
Quality of management and the entrepreneurial background of the sponsors
Equity strength i.e. own capital positions
Line of business, it’s future prospects and the existing position of the respective industry
Required technology, machinery, equipment and their availability
Location, whether the infrastructural facilities are available
Potential contribution to the overall economic development of the country
Security proposed to be given and the gentility of the title of documents
Analyzing the above matters, it is to be convinced that the credit proposal satisfies all the key elements of a sound lending policy such as:
i. Limit on total outstanding loans
ii. Geographic limits
iii. Credit concentrations
iv. Distribution by category
v. Type of loans
vi. Maturities
vii. Loan pricing
viii. Lending authority
ix. Appraisal process
x. Maximum ratio of loan amount to the market value of pledged securities
xi. Financial statement disclosure
xii. Impairment
xiii. Collections
xiv. Financial information
SELECTION OF BORROWER
Selection of borrower is a very significant part of a credit decision. The borrower should be analyzed prudently. Degree of risk has an inverse relationship with the selection of borrower. Selection of right borrower reduces the risk of non-repayment of the loan. To the contrary, degree of risk of non-repayment increases with the selection of wrong borrower. In our country, the huge volume of non-performing loan is mainly the result of failure in selecting right borrower. So if it is found that, line of business is prospective and profitable but the potential borrower is not right one, the proposal should not be entertained. There are some parameters for selection of borrower. Some ‘C’s commonly expresses the parameters. And thus the criteria for selection of a borrower are popularly known as 6 ‘C’s such as:
Character:
The outcome of analyzing the character is to have overall idea about the integrity, experience, and business sense of the borrower. Two variables; interaction / interview and market research are used to analyze the character of the borrower.
I. Interaction/ interview: the indicators are
a. Prompt and consistent information supply, information given has not been found false (willingness to give information)
b. CIB also reveals business character
c. Willingness to give owns stake/equity and collateral to cover
d. Tax payer
II. Market Research:
a. Information on business is verified
b. Dealing with supplier and or customer as supplier is also a kind of lender; the payment character can also be verified.
Capital
For identifying the capital invested in the business can be disclosed using the following indicators:
a. Financial statements
b. Receivable, payable, statements to practically assess the business positions. Net worth though financial statements or from declaration of assets and liabilities
Capacity (Competence)
Capacity of the borrower in running the business is highly emphasized in the time of selecting a good borrower. As the management of the business is the sole authority to run the business that is use the fund efficiently, effectively and profitably. The indicators help to identify the capacity of the borrower:
a. Entrepreneurship skills i.e. risk taking attitude shown by equity mobilization.
b. Management competencies both marketing and products detail, ability to take decision.
c. Resilience or shock absorption: Connection, Back up (if first time falls second lines come to help.)
Collateral
The assets offered as collateral are the second source of repayment and it is offered to the bank is to cover the additional risk that arise due to the default culture.
Cash flow
Cash flow is the vital factor that is used to identify whether the borrower will have enough cash to repay the loan or advance. Cash keeps the liquidity to ensure repayment. The credit officers try to identify the annual cash flow from the submitted statements.
If the borrower’s found satisfactory in terms of all C’s only then it is suggested to entertain the borrower.
PRICING OF LOAN
Pricing of loan is a great important element in banking business. Because through pricing, bank usually create margin. So it is to be determined carefully. In pricing, four components are to be calculated prudently otherwise pricing of that loan will create a definite loss for the bank. The components are:
i. Interest expense or cost of fund:
The interest to be given to the depositor and to central banks for borrowing
ii. Administrative Cost
iii. Cost of Capital:
Return expected by the investors for their capital invested in the bank
iv. Risk Premium
Addition of the first three elements will provide the “Prime rate” beyond which a bank can never go for lending.
Magnitude of the risk premium creates margin for the bank. And this rate of risk premium may vary from person to person and even from sector to sector depending upon the value or importance of the client and the prospective priority of the sector. Once upon a time, it was dictated by the Central Bank but now-a-days, in compliance with the open market operation this power has been delegated to the enlisted commercial banks.
