Credit Risk Management of Sonali Bank

Limited
 An Internship Report on
“Credit Risk Management of Sonali Bank Limited”

Prepared For
The Chairman
Fourth Year Exam Committee
Department of Finance and Banking

Prepared By
Jafrin Akter Juthi
Exam ID: 151937
BBA Program, Session: 2014-15
Department of Finance and Banking

Date of submission: April 03, 2019

Jahangirnagar University
Savar, Dhaka-1342

April 03, 2019

The Chairman
Fourth Year Exam Committee
Department of Finance & Banking
Faculty of Business Studies
Jahangirnagar University
Savar, Dhaka-1342

Through: Debashis Saha, Internship Supervisor

Subject: Submission of internship report

Dear Sir:
With due respect, I would like to submit my internship report on “Credit Risk Management
of Sonali Bank Limited” assigned by Debashis Saha, Internship Supervisor. I have taken this
report as an opportunity to reflect my learning about corporate life, organizational policy,
internal work environment, and different aspects of managerial roles what I have learned from
my 4 years long BBA Program. I believe that by collecting information for this report I have
learned something very valuable that would help me in my future work field. I look forward
to making the optimal use of this knowledge that I have gained from this Internship.

Hereby, I hope that you would be kind and generous enough to accept my sincere effort and
oblige thereby. It will be my pleasure to answer any clarification regarding this report.

Sincerely Yours,

Jafrin Akter Juthi

Exam ID: 151937
Department of Finance and Banking
BBA Program, Session: 2014-2015

Acknowledgement
At the very beginning I would like to express my deepest gratitude to the Almighty God
for giving me the strength and the composure to finish the task within scheduled time.

My Internship at Sonali Bank Limited was an exclusive opportunity for me to understand

the banking sector of Bangladesh outside the class room. I’ve learned a lot about banking
operations; its conveniences, limitations, and prospects. In addition, the preparation of this
report has led me to go deep and strengthen my understanding of this area. Moreover, in
personal level, this internship has helped me to understand & cope with corporate
environment, develop interpersonal skills and self-confidence.

I express my deep sense of gratitude to my honorable supervisor, Mr. Debashis Saha,

Assistant Professor, Department of Finance & Banking, Jahangirnagar University, for his
relentless cooperation, guidance and counseling in preparing this report which have
enabled me to make a good combination of theoretical and practical knowledge.

I am grateful to all officials and staffs of Sonali Bank Ltd, Savar Cantonment Branch – as
they for their huge cooperation. And also grateful to the persons whose books, working
papers, journals and related materials give me continuous support to write this report. I
would also like to express my gratitude to all the employees of Sonali Bank Ltd, for their
co-operation and support.
Finally, I would also like to thank to the authority of Department of Finance & Banking &
Banking, Jahangirnagar University, for their kind co-operation.
 Table of Content
Chapter Name Page
Number
Executive summary iii
Chapter 1: Introduction 1-5
1.1. Introduction……………………………………………………… 2
1.2. Background of the Study………………………………………… 3
1.3. Origin of the report…………………………………………….. 3
1.4. Objectives of the study………………………………………… 3
1.5. Methodology…………………………………………………… 3-4
1.5.1. Types …………………………………………………. 3
1.5.2. Design………………………………………………… 3
1.5.3. Sources of Data……………………………………….. 4
1.5.4. Data analysis and report writing ……………………... 4
1.6. Scope of the study……………………………………………… 4
1.7. Limitation of the study ………………………………………… 5
Chapter 2: Review of Literature 6-8
_________________________________________________________________________________________ _______________

Chapter 3: Overview of Sonali Bank Limited _

9-14
3.1. Overview of Sonali Bank Limited……………………………….. 10
3.2. Corporate profile…………………………………………………. 10
3.3. Vision of Sonali Bank Limited…………………………………... 11
3.4. Mission of Sonali Bank Limited…………………………………. 11
3.5. Slogan of Sonali Bank Limited………………………………….. 11
3.6. Core value of Sonali Bank Limited……………………………… 11
3.7. Objective of Sonali Bank Limited………………………………. 11
3.8. Core business of Sonali Bank Limited…………………………... 12
3.9. Other business/ services …………………………………………… 12
3.10. Islamic banking services ………………………………………... 12
3.11. Services of Sonali bank Limited………………………………… 13-14

