ID#100354(2)

Credit Risk Management & Private Commercial Banks Performance in Bangladesh

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1.1 Background of the Study

Banks are useful to economic development through the financial services they provide. Their

intermediation role can be said to be a method for economic growth. The efficient and effective

performance of the banking industry over time is an index of financial stability in any nation.

The extent to which a bank extends credit to the public for productive activities accelerates

the pace of a nation’s economic growth and its long term sustainability. There are four (4)

State owned Commercial Banks, thirty nine (39) Private commercial Banks, ten (10) foreign

banks and nine (9) specialized development banks in Bangladesh.

The researcher has taken 3 Private commercial Banks as a sample to measure the Private

Commercial Banks Performance in Bangladesh. The researcher has measured the Performances

through different types of methods that represent all the Private Commercial Banks Performance

in Bangladesh. Because every Banks target is to collect the idle money from the people and

invest where deficit and also this process make profit. The Researcher 3 banks are United

Commercial Bank Ltd. (UCBL), Southeast Bank Ltd. (SEBL) and Standard Bank Ltd. (SBL)

whose are Bangladesh based financial institution and provides banking services. The services

include personal & business banking, loans, credit cards, online banking and money transfer

services. The entire bank operates in Bangladesh & headquarter is in Dhaka. Being committed to

the economic development of the country, the entire Private Commercial Bank has already made

a distinct mark in the area of private Sector Banking through personalized service, innovative

practices dynamic approach & efficient Management .The entire bank aiming is to play a leading

role in the economic activities of the country & is firmly engaged in the development of trade,

commerce & industry through a creative credit policy.

United Commercial Bank (UCB) started its journey in mid 1983 and has since been able to

establish itself as one of the largest first generation banks in the country. Its Authorized Capital

is 15,000.00 million Tk. & Paid up Capital is 8,366.00 million Tk. With a vast network of 148

branches, this Bank has already made a distinct mark in the area of Private Sector Banking

through personalized service, innovative practices, dynamic approach and efficient Management.

The Bank has expanded its arena in different and diverse segments of banking like Retail

Banking, SME Banking, Corporate Banking, Off-shore Banking & Remittance etc. Besides


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various deposit and loan products of Retail Banking, the Bank caters export and import loan to

deserving candidates which in turn helps the overall economy of the country through increased

earning foreign exchange.

Standard Bank Limited (SBL) was incorporated as a Public Limited Company on May 11, 1999

under the Companies Act, 1994 and the Bank achieved satisfactory progress from its commercial

operations on June 03, 1999. Its Authorized Capital is 15000.00 million Tk. & Paid up Capital is

5702.00 millions Tk. SBL has introduced several new products on credit and deposit schemes. It

also goes for Corporate and Retail Banking etc. The Bank also participated in fund Syndication

with other Banks. With 96 branches it has made personalized service, innovative practices,

dynamic approach and efficient Management.

Southeast Bank Limited is a private commercial bank in Bangladesh. The Bank’s journey began

when it was incorporated as a public limited Company on March 12, 1995. Its Authorized

Capital is 10000.00 million Tk. & Paid up Capital is 6390.00 million Tk. In the Registrar of Joint

Stock Companies and Firms issued the Certificate of Commencement of Business of Business of

the Bank on the same date. The Southeast Bank received its Banking License from the

Bangladesh Bank on March 23, 1995.With its 111 branches have expanded its arena in different

and diverse segments of banking like Retail Banking, SME Banking, Corporate Banking, Off-

shore Banking & Remittance etc.

Banks are in the Business of managing risk, not avoiding it. A bank’s success lies in its ability to

assume and aggregate risk within tolerable and manageable limits. Risk is the fundamental

element that drives financial behavior. Without risk, the financial system would be vastly

simplified. Financial institution should manage the uncertainty to survive in this highly uncertain

world. Only those banks have efficient risk management system, they can survive in the market

in the long run.

The credit function of banks enhances the ability of investors to exploit desired

profitable ventures. Credit creation is the main income generating activity of banks (Kargi,

2011). However, it exposes the banks to credit risk. The higher the exposure of a bank to

credit risk, the higher the tendency of the banks to experience financial crisis and vice-

versa. Interest rate risk is directly linked to credit risk implying that high or increment in interest


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rate increases the chances of loan default. Credit risk and interest rate risk are intrinsically

related to each other and not separable (Drehman, Sorensen, and Stringa, 2008).

Financial ratios as measures of bank performance has been collected from the annual reports and

accounts of Private Commercial Banks in Bangladesh and analyzed using descriptive, correlation

and regression techniques from the help of SPSS 16.00. The findings revealed that credit risk

management has a significant impact on the profitability of Bangladesh Private Commercial

Banks. Banks’ profitability depends on ROA, Total Investment to Total Assets, Profit Margin

Ratio and it is inversely related with Credit Risk.

All the banks vision are to be the bank of first choice in all terms, sustainable inclusive

business growth by ensuring efficiency, regulatory compliance, good asset quality, combination

of experience and professional talents, consistent profitability and of course good governance.

Pooling of deposits that are able to advance loans from which income is derived for their

survival. Bank offers all kinds of Commercial Corporate & Personal Banking services covering

all segments of society within the framework of Banking Company Act and rules and regulations

laid down by the Central Bank of Bangladesh.

1.2 Origin Of the Report

This report has been prepared to fulfill the partial requirement of Internship of BBA Program of

Business Administration Discipline, Khulna University supervised by Associate Professor Tania

Afroze, Business Administration Discipline, Khulna University, Khulna. The researcher has

attached with Credit Risk Management and Private Commercial Banks Performance in

Bangladesh & the researcher has prepared this report with the guidance of her supervisor and

after getting the approval from the supervisor work on this topic.

1.3 Objective of the study

Investigate the Credit Risk Management of Private Commercial Banks in Bangladesh.

Evaluate credit risk management practices and techniques in dealing with different types

of risk.


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Identify the factors that influence effectiveness of Banks Performance used by Private

commercial banks in Bangladesh.

1.4. Operational definition & Measurements

Now primary variables have been given but other variables may use for the Researcher report in

future. This report researcher has used five independent variables & one dependent variable.

Variable Operational Definition Measurement items Bank Performance screen banks on the basis of their

solvency, liquidity and overall performance

timing of supervisory detect possible

problems provide information to

the investors gives clear idea of

liquidity

Asset Quality is an indicator for the liquidation of banks

management of operations

level of liquidated banks

affects profitability

GNPAs/GA measure of quality of assets in loss of Non-Performing Assets situation

gross advances reduces value of Bank destabilizes credit

system TI/TA helpful to benefit from the possible

economies of scale make profit measures liquid Assets enrich economy

ROA to utilize the Assets employed in the company efficiently and effectively to earn a good return

generating profit indicate efficiency giving clear idea of an

financial institution. PMR determines its ability to withstand

competition and adverse conditions determines ability ensures efficiency contribute to the

economy

Table 1: Operational definitions & Measurement


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1.5. Methodology

This report has conducted data from 3 commercial banks in Bangladesh those are United

Commercial Bank Limited (UCB), Southeast Bank Limited (SEBL) & Standard Bank Limited

(SBL). The main sources have been collected from published Annual Report 2013. Causal

research design & descriptive research design have used for establishing the relationship between

the variables with Bank Performances. Descriptive Research Design has been conducted for

measuring Profitability ratio of Private Commercial Bank. Here Bank Performances is dependent

variable for measurement of profitability relatively to their assets and how the measurement is

efficient in utilizing the company assets to generate profit. The independent variables are Asset

Quality, Gross Non-Performing Assets to Gross Advances, Total Investments to Total Assets,

and Return on Assets & Profit Margin Ratio.

The Researcher population is all the Commercial Banks in Bangladesh. The Researcher has

taken Stratified Sampling that is probability methods of sampling for the 3 banks and the banks

are United Commercial Bank Limited, Standard Bank Limited and Southeast Bank Limited.

Here manipulation of dependent variable is Banks Performance with the control of independent

variables is Asset Quality, Gross Non Performing Assets to Gross Advances, Net advances, Total

Investments, Total assets. The Researcher has measured these factors by semi structured close

ended questions. Five point Likert Scale (SD= Strongly Disagree, MD= Moderately Disagree,

Ag= Agree, MA= Moderately Agree, SA= Strongly Agree) is used to identify correlation. For

the Researcher Report has to use various types of calculation. Those are given below:

1.5.1 Current Ratio

Current ratio is used primarily to ascertain a company’s ability to pay back its short-term

liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher

the current ratio, the better the company’s ability is to pay its obligations. The current ratio can

give a sense of the efficiency of a company’s operating cycle or its ability to turn its product into

cash.

Current Ratio =��

��


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1.5.2 Return on Assets

The Return on Assets of a company determines its ability to utilize the Assets employed in the

company efficiently and effectively to earn a good return. This ratio measures the

percentage of profits earned per Tk. of Assets and thus is a measure of efficiency of the company

in generating profits on its Assets. Higher ratio indicates efficiency of management in employing

its funds efficiently and economically.

ROA = Net Profit / Total Assets

1.5.3 Return on Equity

This ratio indicates how profitable a company is by comparing its net income to its average

shareholders’ equity. The return on equity ratio measures how much the shareholders earned for

their investment in the company. The higher the ratio percentage, the more efficient management

is in utilizing its equity base and better return to investors

ROE= Net Income/Average Shareholders’ Equity

1.5.4 Capital Adequacy Ratio

Capital Adequacy Ratio is the ratio of qualifying capital to adjusted (or weighted) assets. The

minimum capital adequacy ratio is at 10% for all banks that is prescribed by Bangladesh Bank. A

ratio below the minimum indicates that the bank is not adequately capitalized to expand its

operations. The ratio ensures that the bank do not expand their business without having adequate

capital.

CAR = Tier I capital + Tier II capital/ Risk weighted assets

It would be difficult for an investor to calculate this ratio as banks do not disclose the details

required for calculating the denominator (risk weighted average) of this ratio in detail. As such

banks provide their CAR time to time.


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1.5.5 Credits to Deposit Ratio

CD ratio that means how much of the advances lent by banks are done through deposits. It is the

proportion of loan-assets created by banks from the deposits received. It is the ratio, the higher

the loan-assets created from deposits. Deposits would be in the form of current and saving

account as well as term deposits. The outcome of this ratio reflects the ability of the bank to

make optimal use of the available resources

CD Ratio= Total Advance/Total Deposit

1.5.6 Gross NPAs to Gross Advances Ratio

The Gross NPAs to Gross Advances ratio is a measure of the quality of assets in a situation,

where the management has not provided for loss on NPAs (Non-Performing Assets). Here

Gross NPAs are measured as a percentage of Gross Advances. Lower ratio indicates better

quality of advances.

Gross NPAs to Gross Advances Ratio = Gross NPAs / Gross Advances

1.5.7 Net NPAs to Net Advances Ratio

This ratio is the most standard measure of Assets Quality. This ratio measures Net NPAs as a

percentage of Net Advances. Net NPAs are Gross NPAs net of provisions on NPAs and

interest in suspense account.