CONCEPTS OF ACCONTING – FINANCIAL STATEMENTS
1. Concepts of Accounting
The basic concepts of accounting are:
a. Money measurement concept
b. Entity concept
c. Cost concept
d. Conservatism concept
e. Consistency concept
f. Dual aspect concept
g. Time period concept
h. Matching concept
i. Materiality concept
j. Going concern concept
2. Financial Statements and its Analysis
Financial statement is the end use of financial accounting. Financial statements are prepared by collecting, formulating and compiling the accounting data in a consistent and logical accounting procedure. Very popularly we used to understand the financial statements simply by the Balance sheet and income statement. But financial statement is in fact a purpose oriented financial picture. There are generally five parts of a financial statement. These are:
i. Retained Earnings Statement
ii. Fund flow Statement
iii. Cash flow Statement
iv. Profit and Loss account
v. Manufacturing account (in case of Manufacturing Co.)
Analysis of financial statement is the process of evaluating significant relationship between the components of the financial statement. The purpose of analysis is to obtain a better understanding of the firm’s position and performance.
3. Assessment of working capital
The capital, which is needed to meet current obligation and to finance day-to-day operational expenditure of a firm, is working capital. Assessment of working capital bears great importance because excess working capital incurs cost for the firm and in reverse, shortage of working capital may totally upset the smooth operation of the firm.
Practically, working capital becomes obvious for the following reasons:
a. For purchase of raw materials, stores and spares
b. For making advance payment to the raw material suppliers
c. Blocking of fund in work-in-process and finished goods
d. Blocking of fund with sundry debtors
e. For meeting day to day cash expenditures
ASSESMENT:
Required components of working capital are to be computed prudently, for example, for a manufacturing concern, need for working capital can be assessed by calculating the major components:
i. Projected annual sales
ii. Yearly consumption of raw materials
iii. Annual labor charges
iv. Overhead costs
v. Stock of raw materials
vi. Stock in process
vii. Stock of finished goods
viii. Credit allowed to customer in days
ix. Credit received from suppliers in day
x. Annual selling and administrative experience
xi. Annual depreciation
xii. Closing inventory
The days or tied up period for stock of raw material (Local/ imported), stock in process, stock of finished goods, credit allowed to customers, credit received from suppliers should be considered very prudently.
A sample format can be shown for easy understanding of working capital assessment:
Components: Tk.
1. Stock of R.M. = = ***
2. Stock in Process = = ***
3. Stock in finished goods = = ***
4. Credit allowed to customer = =***
***
Less:
5. Credit received from suppliers = = ***
Gross requirement of working capital ***
Less:
6. Margin (Negotiable with the client) ***
Net requirement of Working Capital ***
Note:
Cost of production = RM + DL + OH + Depreciation
Cost of Sales = Cost of Production + Selling and Admin. Exp – closing inventory
Working Capital requirement may vary case to case depending upon the nature of industry, length of operating cycle, seasonal nature of industry, credit practice in purchase and sales, company policy relating to depreciation, dividends and
expansion, Govt. policy relating to taxation, nature of raw materials – local or imported, perishable or non-perishable etc.
CREDIT SCORING SYSTEM
Credit scoring system is a modern approach for assessing the credit worthiness of a potential borrower. Credit scoring system helps to produce a rating, which provides an indication of a company’s management ability and financial strength. CRG used as the tool for scoring a credit.
DOCUMENTATION OF LOANS AND ADVANCES
Immediate after sanctioning of loan, documentation is to be made properly before disbursement of loan. Documentation formalities are commonly known as completion of “Charge Document” in the banking world. Type of documents to be signed by the client varies depending upon the nature of loan and advances given. Some common documents are listed below:
i. Demand Promissory (DP) Note
ii. Letter Arrangement
iii. Letter of Agreement
iv. Letter of continuity (in case of continuous loan)
v. Letter of pledge (in case of Pledge)
vi. Letter of Hypothecation (in case of Hypothecation)
vii. Letter of Undertaking
viii. Letter of Debit Authority
ix. Letter of Installment (in case of term loan to be paid in installment)
x. Letter of Guarantee (Personal Guarantee)
CREATION OF CHAEGE OVER SECURITIES
As a safety measure, bank has to create charge over the securities against the risk of non-repayment of loan. Here in this chapter, the most common modes of charge creation are defined below in a very brief from:
1. Pledge
According to the section 172 of the Contract Act, when a borrower surrenders his business goods to the banker’s custody as the security of loan given by the bank then it is called pledge. The pledged goods remain with the possession and control of the bank and the client draw the goods in case of need with the permission of the bank by repaying adequate amount of loan. Bank usually permits drawing power (DP) to the borrower to draw the goods from its custody after checking the stock report. In case of default, bank deserves the right to realize the loan by selling the pledged goods. Bank creates this charge based upon the letter of pledge which has been taken from the bank borrower before disbursement.