Chapter 4: Credit Risk Management 15-20

(THEORETICAL DISCUSSION)
4.1. What is credit? ................................................................................
16
4.2. Importance of credit…………………………………………......... 16
4.3. Credit management ……………………………………………….. 16
4.4.What is credit risk?……………………………………………….. 16
4.5. Types of credit risk ……………………………………...………... 16
4.6. What is credit risk management? ……………………………….. 17
4.7. What is credit Risk Management process? ……………………... 17
17
4.8.Credit risk management framework ……………………………... 18
4.9. Guideline for CRM by Bangladesh Bank………………………… 18
4.10. Credit administration …………………………………………….. 18-20
4.11. The process of credit rating ………………………..………………

iii
 Chapter 5: Credit risk management of Sonali Bank 21-38
Limited
5.1. Credit risk management of SBL ……………...………………………… 22
5.2. Risk based capital adequacy management of SBL………………... 22
5.3. Implementation of Basel -II in SBL………………………………. 23
5.4. Implementation of Basel - III in SBL…………………………….. 23
5.5. Credit rating report of SBL………………………………………… 24
5.6. Definition of credit rating…………………………………………. 24-25
5.7. Types of loan & advance offered by SBL ………………………... 25-27
5.8. Risk management activities of SBL……………………………… 28
5.9 Risk management framework of SBL……………………………. 28-29
5.10. Risk measurement, monitoring and management reporting system 29
5.11. Three major section of CRM of SBL…………………………….. 30
5.12. Evaluation of loan proposal & risk assessment…………………… 30
5.13. Credit policy of SBL ……………………………………………. 30-34
5.14. Process of credit sanction followed by SBL……………………… 34-36
5.15. Methods used to mitigate credit risk……………………………… 36
5.16. Recovery of loan and advance of SBL
5.16.1. Loan recovery program…………………………… 37
5.16.2. Loan recovery procedure…………………………. 37-38
Chapter 6: Data analysis 39-52
(Trend analysis, ratio analysis & regression analysis)
6.1. Trend analysis and ratio analysis ………………………………… 40-44
6.1.1. Trend of loan and advance………………………………… 40
6.1.2. Trend of classified loan …………………………………… 40
6.1.3. Trend of rate of classified loan ……………………………. 41
6.1.4. Trend of classified loan recovery …………………………. 41
6.1.5. Percentage of NPL to total loan and advance ……………... 42
6.1.6. Return on asset …………………………………………... 42
6.1.7. Return on equity …………………………………………... 43
6.1.8. Return on loan and advance ……………………………….. 43
6.1.9. Capital adequacy ratio …………………………………….. 44
6.1.10. Credit deposit ratio ………………………………………. 44
6.2. Composition of loan and advance ………………………………… 45
6.3. Industry wish loan and advance …………………………………... 46
6.4. General credit ……………………………………………………... 46
6.5. Division wish loan and advance ………………………………….. 47
6.6. Sector wish loan and advance …………………………………….. 47
6.7. The impact of CRM of SBL’s profitability……………………….. 48-52
6.7.1. Hypothesis of the study …………………………………… 48
6.7.2. Data input & regression line ………………………………. 48-49
6.7.3. Result of regression & interpretation………………………. 49-52
6.7.3.1. Regression analysis …………………………..…... 49-50
6.7.3.2. Coefficient analysis ……………………………… 50-51
6.7.3.3. Anova table ………………………………………... 51-52

Chapter 7: Findings, SWOT Analysis, 53-58

iv
 Recommendations, and Conclusion
7.1. Findings ……………………..…….……………………….…………. 54
7.2. SWOT analysis ……………………………………………………….. 55
7.3. Recommendations …………………………………………………… 56
7.4. Conclusion …………………………..………………………………... 57

References …………………………………………….. 58
Appendix ……………………………………………… 59

List of table
Particulars Page No.
Table 1. Composition of loan and advance ……………………………….. 45
Table 2. General credit ……………………………………………………. 46
Table 3. Table of data input ………………………………………………. 48
Table 4. Summary of regression analysis ………………………………… 49
Table 5. Summary of coefficient analysis ………………………………… 50
Table 6. Anova test ……………………………………………………….. 51

List of figure
Particulars Page No.
Figure 1. Risk management framework …………………………………... 28
Figure 2. Risk Management tools ………………………………………… 29

List of Graph
Particulars Page No.
Graph 1: Trend of Loan & advance ………………………………………. 40
Graph 2: Trend of classified loan …………………………………………. 40
Graph 3: Rate of classified loan …………………………………………... 41
Graph 4: Classified loan recovery ………………………………………… 41
Graph 5: Non-performing loan ratio ……………………………………… 42
Graph 6: Return on asset ………………………………………………….. 42
Graph 7: Return on equity ………………………………………………… 43
Graph 8: Return on loan & advance ………………………………………. 43
Graph 9: Capital adequacy ratio …………………………………………... 44
Graph 10. Credit deposit ratio …………………………………………….. 44
Graph 11: Regression line ………………………………………………… 49

v
 List of chart
Particulars Page No.