Net NPAs to Net Advances = Net NPAs / Net Advances

1.5.8 Total Investments to Total Assets Ratio

This ratio indicates the aggressiveness of banks in investing rather than lending. It is the ratio of

Total Investments to Total Assets. Higher ratio means lack of credit take-off in economy and

much proportion of total assets is utilized in investments that should not be the case with

banks because the primary business of the banks is to lend. This ratio indicates how much

proportion or percentage of total assets is in the form of investments.

Total Inv. to Total Assets Ratio = Total Investments/Total Assets


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1.5.9 Net NPAs to Total Assets Ratio

This ratio indicates the efficiency of the bank in assessing credit risk and to an extent recovering

the debts. This ratio is arrived at by dividing the Net NPAs by Total Assets. Net NPAs are

calculated by adjusting provisions against Gross NPAs. Lower ratio indicates the better

performance of banks.

Net NPA to Total Assets Ratio = Adjusting Provision/ Gross NPAs

1.5.10 Earnings per Share

This ratio measures the profitability of the firm on per Equity Share basis. This ratio measures

the earnings available to an equity shareholder on a per share basis.

Earnings per Share = Net Income – Dividend on Preferred Shares/Weighted Average

Number of Common Share Outstanding

1.5.11 Interest Income to Total Income Ratio

Interest Income is a basic source of revenue for banks. The Interest Income to Total Income

Ratio indicates the ability of the bank in generating income from its lending activities. In other

words, this ratio measures the income from lending operations as a percentage of the total

income generated by bank in a year. Interest Income includes Interest on Advances,

Discount on Bills, Income from Investments, Interest on Deposits with Bangladesh Bank

and Other Inter-Bank Funds.

Interest Income to Total Income Ratio = Interest Income/Total Income

1.5.12 Profit Margin Ratio

The profit margin of a company determines its ability to withstand competition and adverse

conditions like rising costs, falling prices or declining sales in future. This ratio measures

the percentage of net profit to total income and thus is a measure of efficiency of the company.

PMR = Net Profit / Total Income


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1.5.13 Non- Performing Assets Ratio

NPAs ratios indicate that is used as a measure of the overall quality of the bank’s loan book.

NPAs are those assets for which interest is overdue for more than 90 days (or 3months).

Net NPAs are calculated by reducing cumulative balance of provisions outstanding at a period

end from gross NPAs. Higher ratio reflects rising bad quality of loans.

NPAs ratio = Net non-performing assets/Loans given

1.6 Sample of Data Collection

In this Report the Researcher has used for Research design is both Causal research design and

descriptive research design. The Researcher has taken Stratified Sampling that is probability

methods of sampling for UCBL, SEBL & SBL. Here Bank Performances is dependent variable

for measurement of profitability relatively to their assets and how the measurement is efficient in

utilizing the company assets to generate profit. The independent variable is Asset Quality, Gross

Non-Performing Assets to Gross Advances, Total Investments to Total Assets, Return on Assets

& Profit Margin Ratio.

The Researcher has collected her essential information for this report from Annual Report of

United Commercial Bank Limited, Standard Bank Limited and Southeast Bank Limited in

Bangladesh. The Researcher has used Primary Data and Secondary data for my report.

Primary Data has been collected from the Head of Credit Division Employee of those

Commercial banks.

Secondary data have collected from the website & financial statement of those banks. A semi

structured questionnaire designed for this report with five point Likert Scale.

As The Researcher has been completed her Internship under the United Commercial bank

limited (UCBL), so its credit policy so far as same all two banks. Because all the commercial

banks follow the rules & regulation of Bangladesh Bank but their interest rate differs and their

loan collection techniques also differ and problem mitigation techniques are different.


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1.7. Hypotheses

Researcher has selected five independent variables that are Asset Quality, Gross NPAs to Gross

Advances Ratio, Total Investment to Total Asset, Total investment to Total Income, Return on

Assets & Profit Margin Ratio. Only dependent Variable is Bank Performances. In this report the

researcher has tried to find out that Independent Variables are they related with Bank

Performances or not and if they linked how much they related strongly with bank performances .

H1 There is a significant relationship between Bank Performances & Asset Quality.

H2 There is a significant relationship between Gross NPA to Gross Advances Ratio and Bank Performances.

H3 There is a significant relationship between Total Investment to Total Asset & Bank Performances.

H4 There is a significant relationship between Return on Asset and Bank Performances.

H5 There is a significant relationship between Profit Margin Ratio and Bank Performances.

Table-2: Hypotheses

1.8. Reliability

Reliability is the consistency of result when the research object has been repeatedly measured.

The Researcher has been measured reliability by using Cronbach’s alpha methodology based on

internal consistence. The reliability analysis of each factor has performed after eliminating

measurement items that lower the overall reliability, produced the following results: Asset

Quality .723, Gross NPAs to Gross Advances .460, Total Investment to Total Asset .725,Return

on Assets.720 & Profit margin Ratio 0.608. Cronbach Alpha value for all factors is (∝>.613),

indicating satisfactory reliability level of internal consistency is (∝>.60).

BP(Y) = α +X1AQ+X2GNPAs/GA+X3TI/TA+X4ROA+X5PMR

Bank Performance Factors Number of Items Cronbach’s Alpha Value

Asset Quality 5 0.723

Gross NPAs to Gross Advances 6 0.460

Total Investment to Total Asset 6 0.725


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Return on Asset 6 0.720

Profit Margin Ratio 6 0.608

Table-3 Reliability tests

1.9. Hypotheses Test

1.9.1 Independent T-test:

The Levene’s test reveals that F statistics is significant (p<0.05). The bottom row (Equal

Variances not assumed) is appropriate for explaining whether difference in opinions lies between

on Banks Performance and Asset Quality. Bottom row shows that null hypothesis (H01) is

significant (p <0.05). It signifies that the hypothesis is true, thus accepted and null hypothesis

rejected. (Figure 1)

The Levene’s test reveals that F statistics is not significant (p>0.05). The upper row (Equal

Variances Assumed) is appropriate for explaining whether difference in opinions lies between

Banks Performance and Gross NPAs to Gross Advances. Bottom row shows that hypothesis

(H02) is not significant (p >0.05). It signifies that the hypothesis is true, thus accepted. (Figure 2)

The Levene’s test reveals that F statistics is significant (p<0.05). The Bottom row (Equal

Variances Assumed) is appropriate for explaining whether difference in opinions lies between

Banks Performance and Total Investment to Total Asset .Bottom row shows that null hypothesis

(H03) is significant (p <0.05). It signifies that the hypothesis is true, thus accepted. (Figure 3)

The Levene’s test reveals that F statistics is significant (p<0.05). The Bottom row (Equal

Variances Assumed) is appropriate for explaining whether difference in opinions lies between on

Banks performance and Return on Asset. Bottom row shows that null hypothesis (H04) is

significant (p <0.05). It signifies that the hypothesis is true, thus accepted. (Figure 4)

The Levene’s test reveals that F statistics is not significant (p>0.05). The upper row (Equal

Variances Assumed) is appropriate for explaining whether difference in opinions lies between on

Banks Performance and Profit margin Ratio. Upper row shows that null hypothesis (H05) is not

significant (p >0.05). It signifies that the hypothesis is true, thus accepted. (Figure 5)


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a. Predictors:AQ,GNPAs/GA, TI/TA ,ROA,PMR

Coefficientsa

Model

Unstandardized Coefficients

Standardized

Coefficients

t Sig. B Std. Error Beta

1 (Constant) 1.594 .516 3.088 .003

AQ .475 .067 .594 7.130 .000

GNPAs/GA -.087 .103 -.075 -.848 .399

TI/TA .335 .096 .289 3.503 .001

ROA .407 .134 -.148 -1.551 .001

PMR .168 .113 .131 1.477 .143

a. Dependent Variable: Bank

Performance

Table – 4: Coefficients

This study has been combined five banks performance variables into one regression, to see the

overall effect on Banks Performance. The result in the table shows that of the five hypothesized

relationships, three are significant (p<0.05) and two are non-significant (p>0.05).

This model explains 53.1% (R2 =.531) variation of Banks Performance. Still 46.9% variation is

not measured. So, Asset Quality, Gross NPAs to Gross Advances, Total Investment to Total

Asset, Return on Asset, Profit Margin Ratio (Independent Variables) are not capable enough to

measure Banks Performance.

This table also indicates that Asset quality, Total investment to Total Assets & Return on Asset

are statistically significant (p<0.05) in determining the performances of Private Commercial

Banks in Bangladesh. So, null hypothesis is rejected and there is significant relationship among

Banks Performance & Asset Quality and Total Investment to Total Assets & Return on Asset.

Model Summary

Model R R Square

Adjusted R

Square

Std. Error of the

Estimate

1 .729a .531 .501 .47386


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This table also indicates that Gross NPAs to Gross Advances, Profit Margin Ratio are not

statistically significant (p>0.05).So, null hypothesis is accepted and there are no relationship

among Banks Performance. Regression results showed that Asset Quality, Total Investment to

Total Asset & Return on Asset have positive impact on the Banks Performance. Gross Non-

Performing Assets to Gross Advances & Profit Margin Ratio have negative impact with Banks

Performance.

1.11. Limitations

The tenure is for twelve weeks only that is not sufficient time for reaching all the Private

Commercial Bank’s in Bangladesh.

The entire employee may not provide all the information that is necessary for me. The

entire employee may not give valid information so it is a risk for me.

Employees are not aware of the terms of Banks Performance & they are not comfortable

with it.

As Audited report is not Published yet so the researcher have faced many problems to

collect the Data of 2014.

1.12. Conclusion

The main objective of this report is to investigate Credit Risk Management and Private

Commercial Bank performance in Bangladesh. The Other objectives are to evaluate credit risk

management practices and techniques in dealing with different types of risk, to identify the

factors that influence effectiveness of Banks Performance by Commercial Banks in Bangladesh.

Bank survival and performance is the key to the stability of the financial system and the overall

growth of the economy. United Commercial Bank, Southeast Bank Limited & Standard Bank

Limited and all other Private Commercial bank in Bangladesh have already made a distinct mark

in the area of Private Sector Banking through personalized service, innovative practices, dynamic

approach and efficient Management. The Bank has expanded its arena in different and diverse

segments of banking like Retail Banking, SME Banking, Corporate Banking, Off-shore Banking

& Remittance etc. Besides various deposit and loan products of Retail Banking, the Bank caters


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export and import loan to deserving candidates which in turn helps the overall economy of the

country through increased earning foreign exchange.

It is only when banks are in health state that they can be able to perform financial intermediation

roles. Therefore, bank supervisors in collaboration with bank owners should put in place

measures that promote bank performance and survival. The remedies for bank survival vary from

those implemented by external parties with interests in the banking sector and those implemented

within individual commercial banks.

Researcher has selected five independent variables that are Asset Quality, Gross NPAs to Gross

Advances Ratio, Total Investment to Total Asset, Return on Assets & Profit Margin Ratio. Only

dependent Variable is Banks Performance. In this report the researcher has tried to find out that

Independent Variables are they related with Banks Performance or not and if they linked how

much they related strongly with bank performances. After gathering information Asset Quality,

Total Investment to Total Asset and Return on Asset are related with Banks Performance.