2. Hypothecation
When loan is given to the borrower against hypothecated possession of goods then it is called Hypothecation. The physical possession and control remain with the borrower’s custody. Bank creates charge over the hypothecated goods in case of default. For creation of this charge bank takes the letter of hypothecation from the borrower.
3. Lien
Lien is the right of the creditor to retain the goods or properties given by the borrower to the creditor as the security against the loan. The creditor deserves the right of lien until the debt is paid. Lien can be of two types.
Particular lien:
In particular lien, the creditor can retain goods only introspect of a particular debt.
General lien:
As per the declaration under section 171 of the Contract Act 1872, the creditor in absence of any contract on any contract to the contrary exercise lien and retain the security of any goods bailed to them for a general balance of account.
In the event of default by customer, the banker can sell the goods or securities retained after giving a reasonable notice.
4. Assignment
Assignment is the transfer of a right, property or debt, existing or future by one person to another person. In banking the usual subject of assignment is “auctionable claims”. Common types of assignments are:
i. Book debts
ii. Contract money due from Govt. or semi Govt. bodies
iii. Supply bills
iv. Life insurance policies
5. Set-off
Right of set-off is the right of a banker to combine all the accounts of a customer to realize the debt. Set-off accrues to the banker as a result of banker-customer relationship. If a customer maintains more than one account with the bank, usually bank obtains a prior letter of set-off so that bank can combine them at its discretion without giving any notice to the customer. The judgments in different cases reveal that bank can combine more than one account of a customer maintains with different branches of the same bank.
6. Mortgage
As per the declaration of the transfer of Property Act 1882 under section 58 (a) mortgage is the transfer of an interest in specific immovable property for the purpose of securing the repayment of money advance or to be advanced by way of loan, existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. The transferor is called the mortgagor and the transferee is called the mortgage. The mortgagor gets back all his rights to the mortgaged property on repayment of loan due there on. Mortgage may be of different types, such as:
i. Registered or simple Mortgage
ii. Equitable Mortgage
iii. English Mortgage
iv. Anomalous Mortgage etc.
Among these, first two are used more frequently.
i. Registered or Simple Mortgage:
Where without delivering possession of the mortgaged property, the mortgagor binds himself personally to repay the debt. The mortgagee (Bank) can sell the property by obtaining decree from the court.
ii. Equitable Mortgage:
Where mortgagor delivers the documents of title of immovable property with intention to create a security thereon, the transaction is called mortgage by deposit of the deeds or equitable mortgage.
LOAN CLASSIFICATION AND PROVISIONING
Classification:
Classification of loan is mandatory for all scheduled commercial banks. It has become obvious due to the bad culture of fabricating the income by window
dressing of the financial statement of the commercial banks. It has been observed that sometimes bank income is being calculated by showing the unrealistic expected income. To protect this ill practice, classification of loan has come to effect basing upon a standard criterion.
Loans are classified into three categories or the basis of the length of overdue. These are:
i. Substandard:
If the loan regains overdue for 9 months and above
ii. Doubtful:
If the loan remains overdue for 24 months and above
iii. Bad or Loss:
If the loans remain overdue for 36 months and above
The criteria of loan classification are:
a. Overdue
b. Required payment
c. Limit overdrawn
d. Legal action
e. Qualitative judgment
Provisioning:
Specific Provision:
After getting list of the classified accounts where no loss is anticipated, partial or total loss is anticipated, audit report by Audit division and Bangladesh Bank,
previous and current portfolio by external auditors and branch managers comments on the classified accounts, Head office credit division prepares a list of credit accounts which are considered to be totally or partially be unrecoverable.