Chart 1: Industry wish loan & advance ……………………………………. 46

Chart 2: Division wish loan & advance ……………………………………. 47
Chart 3: Sector wish loan and advance …………………………………… 47

List of Abbreviations
SBL Sonali bank limited DF Doubtful
CRM Credit risk BL Bad & loss
management
NPL Non-performing CAR Capital adequacy ratio
loan
NPLR Non-performing CDR Credit deposit ratio
loan ratio
ROA Return on asset MCR Minimum capital
requirement
ROE Return on equity CRAR Capital to Risk weighted
asset ratio
TL Total loan RWA Risk weighted asset
SS Standard ALCO Asset-liability
management committee

vi
 Executive Summary

Commercial Banks are one of the key participants of the financial system of
Bangladesh and as such have a huge impact on the overall economic performance of
the country. A banking organization has different department and functional areas, all
of which must operate holistically if the firm is to be successful. One such function that
contributes immensely to the overall performance of a bank is its Credit Management
Department.
This report tries to explore the activities and responsibilities of the credit management
operations in Sonali Bank Ltd. The initial part of the report contains an overview of
Sonali Bank Limited. The second part of the report contains a theoretical discussion
relevant to credit management in a commercial bank. This is followed up by in depth
discussion of the specific credit operations in Sonali Bank Ltd. Topics credit risk,
credit risk management, risk grading, loan and advances and its classification, lending
principle, borrower credit worthiness, credit administration and credit monitoring etc.,
have been emphasized. Finally, the report makes a critical assessment of analysis of
credit performance in Sonali Bank Ltd through a set of quantitative analysis tools and
techniques such as trend analysis, ratio analysis etc. This analysis is then used to
identify major findings and make appropriate recommendations for the bank.

vii
Chapter – 1
Introduction
____________________________________________________________________________________

1
1.1. Introduction
Anyone can gather theoretical knowledge by learning. But practical knowledge  and
theoretical knowledge is totally different. Practical knowledge is needed to be
achieved to match theoretical knowledge. In order to assemble practical
knowledge, all of the Universities should take effective steps such as internship
program for the BBA students. The internship program is one kind of experience. It
is the combined arrangement between educational institutions and business
organizations operative within the practical field.

So the student of BBA ought to be pragmatic and may have a primary

business atmosphere. The objective of the internship program is to produce the
learners with the practical organizational environment so that they can tune up
themselves for the job in future and can get a chance to reconcile the
theoretical data with reality scenario. For this reason, the internship program is
indispensable for the BBA program. In order to supply a student with job exposure
and a chance of the transition of theoretical data into reality expertise, an internship
is a must. A better balance between theories may be gained through this program.
As a student of Finance and Banking, I was placed in Sonali Bank Limited, Savar
Cantonment Branch, Savar, Dhaka. I decided to write an internship report on
“Credit Risk Management of Sonali Bank Limited” after three months of the
internship program.

The best feature of my place program was the access to a driven and hard-working

team of extremely knowledgeable banking professionals. The most important skill
that I learned was the ability to work in a team. I conjointly picked
up significant skills in team communication, communication with the customers,
training others, getting trained me, and the ability to adapt to the ever-changing
banking scenario. I acknowledged different banking functions and day-to-day
banking operations on my way to complete an internship.
In this paper, I have explained my best in respect of my real life experience
gathered from different departments. Sonali Bank Limited is a customer oriented
financial institution. It remains dedicated to meet up with the ever growing
expectations of the customer because, at Sonali Bank, the customer is always at the
center.