The risk associated with the business of banking can be defined credit risk, market risk, foreign

exchange risk, liquidity risk and interest rate risk, operational risk, legal risk & strategic risk.

Every Financial institution face risk and they take various steps to mitigate these risks. By the

help of Bangladesh bank they take proper techniques from that risk. Every function of the

banking business has an element of risk and success of this business lies in prudent

identification, calculation & management of these risks. The future of banking is undoubtedly

rest on risk management dynamics. The effective management of credit risk is a crucial

component of comprehensive risk management essential for long term success of a banking

institution. In the line with this reality, the entire bank concentrates the credit risk management

as the topmost priority.

For measuring financial ratios of all Banks UCBL position is the 1st and then other banks.

Though it established earlier & has created faith to the mind of customers. 2nd generation bank

like SEBL & SBL they are competing with 1st generation bank and making profit and contribute

to enrich our economy. Our Government is giving permission to establish new private banks and

encourage the investors to invest these sectors and it also a good indicator to create employment.


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2.0 Literature Review

The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lenders trust in

a person’s/firm’s/or company’s ability or potential ability and intention to repay. In other words,

credit is the ability to command goods or services of another in return for promise to pay such

goods or services at some specified time in the future. For a bank, it is the main source of profit

and on the other hand, the wrong use of would bring disaster not only for the bank but also for

the economy as a whole. A bank can lend to the customers 80% of its Total Asset by the rule of

Bangladesh Bank.

The risk associated with the business of banking can be defined credit risk, market risk, foreign

exchange risk, liquidity risk and interest rate risk, operational risk which sometimes includes

legal risk and most recently strategic risk (Asare-Bekoe, 2010; Yussif, 2003, Cooperman et al.,

2000). Risk management is an orderly process for the identification and assessment of pure loss

exposure faced by an entity (Redja, 2008). It is also defined as coherent activities which are

undertaken to minimize the negative impact of uncertainty regarding possible losses. It is

the life blood of every organization and corporate officers deal with it decisively wherever it

appears (Abor, 2005 & Shimpi, 2001). It is intended to help an organization meet its objectives

such as the minimization of foreign exchange losses, reduction the volatilities of cash flow

protection of earnings against fluctuations and to promote the survival of the firm through

growth and profitability (Fatemi & Glaum,2000).

Bank capital can be defined as a cushion that protects bank customers and shareholders from

unexpected losses that may arise as the bank assumes risks in its day to day trading and dealing

(BCBS, 2008a). Capital reduces the possibility of bank distress (Diamond, 2000). Capital gives

guarantee that the bank will be liquid in the long-run because deposits are withdrawn on demand

and are prone to bank-runs (Dang, 2011).

Bank’s assets comprise of loan advances, fixed assets, investments in the capital market and

money market (Aydogan, 1990). Every bank derives most of their income in form of interest

earned from loans, which they advance to various sectors of the economy. Therefore, the quality

of the loan book is responsible for bank performance ( Sangmi and Nazir, 2010). The greatest


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risk facing a bank is the probability that loans will turn to be bad, that is borrowers will not honor

their promise to repay (Guy, 2011). All banks to keep the level of their non-performing loans as

low as possible. For this reason, most banks have adopted several techniques to lessen the

possibility of credit risk. Most banks have credit policy manuals, which governs how credit is

originated, sanctioned, and reviewed in order to minimize loan losses (Kroszner, 2002 ).

The need of commercial banks to encourage deposits in order to survive during difficult times

(Mangudya, 2009). As deposit taking financial intermediaries, banks should aim at encouraging

the mobilization of deposits because it is only through pooling of deposits that they are able to

advance loans from which income is derived for their survival (Fatemi & Glaum,2000).

The most important reason of measuring bank performance is to distinguish banks that are

performing well from those which are doing badly (Berger & Humphery, 1997). Bank regulators

screen banks on the basis of their solvency, liquidity and overall performance (Casuet al., 2006).

Therefore, measuring bank performance is crucial in allowing regulators to estimate the timing

of supervisory intervention and to detect possible problems before hand. In addition, investors

are also concerned about bank performance. Their decision on whether to invest in a particular

bank is an issue of performance.Net Interest Margin (NIM), Return on Assets (ROA), and Return

on Equity (ROE) are widely employed to measure performance Profit before Tax (PBT), Profit

after Tax (PAT), ROE, Rate of Return on Capital (ROC) and ROA in measuring Bank

Performance (Ahmed, 2003).

Capital adequacy reflects the scale of ability of a financial institution to withstand shocks in its

balance sheets (IMF, 2011). Therefore, capital adequacy helps banks to guarantee more business,

thus profitability. The capital adequacy for a bank is measured by the capital adequacy ratio

(Dang, 2011) .The CAR is the ratio of total equity to assets (risk-weighted) and it measures the

internal strength of the bank to withstand adverse shocks arising in the course of business

(Hassan and Bashir 2003). There is a positive relationship between performance and capital

adequacy because well-capitalized banks face less bankruptcy costs which reduces their cost of

funding, therefore profitability (Schmist and Roth, 1990). Capital adequacy also enables banks to

take full advantage of their profitable growth prospects (Akintoye and Somoye, 2008).


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ROA is a ratio of Income to its total asset (Khrawish, 2011). It measures the efficiency of

management in utilizing company assets in generating income (Wen, 2010). Higher ROA shows

the effectiveness of the firm in making use of its resource endowments. Therefore, a lower ROA

shows inefficient use of assets implying that either some asset are lying idle or are outdated and

need renovation. In the banking sector a lower ROA may imply branch setups which are

operating below capacity. Banks with a lower leverage ratio (higher equity) usually report a

higher ROA but a lower ROE (Dietrich and Wanzenried, 2011).

Net Interest Margin measures the difference between the amounts paid by the bank to its lenders

(creditors/ depositors) and amount received by the bank from its borrowers (debtors) in relation

to the amount of their assets that are capable of generating income (Athanasoglou et al., 2005). It

is the gap that exists between net interest income and interest expense as fraction of interest

earning assets. NIM is frequently expressed as a percentage of what the bank is earning on its

loans in a specific period less what the bank has paid to its creditors divided by the average

amount of assets from which the interest income has been derived during that period (Tsai, Y.

C., 2005). Higher NIM is a reflection of greater performance in interest earning assets, according

to a higher net interest margin could reflect riskier lending practices associated with substantial

loan loss provisions (Khrawish, 2011).

Non Performing loans, an indicator of credit risk can reduce the value of a bank and destabilizes

the credit system. Loan default reduces the resource base of a bank for further lending, weakens

staff morale and affects the borrower’s confidence (Padmanabham & Agu,1998). There is an

indirect relationship; between non-performing loans & profitability (Kithinji,2010). Return on

equity (ROE) and Return on assets (ROA) both measuring profitability were inversely related

to the ratio of non-performing loan to total loan of financial institutions thereby leading to

a decline in profitability (Felix and Claudine, 2008). An increase in loan loss provision is also

considered to be a significant determinant of potential credit risk.

Management efficiency is regarded as a major variable in explaining firm profitability because of

the influence that it has in determining the level of operating expenses (Athanasoglou et al.

2005). Managers are the main employees in firms and have the responsibility to influence the

performance of their subordinates (Aburime, 2005). The success of an organization therefore


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depends on the efficiency of management in deploying the firms’ resources for income

generation and reducing expenditure (Haron and Wan, 2004). The capability of management to

utilize the firm’s resources can be measured by financial ratios. One of the ratios used to measure

management efficiency is the operating profit to income (Sangmi and Nazir, 2010). It follows

that, the higher the operating profit to income ratio, the more efficient the management is in

terms of operational efficiency and income generation.

Bank liquidity is another factor that can significantly influence financial performance. Liquidity

can be defined as the ability of a bank to meet its obligation as and when they fall (BCBS,2000).

Liquidity is the ability of a bank to fund the increase in assets and to meet its short term

obligations and when they become due (Samad, 2004). Adequate liquidity level is positively

related to profitability (Dang,2011). The more liquid a firm’s asset, the less likely the firm is to

experience problems in meeting short term obligation (Cecchetti, 2005). However, high liquidity

positions are opportunity cost positions as implied by who defined liquidity as the easy with

which assets can be turn into money or cash. Therefore, there is a trade-off between liquidity and

profitability.

A liquid bank is less likely to be insolvent but tend to lose out revenue in form of interest on

investments. The liquidity of the bank can be measured by the loan to deposit ratio and the liquid

asset ratio. The higher the loan to deposit ratio or the lower the liquid asset ratio, the lower the

probability of a bank to be able to meet demand in loans (Hassan & Basir,2003). The liquid asset

ratio is silent regarding to the flow of funds from increase in loans, decrease, or increase in

liability and repayments of loans (Moore,2010).


19

3.1 Understanding the Risks and their Management

Every function of the banking business has an element of risk and success of this business lies in

prudent identification, calculation & management of these risks. Although Banks have been

doing these (prudently or imprudently) for ages, several tools and techniques have been

developed recently by different regulators and supervising bodies to bring uniformity in the

approach. As for UCBL, SEBL & SBL are focusing on the risks on the risks from two broad

perspectives, as prescribed by Bangladesh Bank; those are Core Risk management and Basel

Framework. Therefore, the risks can be described from both these perspectives.

3.2 Core Risk Management

The Core Risks, as identified by Bangladesh Bank, are as under:

Credit Risk

Foreign Exchange Risk

Asset Liability Management Risk

Internal Control and Compliance Risk

Money Laundering Risk &

Information Technology Risk

Every Bank has taken a number of initiatives to identify measure and manage these risks

effectively and efficiently.

3.2.1 Credit Risk

The world over, credit risk has proved to be the most critical of all risks faced by a banking

institution .Credit Risk arises as a result of customers or counter-parties not being able to or

willing to fulfill their financial & contractual obligations as and when they fall due. These

obligations arise from lending, trade financing and other activities undertaken by the Bank. So,

credit risk is the potential loss of revenue as a result of the failure of the borrower or the counter

parties to meet their obligations in accordance with agreed terms. Every Bank has placed strong

emphasis in creating credit risk awareness among all lending employees within the Bank. Credit

Risk awareness programs are conducted regularly to create risk awareness culture and empower


20

staff with the capability to identify and manage credit risks more effectively. Selection and

training of lending personnel is considered a key process in the management of credit risk.

The Possibility of incurring loss due to inability of a borrower or counterparty to honor its

obligations or fulfilling their commitment in accordance with the agreed terms and conditions is

termed as credit risk. In other words, it is the loss associated with degradation in the credit

quality of borrowers or counterparties. In a bank’s portfolio, losses stem from outright default

due to the inability or unwillingness of the customer or counterparty to meet commitments in

relation to lending, trading, settlement and other financial transaction. Alternatively, losses result

from reduction in portfolio value arising from actual or perceived deterioration in credit quality.

Credit risk emanates from a bank’s on and off balance sheet dealings with an individual, firm,

company, corporate entity, bank, financial institution or a sovereign.