Rate of Provisioning
Sonali Bank Limited in the time of loan provisioning to get the real picture of the income mainly follows the Bangladesh Bank guideline. The rate of provisioning used in SBL is summarized in the following table:
Class Rate of Provisions
Short Term Agriculture Credit All other Credits
Unclassified 5% 1%
Substandard 5% 20%
Doubtful 5% 50%
Bad or Loss 100% 100%
Class Rate of Provisions
Consumer Financing Other than HF and LP
Consumer Financing HF and LP
Unclassified 5% 2%
Substandard 20% 20%
Doubtful 50% 50%
Bad or Loss 100% 100%
Accounting Procedure of Interest on Classified Loan
The accounting procedure in dealing the interest earned on the classified loan is very important because the treatment may overestimate the earning of the bank. The accounting procedures followed in SBL are pointed out below:
a) If any credit or advance is classified as substandard or doubtful, the interest will be charged on the credit account but such interest is not transferred to the income account rather it is kept on the interest suspense account.
b) If any loan or advance is classified as Bad and Loss, the interests of that account are suspended instantly. If any suit is required to be filed for recovery of such credit, then it is filed on the total amount of the principal including the interest calculated up to the period before the suit is filed. Such interest is kept on the interest suspense account.
c) If any classified loan or part of that loan is recovered, the interest will be adjusted first then the original loan will be adjusted.
Supervision Monitoring and Recovery of Credit
Recovery of loan ensures the recycling of fund. Non-recycling of fund leads a bank or financial institution to become stagnant. So, recovery of loans and advances is a
must. But the scenario of loan recovery is undoubtedly poor and inefficient in our financial system. Willful non-repayment of loan has become a culture in our country. This is mainly because of inadequate, inefficient and even absence of supervision and monitoring system.
No doubt, a baker before sanctioning a loan carefully evaluates and appraises the loan proposal of the borrower to determine their “Bank ability” on the basis of the principles of sound lending but simply an appraisal of loan proposal is not a guarantee against risk of non-payment by the borrowers. This is only a part of the job. The other and equally important responsibility of the lending Banker is to follow up and supervise the use of the credit.
So, a banker while sanctioning any loan should ensure that the credit facility is allowed to the genuine economic purpose, money lent is properly used for the generation of income through increased economic activities and borrowed money is repaid in time. All these can be ensured through an effective supervision and follow up system of the advances.
The two terms supervision and follow up are closely related. These two terms seem to be the same, but there is a slight difference between these two terms. According to prominent writer of books on banking these are explained as follows:
I) Supervision gives more emphasis on proper end use. Supervision keeps track of the end use of fund lent. It includes adequate arrangement by Banks for maintaining close contract with the borrower and his activities in order to remain well informed about the position and progresses of the purpose financed and offer appropriate guidance to the borrower, where necessary.
II) Follow up gives emphasis on timely recovery of the advances. Follow up includes efforts to ensure that the terms and conditions of the advances at pre-disbursement, disbursement, post disbursement and recovery stages are complied with and money lent is repaid as per schedule of repayment. It also
includes efforts to regularize the irregular advances. Recovery of advances largely depends on the effective follow up.
Previously, advances were security oriented and allowed to traditional sectors. The Bankers were security conscious and little emphasis was given to the purpose and use of credit. With the changed circumstances, the concept of lending has been changed. It now covers a wide range of economic activities both in traditional and non-traditional sectors and both in urban and rural areas. Many of the borrowers do not have asset holding to meet up the so-called security. It, therefore, logically follows that in the absence of the traditional security, an effective system of supervision and follow-up needs to be ensured. If effective supervision and follow-up can be ensured, no advance can become stuck-up and even the most conservative banker will not have to any anxiety for recovery of the money lent.
Credit monitoring implies that the checking of the pattern of use of the disbursed fund to ensure whether it is used for the right purpose or not. It includes a reporting system and communication arrangement between the borrower and the lending institution and within department, appraisal, disbursement, recoveries, follow-up etc.