I am doing my internship in Sonali Bank Limited with rotation on different desks

which includes Accounts Opening, General Banking, Clearing, Loans, and
Advances etc. In this report “Credit Risk Management of Sonali Bank Limited” I
will focus on various aspects of Sonali Bank. Since they are standing at good
position amongst the public banks, their financial position, market shares,
marketing mechanisms, overall strengths and weakness, objectives, goals will be
shown by analyzing the fact that however they were and the way they're going
to be in future. Various types of analysis will help us to understand the
comparative position and a transparent picture of this Bank that will help us to
draw any comment at a glance.

2
1.2. Background of the Study
This report is a basic requirement for the BBA program. The proposed topic is “Credit
Risk Management of Sonali Bank Limited”. The topic has been suggested by Debashis
Saha, Assistant Professor, Department of Finance & Banking, Faculty of Business
Studies, Jahangirnagar University.

1.3. Origin of the report

To support my internship report I worked as an intern in Sonali Bank Ltd, Savar
cantonment branch , Savar and my topic of the report is "Credit risk management of
Sonali Bank Ltd." as part of the fulfillment of internship requirement . Managing a
bank credit is one of the significant challenges. Since bank has earn largest slice of
income from credit

1.4. Objectives of the study

Preparation and presentation of this report contains few specific objectives. These
are:
  To possess a sound understanding of credit risk management system and
procedure followed within Sonali Bank Limited.
 To get data regarding the effectiveness of loan and sanction procedure
that’s conducted on the evaluation of credit risk.
 To analyze how credit risk management impact of profitability of Sonali
Bank
 To analyze the credit risk management method of the bank and to
form recommendations if needed.

1.5. Methodology
Methodology refers to the essential part of the study and the process of collecting
information and arranging it in terms of the relevant issues of the study. It is designed
in a way so that it correspondent to achieve the objectives of the study.

1.5.1. Types: The study is descriptive in nature. This report has been prepared on the
basis of experience gathered, during the period of internship. For preparing this report,
I have also obtained the information from annual report and website of the Sonali Bank
Ltd.

1.5.2. Design: The purpose of the study was to investigate overall scenarios about
contributions, potentiality, profitability and risks of Sonali Bank Limited. Therefore,
descriptive approach is selected.

3
1.5.3. Sources of data: For preparing a report, someone can use basically two sources
for collecting data & necessary information. Those are:

 Primary source: A primary source (also called original source or evidence) is an

artifact, a document, a recording, or other source of information that was created
at the time under study.
 Primary sources:
 Conservation with the bank officers and clients.
 Exposure on different desk of the bank
 Practical work experience.
 Information from senior colleagues & the branch manager.

 Secondary sources: A secondary source is a document or recording that relates

or discusses information originally presented elsewhere. Secondary sources
involve generalization analysis, synthesis, interpretation, or evaluation of the
original information.
 Secondary source:
 Annual report of Sonali Bank limited.
 Lecture materials from Sonali Bank Staff College.
 Official Records of Sonali Bank Limited.
 Various books, articles, compilations act. Regarding lending process.
 Different „Procedure Manual‟, Published by SBL.
 Different circular sent by Head Office of SBL and Bangladesh Bank

1.5.4. Data Analysis and report writing:

After collecting all relevant data I analyzed data consisting both statistical analysis and
financial analysis.
 Statistical tools for analysis: for statistical analysis I used MS EXCEL for
regression analysis and for different types of charts and graph for trend analysis.
1. Regression analysis
2. Trend analysis
 Financial tools for analysis: I used different kind of financial ratio for utilizing
the efficiency of credit risk management of Sonali Bank Limited.
1. Ratio analysis

1.6. Scope of the study

The study would focus on the following areas of Sonali Bank Limited: Credit
management system Sonali Bank Limited, Procedure for different credit facilities, and
Portfolio (Loan or advances) management of Sonali Bank Limited, Organization
structures and responsibilities of management.

4
1.7. Limitation of the study
The presented study wasn't out of limitations. However it absolutely was an
excellent chance on behalf of me to understand the banking activities
of Bangladesh specially Sonali Bank Ltd. The study carried on has the
subsequent limitations:
 The main constraint of the study is insufficient access to data that has
hampered the scope of the analysis needed for the study.
 Lake of printed materials.
 It was terribly tough to gather the data from numerous personnel for his
or her job constraint.
 Lack of information and skill among the officers.
 The time is too short to understand all activities.
 Due to some legal obligation and business secrecy Sonali bank is
reluctant to supply information.
 The report is principally supported the secondary information.
 And because it was my initial work. Thus there could also be some
personal mistake within the report. Some issues produce confusions
relating to verification of information.