3.2.1.1 Credit Risk (Criteria):

Credit Risk

Financial

Risk Business/

Industry

Risk

Management Risk Security Risk Relationship

Risk

Leverage

Liquidity

Profitability

Coverage

Size of Business

Age of Business

Business Outlook

Raw Material

Availability

Industry growth

Market Competition

Entry/Exit Barrier

Experience

Track Record

Second

Line/Succession

Team Work

Security

Coverage

(Primary)

Collateral

Coverage

Support

Guarantee

Account

Contact

Utilization

of Limit

Complianc

e of

Covenants

Personal

Deposit

Diagram -1: Credit Risk


21

The key methods used to identify, assess, control and monitor the Credit Risk of the bank are as

follows:

3. Risk Control

Credit Policy which documents the

credit risk rating, collateral policy and

policies on rehabilitation and

restructuring of problematic and

delinquent loans.

Efficient credit personnel to deal with

the credit approval, processing and

review.

Segregation of duties between credit

approvals functions and credit

obligations.

Independent credit control and

monitoring

4. Risk Monitoring

Past due principal or interest

payments, past due trade bills,

account excesses and breach of loan

agreements.

Loan terms and conditions are

monitored, financial statements are

received on e regular basis and any

agreement breaches or exception

are to be referred to the proper

authority for timely follow-up.

Timely corrective action is to be

taken to address findings of any

internal, external inspection/audit.

Credit Risk Management

1. Risk Identification

Critical analysis & review of criminal

accounts to identify weakness in

credit.

Benchmark of asset quality against

industry peers.

Apart from this, Credit risk for the counter

party arises from an aggregation of the

following:

Financial Risk

Business/Industry Risk

Management Risk

Security Risk

Relationship Risk

Natural Calamities and Political unrest

2. Risk Assessment and Measurement

Use of Credit Risk Rating system to

grade the quality of borrowers.

Collect the Credit Information

Bureau (CIB) report of the potential

borrower from The Central Bank.

Stress testing of loan portfolios

under various scenarios.

Diagram -2: Credit Risk Management


22

3.2.2 Foreign Exchange Risk (FX)

FX Risk refers to the potential change in earnings resulted from exchange rate fluctuations,

adverse exchange positioning or change in the market prices. FX Risk of the Bank is minimal, as

all the transactions are carried out on behalf of the customers against underlying L/C

commitments and other remittance requirements. This risk usually affects import-export

business, but it can also affect investors making international investments. If money is converted

to another currency to make an investment, then any changes in the currency exchange rate will

cause that investments value to either decrease or increase when the investment is sold and

converted back into the original currency. FX Risk may arise from:

Exchange rate Fluctuations

Adverse Foreign Exchange position of the bank

Changes in market price of Foreign Exchange

FX Risk management is one of the important responsibilities of the Treasury and International

Divisions of the Bank. Regular FX operations are done confirming the Central Bank’s

guidelines. Treasury Division conducts the FX transactions and the Back Office of the Treasury

Division is responsible for verification of the deals and passing of their entries in the books of

account.

3.2.3 Money Laundering Risk

Money Laundering Risk can be defined as the loss of reputation and expenses incurred as

penalty for being negligent in prevention of money laundering. Every Bank has a designated

Chief Compliance Officer at Head Office and Compliance Officers at Branches, who

independently review the transactions of the accounts to verify suspicious transactions.

The convenience of several remarkable changes in the world markets propelled Money

Laundering to become a worldwide problem. The entire Bank considers Money Laundering and

Terrorist Financing Risk not only a compliance a requirement of the regulatory bodies but also as

one of its core business values. The Board of Directors and the Management are firmly

committed to combat Money Laundering activities.


23

3.2.4 Internal Control and Compliance Risk

Internal control can be defined as a system in place, on a permanent basis to control the activities

in an organization to accomplishing specific goals or objectives. It is the process by which an

organization’s resources are directed, monitored and measured. It plays an important role in

preventing and detecting fraud and protecting the organization’s resources. At the organizational

level, internal control objectives refer to the actions taken to achieve a specific objective. Internal

Control can provide reasonable, not absolute, assurance that the objectives of an organization

meet. Effective internal control implies the organization generates reliable financial reporting

and substantially complies with the laws and regulations that apply to it.

3.2.5 Asset Liability Management Risk

Asset and Liability Management (ALM) is the practice of managing risks that arise due to

mismatches between the assets and liabilities .Asset Liability management (ALM) is a strategic

management tool to manage Interest Rate Risk, Liquidity Risk and Foreign Exchange Risk faced

by banks and other financial institutions. Banks manage the risks of asset liability of Asset

liability mismatch by matching the assets and liabilities according to the maturity pattern or by

the matching the duration. The key to successful Asset & Liability management is to understand

the uncertainties in return on investments (Assets) and the uncertainties in the amount and the

duration of payouts (Liability). ALM /Balance Sheet Risk can be classified into three types such

as;

Diagram-3: Asset Liability Management Risk

Asset Liability Management Risk/Balance

Sheet Risk

Liquidity Risk Interest Rate Risk Foreign Exchange

Risk


24

3.2.5.1 Liquidity Risk

When bank may not be able to meet its financial obligations/commitment at that time liquidity

risk arises. Liquidity Risk also includes the inability of the bank to liquidate any assets at

reasonable price in a timely manner. An investment may sometimes need to be sold quickly. An

insufficient secondary market may limit this quick liquidation of assets. Some assets are highly

liquid and have low liquidity risk, while other assets are highly illiquid and have high liquidity

risk (Building).

3.2.5.2 Interest Rate Risk

It is the possible loss from adverse movements in market interest rates. Changes in interest rates

affect a bank’s earnings by changing its net interest income and the level of other interest

sensitive income and operating expenses. An investment’s value will change due to change the

absolute level of interest rates. Such changes usually affect securities inversely and can be

reduced by diversifying or hedging.

3.2.5.3 FX Risk

It is also involved with Balance Sheet. Foreign Exchange risk is potential loss arising from

movements in foreign currency exchange rate. Foreign Exchange Risk and its management by

the Bank have already been discussed.

3.2.6. ALM Risk Management

Every Bank is in right place to handle the ALM Risk. For managing the ALM Risk with utmost

care, Every Bank form Asset liability Committee (ALCO).

3.2.7 Information Technology Risk

In a very short space of time, banks and other financial institutions have become more dependent

on internet, computer and other electronic media and operating systems to run their daily

operations. Risk Surrounding IT such as network failure, lack of skills, hacking, viruses & poor

system integration have the potential to have a negative impact on an organization. Moreover,

information and communication technology is rapidly changing which warrants continuous


25

vigilance. The Bank has taken initiatives to serve its customer through its customers through the

modern technology and the bank has undertaken implementation of core banking solution (CBS).

3.3 Basel Regulatory Framework Management

Bangladesh Bank, being the supervisory authority has implemented Basel II framework in the

banking sector from January, 2009.This requires addressing market Risk and Operational Risk

along with Credit Risk and ends up with keeping minimum Capital to safeguard the bank on

susceptibility to these risks. Basel II Framework is acting as a major catalyst for function of Risk

Management practices within the Bank, embedding the risk culture and risk methodologies in the

Bank’s operation. In this regard the Bank has already taken initiatives by introducing new Risk

management Process. Basel II framework emphasizes on the following risk:

3.2.1 Operational Risk

Operational Risk is the risk of loss resulting from inadequate or failed internal process, people

and systems or from external events. It includes risks of physical and logical security, transaction

processing, operations control, technology and systems, as well as unique risk that arise due to

outsourcing.

Operational Risk is monitored and controlled through an operational risk management

framework designed to provide a sound and well –controlled operational environment within the

bank. Daily functional checks and balances method is used to manage the Operational Risk in the

bank. The bank has developed internal procedures and monitoring mechanism Effective internal

control has been ensured that operational policies and procedures are being adhered at different

levels throughout the Bank. In response to the threat of external fraud, losses arising from fraud

or control lapses are analyzed with emphasis on identifying the causes of such losses.

3.2.2 Governance and Broad Oversight

Strong risk governance is essential as the foundation for successful Risk management. In the line

with the Bank’s guideline on corporate governance, the Board of Directors has overall risk

oversight responsibility. The board utilizes its Audit Committee to discharge that responsibility.

Audit committee assists the Board in this regard by ensuring that an effective internal control

framework exists within the bank.


26

The Risk management structure of the bank includes the following divisions /Departments

/Units/Cells/Committees:

Risk Management Unit

Credit Risk Management Division

Credit Administration Department

Special Asset Management Division

Treasury Division

Information Technology Division

General Banking & Development Division

Internal Control and Compliance Division

Board Audit Cell

All Risk Committee

Credit Risk Review Committee

Asset Liability Management Committee

Risk based regulatory capital adequacy in line with Basel II framework has fully come into force

from January 01, 2010 as stipulated by Bangladesh Bank. As per the framework, Minimum

Capital Requirement, Supervisory Review Process and Market Disclosure requirements must be

followed by all the scheduled banks of Bangladesh as for regulatory compliance, which

constitutes of three-mutually reinforcing pillars:

Pillar 3

Market Discipline

Communicating with the Market Participants

about the Bank’s Risk Profile and ensuring

Transaction

Pillar I Minimum Capital

Requirement Credit Risk Market Risk Operational Risk

Pillar II Minimum Capital Requirement Internal Assessment of Risk

Profile of Banks (ICAAP) Evaluation of Risk Profile

Assessment of Banks by the Supervisors

Taking supervisory measures

Diagram-4: Basel II Pillars of Bank


27

Credit Risk, Market risk & Operational Risk constitutes the basic risks that require the Bank to

maintain the minimum level of capital. In case of identifying both credit and market risk, the

Bank resorts to the Standardized Approach. For measuring the operational risk, Basic Indicator

Approach is followed.

Apart from the above mentioned risks, all other risks are assessed through the evaluation of

Supervisory Review Process. Under Internal Capital Adequacy Assessment Process, the

Additional Capital Requirement of a Bank is estimated. The supervisor will evaluate the risk

assessment process of the Bank and give directions to the acceptability of the process.

Under Pillar 3 of the framework, Market discipline comprises a set of disclosures on the capital

adequacy and risk management framework of the Bank. These disclosures are intended for

market participants to assess key information about the Bank’s exposure to various risks and to

provide a consistent and understandable disclosure framework for easy comparison among banks

operating in the market.

3.4. Capital Structure

3.4.1Tier I capital

The highest quality capital components comprise the Tier I Capital. This is also as core Capital.

3.4.2 Tier II Capital

The components of Tier II capital lacks some quality of Tier I capital, but strengthen the capital

base of the Bank. The Components of Tier I and tier II capitals are depicted below:

Digram-5: Tier I Capital

Tier I

Capital

Paid- Up Capital

Statutory

reserve Non-

repayable

share

General

Reserve

Non-cumulative

irredeemable

preference Minority

Interest in

subsidiaries

Retained

Earnings

Dividend

equalization

account


28

Diagram-6: Tier II Capital

3.5 Approaches followed for Specific & General Allowances and

Statistical Methods

As per the guideline of Bangladesh Bank regarding the provisioning of loans & advances, the

bank has followed the following approaches in calculating the Specific & General Allowances:

Types of Loans & Advances Rate of Provision Requirement

UC SMA SS DF BL

Consumer House building &

Professionals

2% 5% 20% 50% 100

%

Other than Housing Finance

&

Professionals to set up

Business

5%

5%

20%

50%

100

%

Tier II

Capital

General

Provision

Subordinated

debt with

remaining

maturity of more

All other

preference

shares Asset

Revaluation

Reserve Exchange

Equalization

account

Revaluation

reserve for

securities

Revaluation

reserves for

equity

Instruments


29

Brokerage House, Merchant banks, Stock

dealers, etc.