The Credit officer checks on the following points:
a. The borrower’s behavior of turnover
b. The information regarding the profitability, liquidity, cash flow situation and trend in sales in maintaining various ratios
Recovery can be ensured or at least making close supervision and monitoring can increase rate of recovery. Supervision should be started from the starting point of a credit proposal. Supervision can be done in two stages:
i. Pre-finance Stage Supervision :
In this stage, supervision should be made –
To select the right borrower i.e. credit worthiness of the borrower
To be sure about the business prospect
To see whether any misstatement made by the borrower etc.
ii. Post finance stage Supervision:
Post finance stage supervision is sometimes synonymous to the monitoring. Monitoring is a continuous process of overseeing the borrower, his business, his trend in repaying the loan. In this stage, supervision and monitoring should be made-
To see whether the borrower draws the sanctioned credit regularly
To see whether the loans are being properly and fully utilized
To see whether the borrower repays the loan regularly
To see whether any significant change happens in the management of the borrower
To see whether the borrower maintains close contact with bank regularly
To see whether any significant change happens in the borrower’s business plan
To make the borrower aware about the timely repayment of loan
To take necessary step in case of need
It has proved that supervision and monitoring help to develop a cooperative attitude between the borrower and the bank. Moreover, close supervision and monitoring make the borrower loyal to the bank and thus supervision and monitoring ensure the recovery of loan.
Management of Delinquent Client
When a problem loan is detected the responsible loan officer takes the corrective action and tries to minimize the loan losses allowing different facilities to the client. The steps practices in Sonali Bank Limited to manage the delinquent loan are:
a) Persuasion:
This is the first step practiced in the SBL to manage the problem loan. This steps involves –
Open discussion with the borrower about the problem he is facing
Discussion with third party to find out the underlying reasons
Issuing “First reminder” letter to inform the due date and ever due installments
If the party doesn’t response issuing “Second reminder” and then “Third reminder” letter
b) Negotiation:
If the persuasion failed, the loan officer negotiates a plan of action with the borrower to try to extract both the bank and the borrower from possible loss. This calls for certain sacrifices on the part of the bank and borrower in their mutual interest. The plan of action in SBL consist of –
Revise loan agreement
Concession of interest (if the client was difficult to manage)
Reschedule of the loan and giving installment facility to repay the overdue amount beside the regular installment
c) Litigation:
If after rescheduling the loan and or failed to negotiate with the delinquent client, SBL go for taking legal action against the delinquent client to recover the loan. The branch managers send a letter to the Head Office credit
department informing the borrower’s reluctance to repay and negotiate the loan.
Filing case against the client
Assigning the loan officer for assisting the lawyer
As soon as an account is classified the branch manager will send a detailed report of delinquent client to the Head Office’s Particular Credit Division. After that, a monthly report on all delinquent facilities is to be sent to the Head Office Credit Division jointly signed by the Branch manager with the second officer/ credit officer. Beside this the branch manager should include the action plan taken against the delinquent account and status report.
OPERATION RESULT OF SONALI BANK LIMITEDGrowth of Credit in SBL
Credit Distribution:
Credits are provided in different fields in different names. Sonali Bank Ltd provides various types of credits to their clients. Credit disbursement in 2007-2008 given below in different categories:
Credit Types
31.12.08 31.12.07 Change In (%) Change
Total (%) in advance
Loan (General)
Industrial
Agricultural
Other Loans And Advances
Recovery of Credit
Division
C.L Target
Recovery
Recovery (%)
Bad & Loss
Target
Recovery
Recovery
(%)
LO
IPFD
Dhaka
Barisal
Sylhet
Rajshahi
Khulna
Ctg.
Total
RPOFITABILITY ANALYSIS OF A BANK
Many banks will have to take and manage higher risks in order to make acceptable returns. It will be increasingly important for a bank to be able to measure the risk taken to produce acceptable return during the coming period of challenging extent factors and deregulation. A bank performance will affect its valuation in the market, its ability to acquire other banks or to be acquired at a good valuation in the market and its ability to be funded in the deposit and financial markets.
ROE Model:
A bank’s ROE is derived from its return on assets (ROA) and its leverage multiplier. ROA, which is net income divided by total assets, should reflect the bank management’s ability to utilize the bank’s financial and real resources to generate net income. Many regulators believe ROA is the best measure of bank efficiency. Since ROA is lower of financial intermediaries than of most non-financial businesses, most intermediaries must utilize financial leverage heavily to increase ROE to a competitive level. The leverage multiplier to be applied to ROA is calculated by dividing assets by equity (assets minus all liabilities, borrowing and preferred stock).