5
Chapter 2
Review of Literature
______________________________________________________________________

6
Credit Risk Management and Risk based Supervision in Banks has been the subject of
study of many Agencies and Researchers and Academicians. There is a treasure of
literature available on the subject. A careful selection of relevant material was a
formidable task before starting their search. Efforts have been made to scan the
literature highly relevant to the Context.

Rajagopal (1996) made an attempt to overview the banks risk management and
suggests a model for pricing the products based on credit risk assessment of the
borrowers. He concluded that good risk management is good banking, which ultimately
leads to profitable survival of the institution. A proper approach to risk identification,
measurement and control will safeguard the interests of banking institution in long run.

 Froot and Stein (1998) found that credit risk management through active loan
purchase and sales activity affects banks‟ investments in risky loans. Banks that
purchase and sell loans hold more risky loans (Credit Risk and Loss loans and
commercial real estate loans) as percentage of the balance sheet than other banks.
Again, these results are especially striking because banks that manage their credit risk
(by buying and selling loans) hold more risky loans than banks that merely sell loans
(but don’t buy them) or banks that merely buy loans(but don’t sell them).
 
Treacy and Carey (1998) examined the credit risk rating mechanism at US Banks.
The paper highlighted the architecture of Bank Internal Rating System and Operating
Design of rating system and made a comparison of bank system relative to the rating
agency system. They concluded that banks internal rating system helps in managing
credit risk, profitability analysis and product pricing.

Bagchi (2003) examined the credit risk management in banks. He examined risk
identification, risk measurement, risk monitoring, and risk control and risk audit as
basic considerations for credit risk management. The author concluded that proper
credit risk architecture, policies and Framework of credit risk management, credit
rating system, and monitoring and control contributes in success of credit risk
management system.

 Muninarayanappa and Nirmala (2004) outlined the concept of credit risk

management in banks. They highlighted the objectives and factors that determine the
direction of banks policies on credit risk management. The challenges related to
internal and external factors in credit risk management are also highlighted. They
concluded that success of credit risk management require maintenance of proper credit
risk environment, credit strategy and policies. Thus the ultimate aim should be to
protect and improve the loan quality.

7
Khan, A.R. (2008) illustrates that Credit risk is one of the most vital risks for any
commercial bank. Credit risk arises from non performance by a borrower. It may arise f
rom either aninability or an unwillingness to perform in the pre-commitment contracted
manner. The real risk from credit is the deviation of portfolio performance from its
expected value. The credit risk of a bank is also effect the book value of a bank. The
more credit of a particular is in risk, the more probability of a bank to be insolvent.

 Banerjee, Prashanta K., &Farooqui Q.G.M. (2009) said that the objective of the
credit management is to maximize the performing asset and the minimization of the
non-performing asset as well as ensuring the optimal point of loan and advance and
their efficient management. The lending guideline should include Industry and
Business Segment Focus, Types of loan facilities, Single Borrower and group limit,
Lending caps. It should adopt a credit grading system. All facilities should be assigned
a risk grade.

 Rose, Peter S. (2001) examined that for most banks, loans are the largest and most
obvious source of credit risk; however, other sources of credit risk exist throughout the
activities of a bank, including in the banking book and in the trading book, and both on
and off the balance sheet. Banks are increasingly facing credit risk (or counterparty
risk) in various financial instruments other than loans, including acceptances, interbank
transactions, trade financing, foreign exchange transactions, financial futures, swaps,
bonds, equities, options, and in the extension of commitments and guarantees, and
the settlement of transactions.

Wallich (2006) Pre-election has an influencing power in the regulatory side of the
financial sector. The Government and Bangladesh Bank appear to be under pressure
from certain quarters due to this. This becomes evident with the relaxation of the
guidelines issued by Bangladesh Bank on defaulters accessing fresh loans. This is
clearly not an easy environment to operate in and specific steps should be taken to
prevent the situation from further deteriorating and undermining the banking sector.
 
Khemraj & Pasha, (2006) An empirical result of econometric model based on a study
on Guyana show that GDP growth is inversely related to non-performing loans,
suggesting that an improvement in the real economy translates into lower on-
performing loans. We also find that banks which charge relatively higher interest rates
and lend excessively are likely to incur higher levels of non-performing loans.