2% 5% 20% 50% 100

%

Short term Agriculture, Credit and micro Credit 5% 5% 5% 5% 100

%

Small & Medium Enterprise Finance 0.25% 5% 20% 50% 100

%

Others 1% 5% 20% 50% 100

%

Table -5: General allowances & Statistical Methods

3.6 Methods used to measure Credit Risk

As per Central Bank’s Guidelines, the Bank Standardized Approach for measurement of Credit

Risk adopting the credit rating agencies as External Credit Assessment Institutions (ECA) for

claims on Bank & Non-Banking Financial Institutions (BNFIs), Corporate Customers and Credit

Risk Mitigates (CRM) against the financial securities & guarantees of loan exposure.

3.7 Credit Risk Management

The global economic crisis has radically changed the credit risk environment not only of the

developed countries but also of the emerging and developing countries. The economy has

slumped with defaults soaring around the world. The Board of Directors and the Management

play their due role to manage the credit risk efficiently in the middle of this credit crunch. The

entire Banks manage their credit risk in the following manner:

3.7.1 Credit Risk Management Policy

Given the fast changing dynamic global economy and the increasing pressure of globalization,

consolidation and disintermediation, The entire Bank have a robust credit risk management

policy and procedures that are sensitive and responsive to these changes. A clearly defined, well-

planned, comprehensive and appropriate Credit Risk Management Policy of the Bank provides a

board guideline for the Credit Operation towards efficient management of its Credit portfolio.


30

3.7.2 Delegation of Credit Approval

Major credit exposures to individual borrowers, groups of connected counterparties and

portfolios of retail exposures are reviewed by the Head Office Credit Committee (HOCC) and

HOCC recommends the loan to the approval authority. All credit approval authorities are

delegated by the Board of Directors to the executives based on their capability, experience &

business acumen. Credit origination and approval roles are segregated in all cases. Credit

approval authorities are carefully segregated between CRM & the business units with appropriate

level of management for check and balance between control and business consideration. Proper

delegation of credit approval ensures full transparency and accountability at all levels.

3.7.3 Credit Quality and Portfolio Diversification

The well practiced 5Cs principles of Credit i.e. Character, Capacity, Capital, Conditions and

Collateral are followed professionally in the credit evaluation stage. Evaluation of repayment

ability, character of financial discipline and its key personnel, financial health of the borrower

and other qualitative and quantitative information are gathered so that credit facilities are

allowed in a manner so that Bank’s optimum asset quality is ensured. Concentration of credit is

carefully avoided to minimize risk. Credit lines have been segregated focusing on regulatory

requirements and with respect to sector, industry, geographical region, maturity, size, economic

purpose etc.

3.8. Large loan limit and credit facility on business consideration

The Bank watchfully avoids name lending. Credit facility shall be allowed absolutely on

business consideration after conducting due diligence. No credit facility is allowed simply

considering the name and reputation of the key person of the borrowing company. In all cases,

viability of business, credit requirements, and security offered, cash flow and risks level are

meticulously and professionally analyzed.

3.8.1 Credit Monitoring and Early Warning system

The Bank regularly monitors the performance of loan portfolio and external events both at

branch level as well as on head office level. The HOCC & PAMC meet regularly to assess the

impact of external events and trends on the credit risk portfolio and to define and implement total


31

response in terms of appropriate changes. Action trigger point has been set to identify accounts

according to early Warning system to address the loans whose performances show any

deteriorating trend. Recovery division has been given the responsibility to handle these delicate

issues with caution. It enables the bank to grow its credit portfolio in a sustainable way to ensure

higher quality and lower risk with the ultimate objective to protect the interest of depositors and

shareholders.

3.8.2 Provision

For Classified loans & Advances, Banks maintain enough provision. Thus, the bank has adequate

shock absorbing capacity in case of loss of impaired assets.

3.8.3 Independent internal audit and Board Audit cell

Internal Control and Compliance Division (ICCD) independently verifies and ensures, at least

once in a year, compliance with approved lending guidelines, Bangladesh Bank guidelines,

Operational procedures, adequacy of internal control and documentation. Board Audit Division

directly reports to the Board/Audit Committee the overall quality, performance, recovery status,

risks status, adequacy of provision of loan portfolio for information and guidance.

3.9. Creating Credit Risk awareness Culture

Strong emphasis has been placed to create credit risk awareness among all lending employees

within the bank. Awareness programs have been conducting regularly to create a risk-conscious

culture and empower them with the capability to identify, control and manage Credit Risks more

efficiently.

3.10. Interest Rate Risk in the Banking Book

Interest Rate Risk in the Banking Book reflects the shocks to the position of the Bank including

potential loss that the bank may face in the event of adverse change in market interest rate. This

has an impact on earning of the bank through Net Interest Earning as well as on Market Value of

Equity or net worth.

Thus this risk would have an impact on both earning potential and economic value of the Bank.


32

The Bank uses following measures for deriving value of capital requirement for interest

rate risk.

Modified Duration gap

Simulation on Market Value of Equity

Impact of average interest rate fluctuation demonstrated in last 12 months from

the date of computation. In the event of lack of data for last twelve month the

bank considers data of maximum period available.

The bank ensures that interest rate risk is not included within the market risk. The Bank has

calculated the rate sensitive assets and liabilities with maturity up to 12 months bucket and

applied the sensitivity analysis to measure the level of interest rate shock on its capital adequacy.

3.11. Market Risk

Market Risk is a trading book concept. It may be defined as the risk of losses in on and off-

balance sheet positions arising from movements in market prices. The market risk positions

subject to the risks pertaining to interest rate related instruments and equities in the trading book

and Foreign exchange risk and commodities risk throughout the Bank. This signifies the risk of

loss due to decrease in the market portfolio arising out of market risk factors. The Bank has

considered interest rate risk on banking book separately and the impact of interest rate risk on the

trading book will not be considered here.

The board approves all policies related to market risk, sets limits and reviews compliance on a

regular basis. The objective is to provide cost effective funding last year to finance growth and

trade related transaction.

3.11.1 Methods used to measure market Risk

Standardized (Rule Based) Approach is used to measure the Market Risk of the Bank whereas

for Interest Rate Risk and equity Risk both General and Specific risk factors are applied for

capital charge and for Foreign Exchange and Commodities only General risk factor is applied.


33

3.11.2 Management system of Market Risk

The duties of managing the market risk including liquidity, interest rate and foreign exchange

risk lies with the Treasury Division under the supervision of ALCO committee. The ALCO

committee is comprised of senior executives of the Bank, who meets at least one time in a month

during the ALCO meeting. The committee evaluates the current position of the Bank and gives

directors to mitigate the market risk exposure to a minimum level.

3.12. Credit Process

Credit process starts with receiving prescribed completed credit application from the customer

and ends with issuance of a written “Sanction Advice” by the Bank. Credit process in the bank

shall be guided by some basic principles. These are as follows:

3.12.1 Credit Proposal Purpose

A Credit Proposal is prepared by the Relationship Management Team either at Branch or

Corporate Division based at Head Office to present a concise and objective assessment of the

risks associated with lending money to the prospective borrowers. Banks have to ensure before

sanction/disbursement that their portfolio is of high quality. A credit proposal may be defined as

here under;

Initial Credit Proposal – Initiate credit facilities for any new relationship for the bank.

Annual Credit Proposal – Renew existing facilities extended to a borrower or

amendments to existing facilities at the Annual Review Date.

Interim Credit Proposal – Propose amendments (for e.g., an increase in amount or tenor

or pricing, or a change in security structure), and/or new facilities for an existing

borrower at any time other that the Annual Review Date.

Identification Number: Each borrower would have a unique Loan Identification Number.

3.12.2 Time frame for decision

Any requirement for further information regarding a particular credit proposal shall have to be

communicated in writing to the customer within 5 days from the date of submission of the credit

application. Any decision of declining a credit application other than retail credit shall have to be

communicated to the customer by the Relationship Team within 15 days from the date of


34

receiving all information from the customer. On the other hand, Head Office Credit Risk

Management Division informs the primary status of the proposal after scrutiny of the proposal

within 3(three) days from the date of submission of the scrutinized credit proposal by the

Corporate Banking Division other than Industrial Credit.

3.12.3 Reporting Approvals

Credit Executives having credit approval authority at Branch level should report on monthly

basis a summarized position of all credit facilities sanctioned by him/her during the month in the

prescribed form. This is to be submitted to the Head of Credit and Head of Corporate within the

first week of the following month.

3.12.4 Review of Approval

The Head of Credit Risk Management Division review at least 10% of total approval of an

individual executive on monthly basis in respect of compliance with the Credit Risk

Management Policy, internal circulars, prevailing regulations etc. and report the findings to the

Managing Director.

3.12.5 Revision of Credit Decision

Any credit proposal declined by Credit Risk Management Division may be placed before next

higher authority for reassessment/review if Corporate Banking Division feels that the exceptions

are justifiable, or can be rectified over a reasonable period of time. But no appeal goes beyond

the Managing Director.

3.12.6 Compliance to Regulation

Any credit approval/sanction shall be subject to the compliance of Bank’s Credit Policy as well

as banking regulations in force or to be imposed by the regulatory body from time to time and to

the changes in the Bank’s policy. This is to be specifically mentioned in the Sanction Advice

issued to the customer.


35

3.12.7 Credit Committee

Bank has a multi-tier Credit approving system to manage the credit risk efficiently. Credit

proposals after preliminary evaluation and making necessary adjustment are placed by Corporate

Banking Division before the Credit Committee for preliminary appraisal since recommendation

of the Credit Committee is pre-requisite before approving any loans by the appropriate approval

authority. Credit Risk Review Department of CRMD conduct their risk assessment on different

aspects of the proposal and may place their observation in the Credit Committee meeting.

Additional Managing Director/Deputy Managing Director is the Chairman of the committee and

the committee is to be constituted by the Managing Director.

3.13. Steps in Credit Approval Process

Step-1: A potential borrower collects prescribed Credit Application Form from the

Relationship Officer of Branch/Corporate Division, Later; he/she submits the filled in

Credit Application Form along with required papers and documents.

Step-2: The Relationship Officer scrutinizes the Credit Application Form and other

documents submitted by the customer and make a preliminary assessment on

creditworthiness of the potential borrower on the basis of the information provided by the

borrower. Relationship Officer forwards the application with his comments to the

concerned Relationship Manager.

Step-3: The Relationship Manager, singly or jointly with Relationship Officer, visit the

customer’s business premise and try to acquire proper understanding about the business

position, business expertise and reputation of the borrower, purpose of credit, actual

credit requirement, sources of repayment, Apart from this, he/she assesses the value of

the security to be offered and prepares Valuation Report. Finally, the Relationship

Manager summarizes all these information in the Pre-sanction Inspection Report/Call

Report/Visit Report in the Bank’s prescribed format in which he/she recommends for

specific credit facility for the customer.