Measuring Returns of a Bank:
Bank management’s primary objective is to maximize the value of the owner’s investment in the bank. Useful information on the appropriate trade-off between returns and risk is obtained from restively efficient markets for most publicly held banks. The management of the smaller banks seeks to achieve the highest returns for the risk level deemed appropriate by the owners and top management. However, the steps of measuring returns of a bank are as follows:
The first return measurement is the Interest Margin in percentage term, which income minus interest expense divided by earning assets (all securities and loans)
Interest income less both interest expense and other expenses divided by the revenue is leveled the Net Margin.
This net margin limes the Asset Utilization (revenues divided by assets) equals the ROA. It is important to note that is asset utilization figure is strongly affected by how much a bank has invested in earning assets.
When the ROA is multiplied by the Leverage Multiplier (asset divided by equity capital) is the most important measurement of banking returns because it is the ROE. The ROE (net income divided by the equity capital) is the important measurement of returns because it is influenced by how well the bank has performed on all other return categories and indicates whether a bank can complete for private sources of capital in the economy.
Measuring Risks of a Bank:
Risk measurement is related to return to return measurement because a bank must take risks in order to earn adequate returns. Four categories of risks are generally computed in bank:
i. Liquidity Risk:
A bank’s liquidity risk refers to a comparison of its liquidity needs for deposit outflows and loan increases with its actual and potential sources of liquidity, from either selling an asset it holds or acquiring an additional liability. It is computed by dividing short term securities with the deposits. The trade-off that generally exists between returns and risks are demonstrated by observing that a shift form short term into long term securities or loans would raise a bank’s return but would also increase its liquidity risk. The inverse would be true if short term securities were increased. Thus, high liquidity ratio for the sample bank would indicate a less risky and less profitable bank.
ii. Interest Rate Risk:
The bank’s interest rate risk is related to the changes in interest rates. The ratio of interest sensitive assets to interest sensitive liabilities is the measure of interest rate risk. Particularly in the period of wide interest rate movements, this ratio reflects the risk the bank is willing to take so that it can predict the future direction of interest rates. The difficulty of predicting interest rates, some bank has concluded that the way to minimize interest rate risk is to have an interest sensitivity ratio to close to 100 percent.
iii. Credit Risk:
Credit risk measures the risk of medium quality loans into assets. The relative amount of past due loans or loan loss would be a better measure but such data are not available. The credit risk is higher if the
bank has more medium quality loans, but the returns are usually higher too.
iv. Capital Risk:
Capital risk is measured by dividing capital by the risk assets. Capital risk indicates the risk of creditors can be shifted to the owners if the company is in jeopardized condition. The higher the capital risks the higher the safety for the creditors and the inverse is also true.
The capital risk is inversely related to the leverage multiplier and therefore of the ROE. When a bank chooses (assuming this is allowed by its regulators) to take more capital risk, its leverage multiplier and ROE will be higher, if other factor remains unchanged. If the bank choose (or is forced to choose) to lower capital risk, its leverage multiplier ROE will be lower.
PROFITABILITY ANALYSIS OF SONALI BANK LIMITED
Sonali Bank Ltd had a record of successful year. It earned remarkable profit in 2008. Profitability of a bank depends on ROE. But we can not avoid risk factors in case of a bank, because too much risk taking may harm the interest of the depositors. Here ROE model is applied for the profitability analysis of SBL.
MEASURING RETURNS OF THE SONALI BANK LIMITED
Interest Margin:
Interest margin indicates the net interest income into earning assets. Bank’s main earning source is its interest income. The higher the interest income is, the higher the possibility for the bank to survive. Interest margin for the bank is increasing trend for years, which is a good sign for the bank. In the year 2008 it was about ……..
Net Margin:
Net margin is the net income for the bank after covering all the expenses. Sonali Bank Limited made an exclusive profit in 2008 it was about …………By comparing the interest margin and net margin we can envisage the real source of earnings of this bank. In the year 2007 it was ………….due to ………..
Category Equation 2008 2007 2005 2004
Interest Margin
Net Margin
Asset Utilization Ratio
Return on Assets (ROA)
Leverage multiplier
Return on Equity (ROE)
Note:
Earning assets = Money at call and short notice, investments, advances
Net interest income = Interest and discount – interest paid on deposit
Net income = Net profit after tax
Revenue = Interest paid + Operating Income
Assets = Total Assets
Equity = Paid up capital + Retained Earnings
MEASUREMNET RISKS OF SONALI BANK LIMITED