Fan & Shaffer (2004) Profit efficiency of large commercial banks is by accounting for
non-performing loans. Although non-performing loans are negatively related to banks’
profit efficiency, it is not statistically significant.

8
Chapter – 3
Overview of the Sonali Bank Limited
_________________________________________________________________________________________________________

9
3.1.Overveiw of Sonali Bank Limited
Soon after independence of the country Sonali Bank emerged as the largest
and leading Nationalized Commercial Bank by proclamation of the Banks'
Nationalization Order 1972 (Presidential Order-26) liquidating the then
National Bank of Pakistan, Premier Bank and Bank of Bhwalpur. As a fully
state owned institution, the bank had been discharging its nation-building
responsibilities by undertaking government entrusted different socio-
economic schemes as well as money market activities of its own volition,
covering all spheres of the economy.
The bank has been converted to a Public Limited Company with 100%
ownership of the government and started functioning as Sonali Bank
Limited from November 15, 2007 taking over all assets, liabilities and
business of Sonali Bank. After corporatization, the management of the bank
has been given required autonomy to make the bank competitive & to run
its business effectively.
Sonali Bank Limited is governed by a Board of Directors consisting of 11
(Eleven) members. The Bank is headed by the CEO & Managing Director,
who is a well-known Banker and a reputed professional. The corporate head
quarter of the bank is located at Motijheel, Dhaka, Bangladesh, the main
commercial center of the capital.

3.2.Corporate Profile

Name of the Company : Sonali Bank Limited

Chairman : Mr. Md. Ashraful Moqbul
CEO & Managing
: Mr. Md. Obayed Ullah Al Masud
Director
Company Secretary : Mr. Md. Hasanul Banna
Legal Status : Public Limited Company
Emerged as Nationalized Commercial Bank in 1972,
Genesis : following the Bangladesh Bank (Nationalization) Order
No. 1972 (PO No.26 of 1972)
Date of Incorporation : 03 June, 2007
Date of Vendor's
: 15 November, 2007
Agreement
35-42, 44 Motijheel Commercial Area, Dhaka,
Registered Office :
Bangladesh
Authorized Capital : Taka 6000.00 Crore
Paid-up Capital : Taka 4130.00 Crore
Number of Employee : 18,167
Number of Branches : 1215
Phone-PABX : 9550426-31, 33, 34, 9552924
FAX : 88-02-9561410, 9552007
SWIFT : BSONBDDH

10
 3.3.Vision of Sonali Bank
Socially committed leading banking institution with global presence.
3.4.Mission of Sonali Bank
Dedicated to extend a whole range of quality products that support divergent
needs of people aiming at enriching their lives, creating value for the
stakeholders and contributing towards socio-economic development of the
country.

3.5.Slogan of Sonali Bank:

Your trusted partner in innovative banking.

3.6. Core Values of Sonali Bank:

Sonali Bank Limited (SBL) Core Values proposition consists of ten key elements.
The values would assist the bank in perceiving its employees to work as a team
towards the accomplishment of assigned duties and responsibility for the achievement
of desired objectives. Teamwork: Open communication discussion interaction
amongst the employees would ensure unification actions and efforts towards
achieving the common goal.

Ethics: Everyone must ensure adherence to ethical practices of banking.

Objective: All persons will have definite objective in carrying out their tasks.
Integrity: Protection and safeguard of customers interest is a vital element for
societal trust
Excellence: Excellence performance and effectiveness are preconditions to ensure
quality service to the large customer base of the bank.
Innovation: New and innovative products are the needs of the time for which
continuous action oriented researchers are carried out.
Commitment: Every employee is committed to working up to the expected level to
ensure satisfaction of the valued customer.
Self-Reliance: Each employ will have ownership attitude towards the bank and
self-confidence in his work for the betterment of the bank.
Transparency: Information is to be kept open for all so that stakeholders can have
proper ideas about the bank's activities.
Accountability: All employees are responsible for their activities and will remain
accountable to their respective superior for the accomplishment of the task.