36

Step-4: The Relationship Manager sends the Pre-sanction Inspection Report to the

Corporate Division, Head Office. The Head of Corporate Division or assigned Executive

assesses the credit proposal and may contact with the concerned Relationship Manager or

directly to the customer for any query. Finally, Corporate Division of Head Office

communicates their decision to the Relationship Manager.

Step-5: Credit Administration Department on receipt of the request letter from the

Branch sends the “CIB Inquiry Form” to Bangladesh Bank. Credit Administration

Department will send the CIB report immediately by facsimile/e-mail/courier service to

the concerned Relationship Officer on receipt of the report.

Step-6: If, clean CIB Report is received, the Relationship Officer originates a formal

Credit Proposal in prescribed format that should carry the recommendations of the

Relationship Manager. After signing by him, it is to be sent to the Corporate Banking

Division, Head Office and a copy to the Credit Risk Review Department of Credit Risk

Management Division.

Step-7: Corporate Banking Division, Head Office after modifying the proposal as

required place the proposal along with Head of Corporate Banking Division’s

recommendation before the Credit Committee. Head of Credit Risk Review Department

of CRMD or his authorized representative may report his observation in writing/verbally

before the Credit Committee. Corporate Banking Division should inform the list of

proposals that are to be placed before the Credit Committee at least 15(fifteen) hours

before to the Credit Risk Review Department of CRMD for smooth functioning of the

committee except the exception cases be recommended by Credit Risk Management

Division for approval. The appropriate approving authorities may approve the proposal if

within their respective delegated approval authority or decline the proposal or may ask

for further review. If the proposal exceeds Managing Director’s delegated authority,

he/she recommends it to the Executive Committee of the Board of Directors or to the full

Board of Directors.


37

Step-8: If the proposal is endorsed by the Credit Committee, Corporate Banking Division

prepares required Memo mitigating the weakness/risk factors and incorporating the

suggestion/observation of the Credit Risk Review Department as well as Credit

Committee for approval of the appropriate authority. The modified Memo should be

routed through Credit Risk Management Division for further scrutiny. On receipt of the

Memo, Head of Credit Risk Review Department distributes to the respective Credit

Officer to review, scrutinize and analyze in line with the business plan, risk acceptance

criteria of the bank and general credit norms. Credit Officer after evaluating the credit

information, facility structure and risk factors summarize his observations with reasons

and forward for concurrence of Head of Credit. At that time the final Memo is

acceptable, risk is within tolerance level and facility structure commensurate with the

total facility.

Step-9: If the facility is approved by the appropriate approval authority, Corporate

Banking Division sends the copy of approval Memo/Note sheet to Credit Risk

Management Division. On receipt of approval, Credit Risk Review Department of CRM

issues Sanction Advice to the originating Branch along with a Documentation Check

List.

Step-10: Sanction Letter to the customer following Credit Risk Review Department of

CRM sanction advice to be issued under dual signatures from the originating Branch.

Preferably, Relationship Manager and Credit Administration Officer of the Branch

should sign on the Sanction Letter.

3.14. Different modes of Advances /Credit

Commercial Banks make advances in different form. All types of credit facilities can be broadly

classified into two groups.

Funded Credit

Non-Funded Credit


38

3.14.1Funded Credit

Any type of credit facility which involves direct outflow of banks fund on account of borrower is

termed as funded facility. Funded credit facilities may be classified into four major types.

Loan

Cash credit

Overdraft

Bill Purchased and Discount

3.14.1.1 Loans

Demand loan: To meet short term working capital need that is usually for a period up to

01 year.

Term loan: To meet Fixed Capital expenditure, that is usually for the period 01 year to

05 years.

3.14.1.2 Cash Credit

CC (Pledge)

CC (Hypothecation)

Under this arrangement borrows can borrow any time within the agreed limits and can deposit

money to adjust whenever he has surplus cash in hand.

3.14.1.3 Overdraft (OD)

Basically this is an arrangement between a banker and his customer by which the later is allowed

to withdraw over and above his credit balance in his /their current account. This is a temporary

accommodation of fund to the client. Overdraft facility to the borrower may be allowed generally

in the following ways.

Overdraft-clean

Overdraft-against guarantee

Overdraft-against FDR in the name of borrower

Overdraft-against FDR in the name of the 3rd party.


39

Overdraft against savings certificate

Overdraft against Wade Earners Development Bond

Overdraft against DPS

Overdraft against assignment of book debts/bills receivables/life insurance policy etc.

Bills discounted and purchased.

3.14.1.4 Discounting

Bank allows advances to the clients by discounting bills which matures after a fixed tenor. In this

method the bank calculates and realizes the interest at a prefixed rate and credits the amount after

deducting the interest amount after deducting the interest from the amount of instrument.

Discounting of bills, in fact is an extension of credit facilities for a specified period.

3.14.1.5 Purchase of Bill

Financing against Sight/Demand bills are treated as purchase of bills. In this the bank becomes

the purchaser owner of such bills which is treated as security for the advance.

Before purchasing and or extending discounting facilities to any customer banker has to give

consideration to the following aspects:

Bills to be purchased from the regular customers of the bank.

Integrity and credibility of the customer.

Documents of title of goods are clean and supported with all required documents.

The Branch manager is authorized to purchase bills.

Other important funded advances/facilities are:

Advance against hypothecation of vehicles (Transport Loan)

Consumer Loan

Agriculture loan

Micro Credit

Consortium Loan

Lease financing


40

Hire Purchase

Syndication loan

Import Finance

Export Financing(Pre-shipment and post-shipment credit)

3.14.2 Non-Funded Credit Facilities

Though these types of Credit facilities are primarily non-funded in nature but at times it may turn

into funded facilities. As such, liabilities these types of credit facilities are termed as contingent

liability.

The major facilities are:

Letter of credit(L/C)

Bid bond

Performance bond

Advance/payment guarantee

Besides the above, credit facilities given by the banks can be classified in the following ways

On the basis of security obtained

o Clean

o Secured

o Micro Credit

On the basis of term

1. Short Term

2. Medium term

3. Long Term

Sectoral Classification

1. Private

2. Public

3. Commercial & Industrial


41

4. Agricultural

5. Transport

6. House building etc.

3.15. Loans

Bank classifies loans and advances into performing and non-performing loans (NPL) in

accordance with the Bangladesh Bank guidelines in this respect. An NPA (impaired is defined as

a loan or an advance where interest and/or installment of principal remain overdue for more than

90 days in respect of a Continuous credit, Demand loan or a Term Loan etc.

Classified loan is categorized under following 03(three) categories:

1. Sub-standard

2. Doubtful

3. Bad & Loss

Any continuous loan is classified as:

Sub-standard if it is past due/overdue for 3months or beyond but less than 6 months.

‘Doubtful’ if it is past due/overdue for 6 months or beyond but less than 9 months.

Bad/Loss if it is past due /overdue for 6months or beyond but not over 9 months from

the date of claim by the bank or from the date creation of forced loan.

‘Bad/Loss if it remains past due/Overdue for 9 months or beyond from the date of

claim by the bank or from the date of creation of forced loan.

In case of any installments or part of installments of a fixed Term Loan is not repaid within the

due date ,the amount of unpaid installments will be termed as past due or overdue installment.

3.16. Loan Classification Aspects

First – where a bank does not really receive interest and is merely capitalizing it in the

borrower’s account. The bank in this situation loses the opportunity to redeploy the income

stream for a better purpose.

Second- There is an effect on profitability.


42

Third- There is an effect on the balance sheet of bank since nonperforming assets need to be

provided for and eventually written-off against capital and reserves. If adequate provision is not

made against non-performing assets, it will eat-up the bank’s entire capital base with the passage

of time.

3.17. Classification Procedure of Loans

3.17.1 Categories of Loans – At first all loans and advances will be grouped into four categories

for the purpose of classification, such as – (a) Continuous Loans (b) Demand Loans (c) Fixed

Term Loans and (d) Short Term and Agriculture & Micro Credit.

3.17.1.1Continuous Loans: The loan A/c in which transaction may be made within a certain

limit and have an expiry date for full adjustment will be treated as continuous loan. Example:.

CC, OD etc.

3.17.1.2 Demand Loans: The loan that becomes repayable by the party on demand by the Bank

treated it as demand loans. If any contingent or any other liabilities are turned into forced loan

will also be treated as demand loan. Example: LIM, PAD, FBP, IBP etc.

3.17.1.3 Fixed Term Loans: The loan which is repayable within a specific time period under a

specific repayment schedule will be treated as Fixed Term Loans.

3.17.1.4 Short Term Agriculture & Micro Credit: Short Term Agricultural Credit will be as

per list issued by Agricultural Credit and Specialized Programs Department (ACSPD) of

Bangladesh Bank under the Agricultural Credit Program. Credit in the Agricultural sector

repayable within 1(one) year will also be included herein. Short Term Micro Credit will include

any micro credit not exceeding Tk.25, 000.00 and repayable within 12 months.

3.18. Basis for loan Classification

Past due / Overdue:

(i) Any Continuous loan if not repaid /renewed within the fixed expiry date for repayment is

treated as past due/overdue from the following day of the expiry date.


43

(ii) Any Demand Loan if not repaid/rescheduled within the fixed expiry date is treated as past

due/overdue from the following day of the expiry date.

(iii) In case of any installment or part installment of a Fixed Term Loan (repayable within five

years) is not repaid within the fixed expiry date, the amount of unpaid installment is

treated as past due/overdue (defaulted installment) from the following day of the expiry

date of that particular installment.

(iv) In case of any installment or part installment of a Fixed Term Loan (repayable over five

years) is not repaid within the fixed expiry date, the amount of unpaid installment is

treated as past due/over due after 6 (six) months of the expiry date of that particular

installment.

(v) The Short Term Agriculture & Micro Credit if not repaid within the fixed expiry date for

repayment is considered as past due/overdue (defaulted installment) after 6 (six) months

of the expiry date.

3.19. In case of Fixed Term Loans (repayable within five years)

If the amount of defaulted installment is equal to or more than the amount of due for 6(six)

months, the entire loan is classified as ‘Sub-Standard’.

If the amount of defaulted installment is equal to or more than the amount of installment due

for 12(twelve) months, the entire loan is classified as ‘Doubtful’.


for 18(eighteen) months, the entire loan is classified as ‘Bad/Loss’.

3.20. In case of Fixed Term Loans (repayable in more than five years)


for 12(twelve) months, the entire loan is classified as ‘Sub-Standard’.


44


for 18(eighteen) months, the entire loan is classified as ‘Doubtful’.


for 24(twenty four) months, the entire loan is classified as ‘Bad/Loss’ after 60 months from

the stipulated due date.

3.21. The Short Term Agriculture and Micro Credit

These loan is treated as irregular loan up to 12 months and is classified as Substandard after 12

months, as Doubtful after a period of 36 months and as Bad/Loss after 60 months from the

stipulated time.

3.22. Qualitative Judgment

If any uncertainty or doubt arises in respect of recovery of any continuous, Demand or Term

Loans, the same have to be classified as Sub-Standard or Doubtful or Bad/Loss. Considering the

merit of the A/c on the basis of qualitative judgment is to be it classified or not on the basis of

objective criteria.

The Bank classifies on the basis of qualitative judgment and can de-classify loans if qualitative

improvement does occur. But if a loan is classified by Bangladesh Bank Inspection Team, the

same can be de-classified with the approval of the Board of Directors of the Bank.

3.23. Accounting of the Interest of Classified Loans

If any loan or advance is classified as Sub-Standard and Doubtful, the interest accrued on such

loan is to be credited to Interest Suspense A/c instead of crediting the same to Income A/c. As

soon as any loan or advance is classified as Bad/Loss charging of interest in the same A/c cease.

But on any special purpose interest is charged on that A/c such as at the time of filing suit should

be preserved in Interest Suspense A/c.


45

3.23.1 Maintenance of Provision

Banks are required to maintain provisions for entire loans and advances i.e. Unclassified, SMA,

classified and also for classified other assets & investment as per Bangladesh Bank Guideline,

details of which are :-

General Provision in the following way:-

i. @1% against all unclassified loans (other than loans under small enterprise and

consumer financing and Special Mention Account).

ii. @2% on the unclassified amount for small enterprise financing.

iii. @5% on the unclassified amount for consumer financing where it has to be maintained

@2% on the unclassified amount for (1) Housing finance and (2) Loans for professionals

to set up business under consumer financing scheme.

iv. @5% on the outstanding amount of loans kept in Special Mention Account after netting

off the amount of Interest Suspense.

Provision in respect of classified continuous, demand and Term Loans:-

Provision is be maintained on the balance to be ascertained by deducting the amount of Interest

Suspense and value of eligible security from the outstanding amount of classified A/c:-

i. Sub-Standard 20%

ii. Doubtful 50%

iii. Bad/Loss 100%

Provision in respect of Short Term Agriculture and Micro Credit-

i. All credit except Bad/Loss- 5%

ii. Bad/Loss 100%

3.23.2. Eligible Security

As per Bangladesh Bank definition the eligible security in determining the base for provision is –


46

i. 100% of deposit under lien against the loan.

ii. 100% of the value of the Government bond/ Savings Certificate under lien.

iii. 100% of the value of the guarantee given by Govt. or Bangladesh Bank.

iv. 100% of the market value of the gold or gold ornaments pledged with the Bank.

v. 50% of the market value of the easily marketable commodities kept under control of the

Bank.

vi. Maximum 50% of the market value of the land and building mortgaged with the Bank.

vii. 50% of the average market value for last 6 months or 50% of the face value whichever is

less, of the shares traded in the stock exchange.

Bank will conduct classification activities on quarterly basis.

Head Office should prepare a consolidated position of classification, provisions and Interest

Suspense using form CL-1 and send the same to BRPD of Bangladesh Bank.

All the Banks Credit Risk Management system is same because every Private Commercial

controlled by the rules & regulation of Bangladesh Bank.


47

4. Measurement & Analysis (‘000’)

4.1 Current Ratio

Measurement Item United Commercial

Bank Limited

Southeast Bank

Limited

Standard Bank

Limited

22633313/20582817 4297618/3404393 852852/802966

Current Ratio 1.09:1 .12:1 1.06:1

4.2 Return on Assets (ROA)


Bank Limited

Southeast Bank

Limited

Standard Bank

Limited

Return on Assets (ROA) 319129.71/226333.13 33132/220930 35801/239939

1.41% .15% .15%

Table 4.1 indicates the current ratio that is used primarily to ascertain a company’s ability to pay

back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory,

receivables). The higher the current ratio, the better the company’s ability is to pay its obligations.

The current ratio can give a sense of the efficiency of a company’s operating cycle or its ability to

turn its product into cash. Among these three banks in 2014, UCB is more efficient than other two

banks. So it is more efficient than other banks to pay off its obligations. In case of SEBL ratio is

under 1 that means this bank is not more efficient to pay its obligations. So UCB is better position

& SBL is also in better position.

Table 4.2 indicates Return on Assets how profitable a company is relative to its total assets. It

illustrates how well management is employing the company’s total assets to make profit. The

higher the return, the more efficient management is in utilizing its asset base. In 2014, UCB is

the most profitable position than SBL & SEBL relative to its total assets. After UCB, SEBL &

SBL is the same profitable position for utilizing its assets.


48

4.3 Return on Equity (ROE)

Measurement Item United

Commercial

Bank Limited

Southeast Bank

Limited

Standard Bank

Limited

ROE 12205975/781647 8477831/570547 6041062/438422

15.62% 14.85% 13.77%

4.4 Capital Adequacy Ratio (2013)


Commercial

Bank Limited

Southeast Bank

Limited

Standard Bank

Limited

Capital Adequacy Ratio 11.53% 10.99% 10.68%

Table 4.3 this ratio indicates how profitable a company is by comparing its net income to its average

shareholders’ equity. The return on equity ratio measures how much the shareholders earned for

their investment in the company. The higher the ratio percentage, the more efficient management is

in utilizing its equity base and better return to investors. In 2014, UCBL shareholders have earned

more for their investment and SEBL & SBL are also profitable comparing to their net income to

shareholders’ equity.

Table 4.4 indicates Capital Adequacy Ratio is the ratio of qualifying capital to adjusted (or

weighted) assets. The minimum capital adequacy ratio is at 10% for all banks that is prescribed by

Bangladesh Bank. A ratio below the minimum indicates that the bank is not adequately capitalized

to expand its operations. The ratio ensures that the bank do not expand their business without

having adequate capital.

It would be difficult for an investor to calculate this ratio as banks do not disclose the details

required for calculating the denominator (risk weighted average) of this ratio in detail. As such

banks provide their CAR time to time. But I have taken the information from the website of

UCBL, SEBL & SBL 2013. As 2014, CAR is not disclosed yet & audited report is not published

also. Every bank wants to increase this ratio.


49

4.5 Credit to deposit ratio (CD ratio)


Bank Limited

Southeast Bank

Limited

Standard Bank

Limited

148664.86/184896.85 134863/177519 217291/293249

CD Ratio 80.40% 75.97% 74%

4.6 Non-Performing Asset Ratio (NPA ratio)


Bank Limited

Southeast Bank

Limited

Standard Bank

Limited

NPA Ratio 59911592/14866486 615357/12918462 325297/3459177

4.03% 4.76 9.40

Table 4.5 indicates CD ratio that means how much of the advances lent by banks is done through

deposits. It is the proportion of loan-assets created by banks from the deposits received. It is the

ratio, the higher the loan-assets created from deposits. Deposits would be in the form of current and

saving account as well as term deposits. The outcome of this ratio reflects the ability of the bank to

make optimal use of the available resources.UCB has been created better its deposit to loan asset

then SEBL and SBL. It measures the Banks Performance.

Table 4.6 NPA ratios indicate that is used as a measure of the overall quality of the bank’s loan

book. An NPA are those assets for which interest is overdue for more than 90 days (or 3months).

Net NPAs are calculated by reducing cumulative balance of provisions outstanding at a period end

from gross NPAs. Higher ratio reflects rising bad quality of loans. All the banks fall this problem

every year because 100% successful is not possible for any financial institution. SBL is the worst

position comparing with UCB & SEBL. But every bank tried hard to overcome this type of

riskiness. So UCBL position is better than two. All the banks want to mitigate this ratio by taking

proper Risk Management techniques


50

4.7 Gross NPA to Gross Advances Ratio

Measurement Item United Commercial Bank

Limited

Southeast Bank

Limited

Standard Bank

Limited

Gross NPAs to Gross

Advances Ratio

14899612.49%/59911592 615357/12918462 325297/6914062

2.49% 4.70% 4.70%

4.8 Net NPAs to Net Advances Ratio


Bank Limited

Southeast Bank

Limited

Standard Bank

Limited

Net NPAs to Net

Advances Ratio

59911592/148866486 3867540/69422064 4445080/69106277

4.03% 5.57% 6.43%

Table 4.7 describes The Gross NPAs to Gross Advances ratio is a measure of the quality of

assets in a situation, where the management has not provided for loss on NPAs (Non-

Performing Assets). Here Gross NPAs are measured as a percentage of Gross Advances.

Lower ratio indicates better quality of advances. Here UCBs percentage is lower so it

indicates UCB is better quality of advances. SEBL & SBL is the same. So UCBL position is

better than two. All the banks want to mitigate this ratio by taking proper Risk Management

Table 4.8 describes Net NPAs to Net Advances. This ratio is the most standard measure of

Bank Performance. This ratio measures Net NPAs as a percentage of Net Advances. Net

NPAs are Gross NPAs net of provisions on NPAs and interest in suspense account.

UCBL, Net Non Performing Asset is low than SEBL & SBL. So UCBL position is better than

two. All the banks want to mitigate this ratio by taking proper Risk Management techniques


51

4.9 Total Investment to Total Assets Ratio


Bank Limited

Southeast Bank

Limited

Standard Bank

Limited

Total Investment to

Total Assets Ratio

13558725/22633313 9153993/2209308 11553643/2393969

59.90% 41.55% 48.15%

4.10 Net NPAs to Total Assets Ratio


Bank Limited

Southeast Bank

Limited

Standard Bank

Limited

Net NPAs to Total

Assets

59911592/226333133 3867540/69422064 4445080/69106277

.26 .55 .64

4.9 Table describes TI to TA Ratio. This ratio indicates the aggressiveness of banks in

investing rather than lending. It is the ratio of Total Investments to Total Assets. It highlights

alternative avenues for parking funds. Higher ratio means lack of credit take-off in

economy and much proportion of total assets is utilized in investments that should not be

the case with banks because the primary business of the banks is to lend. This ratio

indicates how much proportion or percentage of total assets is in the form of

investments. UCB is used its Total Asset into investment because it is the 1st generation bank

and established faith to the mind of customrs.SBL is also is the better position and after that

SEBL.SEBL investment is lower than other two banks because it is 2nd generation bank.

4.10 Table describes Net NPAs to Total Assets Ratio that indicates the efficiency of the bank in

assessing credit risk and to an extent recovering the debts. This ratio is arrived at by dividing the

Net NPAs by Total Assets. Net NPAs are calculated by adjusting provisions against Gross

NPAs. Lower ratio indicates the better performance of banks. So UCB is most efficient than

SEBL & SBL.


52

4.11 Earnings per Share


Commercial

Bank Limited

Southeast Bank

Limited

Standard Bank

Limited

Earnings Per Share 3.66 3.87 7.85

4.12 Interest income to Total Income


Commercial

Bank Limited

Southeast Bank

Limited

Standard Bank

Limited

Interest Income to Total

Income

27802/41535 77095/229993 21651/49221

66.93% 33.52% 43.98%

1.12 Profit Margin Ratio

4.11 This ratio measures the profitability of the firm on per Equity Share basis. This ratio

measures the earnings available to an equity shareholder on a per share basis. UCBL EPS is

3.66, SEBL is 3.87 & SBL is 7.85. I have got the information from their Annual Report 2013,

because 2014 audited report yet not published.

4.12 Table shows Interest Income to Total Income Ratio. It is a basic source of revenue for

banks. The Interest Income to Total Income Ratio indicates the ability of the bank in

generating income from its lending activities. In other words, this ratio measures the income

from lending operations as a percentage of the total income generated by bank in a year.

Interest Income includes Interest on Advances, Discount on Bills, Income from

Investments, Interest on Deposits with Bangladesh Bank and Other Inter-Bank Funds. UCB

revenue is more than two Banks.SBL is the 2nd position & then SEBL.


53

4.13 Profit Margin Ratio

Measurement

Item

United Commercial Bank

Limited

Southeast Bank Limited Standard Bank Limited

Profit Margin

Ratio

2181635425/3835360138 932897890/2617086773 764745570/2008527966

56.88% 35.65% 38.07%

4.13 Table shows that Profit Margin Ratio. The profit margin of a company determines its

ability to withstand competition and adverse conditions like rising costs, falling prices or

declining sales in future. This ratio measures the percentage of net profit to total income and

thus is a measure of efficiency of the company. UCB is more efficient than other two banks.

Because UCBs position is the 1st Private commercial bank in Bangladesh in 2013.But all the

Banks are in good position in this report.


54

4.14 Banks Performance Ratio- Descriptive Statistics

Ratios Banks Mean

Ratio

Std.Dev F-

Value

Significance

Asset Quality UCBL 2.564 0.27655 34.69 0.000

Southeast 1.9432 0.6522

Southeast 3.522 0.89368

Gross NPA to Gross Advances UCBL 0.123 0.45362 2.17 0.000

Southeast 1.5 0.3178

Standard 1.557 0.9873

Total Investment to Total Assets UCBL 1.146 0.15978 39.35 0.000

Southeast 1.72 0.42697

Standard 0.186 0.13831

ROA UCBL 34.77 4.47377 47.74 0.078

Southeast 29.194 3.22174

Standard 31.458 2.94808

Profit Margin Ratio UCBL 0.682 0.0545 38.41 0.000

Southeast 0.956 0.26121

Standard 0.268 0.0545

Source: Results generated with the help of SPSS

The period for evaluating impact of Banks Performance of these private banks in this study is for

the year of 2013. The data is collected from various sources such as annual reports of banks and

their websites. Internet has been an important source of secondary data. In order to have a

comprehensive view the movement of each ratio covered by Banks Performance Ratios are

calculated. Moreover multiple regressions have been employed to measure the degree of impact

of Banks Performance on profitability of banks under study. Mean of Private Commercial Bank


55

Performances ratios is taken as dependent variable and various variable ratios have been taken as

independent variable. Asset quality is important issue for a bank to prevent the bank from going

bankrupt. If the banks have more risky assets on their balance sheet, then the capital will

be lower implying greater credit risk exposure. The ability of management to identify,

measure, monitor and control credit risk is also reflected here. The ratio Total Investment to

Total Asset indicates banks aggressiveness in lending. Gross NPAs to Gross Advances indicates

credit risk of bank. The lower this ratio is the better it is. All the banks are showing first an

increasing trend and the main reason is the political violence. But at the same time every

Private Commercial Banks want to make profit and always try hard for doing well. The ratio of

Return on Asset and Profit margin Ratio are in a good position. It indicates the Profitability of

any Bank.


56

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Prentice Hall.

38. Tsai, Y. C.(2005), “The Current Situations, Problems, and Countermeasures of

Taiwan’s Banking System”, Sinopac Finance Quarterly Journal, 8, 1999, p.77-102.

39. Wen,(2010), Return and volatility intra-day transmitting of dually-traded stocks:The case

of Taiwan, Korea, Hong Kong and Singapore”, Journal of Economics and

Management,1(2), 119-141.


60

Short Form Abbreviation

UCBL United Commercial Bank Limited

SEBL Southeast Bank Limited

BB Bangladesh Bank

NPL Non-Performing Loan

LA Loan & Advances

ROI Return on Investment

NPA Non Performing Assets

NPL Non Performing Loan

LLP Loan Loss Provision

CL Classified Loan

FX Foreign Exchange

L/C Letter of Credit

EPS Earnings Per Share

ROA Return on Assets

ROE Return on Equity

CAR Capital Adequacy ratio

6. Appendix


61

TD Total Deposit

CD Credit to deposit

OD Overdraft

ALCO Asset Liability Committee

ECA External Credit Association

ICCD Internal Credit & Control Division

HOCC Head of Credit Committee

PAMC Provisionary Advance Monitoring

Committee

TI Total Investment

ALM Asset Liability Management Risk

NIM Net Interest Margin

CRM Credit Risk Management

GNPA Gross Non Performing Assets

ICAAP Internal Assessment of Profile of Banks

CIB Credit Information Bureau

IT Information Technology

ECA External Credit Assessment Institutions

BNFIs Non-Banking Financial Institutions


62

Rules

Current Ratio =��

��

ROA = Net Profit / Total Assets

ROE= Net Income/Average Shareholders’ Equity

CAR = Tier I capital + Tier II capital/ Risk weighted assets

CD Ratio= Total Advance/Total Deposit

Gross NPAs to Gross Advances Ratio= Gross NPAs / Gross Advances

Net NPAs to Net Advances ratio = Net NPAs / Net Advances

Total Inv. to Total Assets Ratio = Total Investments/Total Assets

Net NPA to Total Assets ratio = Adjusting Provision/ Gross NPAs

Earnings per Share = Net Income – Dividend on Preferred Shares/Weighted

Average Number of Common Share Outstanding

Interest Income to Total Income ratio = Interest Income/Total Income

PMR = Net Profit / Total Income

NPA ratio = Net non-performing assets/Loans given

CCCRM Corporate Customers & Credit Risk

Mitigates

ICCD Internal Control & Compliance Division

CRMD Credit Risk Review Department


63

Independent Samples Test-1

Figure 1

AQ

Equal variances assumed

Equal variances not assumed

Levene’s Test for Equality

Variances

t-test for Equality of means

F

6.738

Sig.

.001

t

1.860

1.860

df

98

87.125

sig(2-tailed)

.066

.066

AQ




Mean Difference std.Error

Difference

95%Confidence

Interval of the

Difference

Lower Upper

.30800

.30800

.16556

.16556

.02055

.02106

.63655

.63706


64


Figure 2

GNPAs/GA



Levenes Test for Equality

Variances


F

6.682

Sig.

.211

t

1.173

1.173

df

98

87.914

sig(2-tailed)

.244

.244

GNPAs/GA





Difference

95%Confidence

Interval of the

Difference

Lower Upper

.13600

.13600

.11596

.11596

.09412

.09445

.36612

.36645


65


Figure 3

TI/TA




Variances


F

6.511

Sig.

.041

t

.979

.979

df

98

96.979

sig(2-tailed)

.033

.033

TI/TA





Difference

95%Confidence

Interval of the

Difference

Lower Upper

.11333

.11333

.10008

.10008

.04309

.04312

.11642

.11645


66

Independent Sample Test-4

Figure 4

ROA




Variances


F

5.808

Sig.

.0012

t

.537

.537

df

98

84.509

sig(2-tailed)

.022

.022

ROA





Difference

95%Confidence

Interval of the

Difference

Lower Upper

.10514

.10514

.09575

.09575

.04143

.04152

.13958

.13866


67

Independent Sample test-5

Figure 5

PMR




Variances


F

.050

Sig.

.224

t

.792

.792

df

98

97.871

sig(2-tailed)

.430

.430

PMR





Difference

95%Confidence

Interval of the

Difference

Lower Upper

.05143

.05143

.09575

.09575

.24143

.24152

.13958

.13866


68

Bank Performances

Asset Quality

Gross NPAs to

Gross Advances

Total Investment to

Total Asset

Return on Asset

Profit Margin Ratio

Figure 6: A schematic Conceptual Framework of Banks Performances

Dependent Variable Independent Variables


69

7.Questionnaire

“Assessing the Credit Risk Management & Commercial Banks

Performance in Bangladesh’’

Dear Respondent,

The Researcher is a BBA student of Khulna University conducting an analysis on Credit Risk

Management & Commercial Banks Performance in Bangladesh.

These Questions pertains to your experience in your present job and organization. Your answer

will be kept strictly confidential and used for this research purpose only. Your name will not be

mentioned anywhere on the document. So, kindly provide an impartial opinion to make my

research successful. The Researcher have used Five Point Likert Scale that is (1.SD=Strongly

Disagree, 2. MD= Moderately Disagree, 3. Ag= Agree, 4. MA= Moderately Agree, 5. SA=

Strongly Agree).

1. Indicate the number of years you have served in Credit division?

2. What is your designation

3. Indicate the ownership of your institution?[Please put (√) tick mark]

Foreign Commercial Bank

Private Commercial Bank

State Owned Commercial Bank

1. Are you aware of the following performance measurement systems? [ Please Put (√)Mark]

Performance Measurement Systems To Large To some

extent

To little

extent

Not aware

ROI

CAMEL Framework

Productivity Measures


70

2. Asset Quality[Please Put (√)Mark]

No. Particulars SD MD Ag MA SA

I. We think that it is the most critical

area in determining the overall

condition of a Bank

II. Loans that we provide usually the

largest items of Asset & Largest items

of Risk Also.

III. It is the important parameter of

measuring the strength of the bank.

IV. We follow the CAMEL model for

measuring Asset Quality

V. Every employee of this Bank knows

the terms & condition of Asset Quality

3. Gross NPAs to Gross Advances [Please Put (√)Mark]


I. We think it is a Measuring percentage

of gross advances

II. We know that Higher Ratio is harmful

for Bank.

III. It indicates Profit when the percentage

of Net Performing Asset is low.

IV. We believe that Gross advances reduce

the financial risk of Bank and help to

grow sustainability.


71

V. We know that When advances are

more than NPAs at that time the ratio

is lower and it is better for bank.

VI. It reduces the value of a bank &

destabilizes the credit system

4. Total Investment to Total Asset [Please Put (√)Mark]


I. We know every bank is aggressive to

invest its asset rather than lending.

II. It measures the Banks Performance

whether it better condition or lower

condition.

III. We think when we invest our money to

enrich our economy ultimately it will

enrich our institution.

IV. It measures how much Liquid asset is

available to Total asset to convert cash

easily.

V. We believe from our heart when our

institution use our asset properly at that

time quality will increase

simultaneously

VI. It protects our institution from uncertain

Risk

VII. We know that higher net interest

margin gives higher profit for

investment.


72

5. Return on Assets [Please Put (√)Mark]


I. It determines the company ability

to utilize its assets.

II. It measures the percentage of

profit and efficiency of

management.

III. It gives an indication of capital

intensity of any organization.

IV. We know it gives clear idea of

any financial institution

V. A bank always try to earn good

return to utilize its asset

VI. It is the most stringent & vital

part to measure return from

shareholders.

6. Profit Margin Ratio[Please Put (√)Mark]


I. We think a bank performance

would not be possible without

calculating PMR.

II. It gives Clear idea about the

performance of our Bank


73

III. Rising Costs, falling Prices,

Political Violence affects our Profit

margin Ratio.

IV. It measures the efficiency of

management of any financial

institution.

V. Most of the time it helps to measure

the quality of Asset and help to take

right decision to mitigate risk.

VI. It the way to know the borrowers

information of the bank.

Thank you so much for your cooperation

ID#100354(2)

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