3.7. Objectives of Sonali Bank limited

The prime objective of Sonali Bank Limited is to play a vital role in the national
economy. To serve each one promptly and with a sense of dedication and dignity is a
motto of Sonali Bank
Limited. Other Objectives of Sonali Bank Limited is as follows-
 To provide the best services to each and every clients through concentrated and

11
 coordinated efforts and strict professional approach.
 Forging a cordial, deep-rooted and firm banker-customer relationship by dispensing
prompt and improved clientele services.
To diversify and to widen the overall operations and activities.
 Ensuring highest use of the professional workforce through enhancement of their
aptitude and competence.
 To render innovative, customized and cost effective financial solutions to its clients.
 Responding to the need of the time by participating in syndicated large loan
financing with like-minded banks of the country, thereby expanding the area of
investment of the bank.
 Elevating the image of the Bank at home and abroad by sustained expansion of its
activities.
 To establish a strong market presence.
 To maintain integrity and intellectual ingenuity of highest standard.

3.8.Core Business of Sonali bank:

 Corporate  Trade Finance
 Investment
Banking  Loan Syndication
 Government Treasury Function
 Project Finance  Foreign Exchange
 Money Market Operation
 SME Finance Dealing
 Rural and Micro credit
 Remittance  International Trade
 Capital Market Operation
 Lease Finance  NGO-Linkage Loan
 Special Small Loan
 Consumer Credit  Consumer Credit
3.9.Other Business/Services::
 Government Treasury Bonds  Utility Bills Collection
 Locker Service  Ancillary Services
 A.T.M. Card  Merchant Banking
3.10.Islamic Banking Services::
:Deposit Products:
 Mudaraba Term Deposit
 Al-Wadeeah Current Account(MTDA)
Account(AWCA)  Mudaraba Hajj Saving
 Mudaraba Savings Account(MHSA)
Account(MSA)  MudarabaSonali Monthly
 Mudaraba Special Notice Deposit Deposit Scheme(SMDS)
Account(MSNDA)  Mudaraba Monthly Profit
Scheme(MMPS)
:Investment Products:
 Bai-Murabaha  Bai-Istisna
 Bai-Muajjal  Hire Purchase Under Shirkatul
 Bai-Salam Melk(HPSM)

12
3.11. Services of Sonali Bank Limited
 ATM Services:
 Sonali Bank Limited has introduced ATM services since 2007. The numbers of ATM
are increasing day by day. The bank is the member of Q-Cash Consortium, National
Payment Switch Bangladesh (NPSB) and VISA. Customers are enjoying round the
clock cash withdrawal facility from 87+ own ATM and around 6500+ shared ATM
Booths across the country. Initiative has been taken to setup ATMs at important places
like important branches, airports, railway stations, post office, university campuses,
important public places etc. To increase the efficiency of our ATM service, we have
taken various steps such as reduce down time of individual ATMs. Also trying to
ensure more ATM friendly environment through un-interrupted transaction.

 Sonali Debit Card Facilities

Sonali Bank Limited is one of the member bank of Q-Cash and visa Consortium. Card
holder of Sonali Bank Limited can use ATMs of consortium member banks, Dutch-
Bangla bank and BRAC bank limited.

 Credit Card:
Understanding the importance of needed money Sonali Bank Limited has introduced
Credit Card that gives the maximum benefit with a minimum cost. This is basically one
plastic card that has dual options to make transaction in multi currencies. Customer can
choose the type of card that matches with his requirement. Dual card can be used in
local currency within Bangladesh and foreign currency in abroad. Local currency and
foreign currency limit will be defined in the system as per approved credit limit.

 Prepaid Card:
Without having any account any one can get Sonali Bank Prepaid Card from any
branch. A Prepaid Card has a pre-determined monetary value loaded into card. We
offer Prepaid Dual Currency Card that can be used at any ATM to withdrawal cash and
any POS to purchase of goods & services. Dual card can be used in local currency
within Bangladesh and foreign currency in abroad.

13
  Ancillary Services
Sonali Bank Limited offers multiple special services with its network of branches
throughout the country in addition to its normal banking operations.

 Collection:  Payment:  Social Services

 Gas bills.  Pension of employees Old age allowances.
 Electricity bills. of Government and other  Widows, divorcees and
 Telephone bills. Corporate Bodies. destitute women allowances.
 Water/Sewerage bills.  Bangladesh 
Bank Freedom Fighters'
 Municipal holding Tax. employees’ pension. allowances.
 
Passport fees, visa fees Army pension.  Rehabilitation
and Travel tax.  British pension. allowances for acid survival
 Customs & Excise  Students' women.
duties. stipend/scholarship.  Maternal allowances for
 Source tax and VAT.  Govt. & Non-Govt. poor women.
 Jakat fund. Teachers' salary.  Disability allowances.
 Hajj deposit.  Food procurement bill
 Land development tax. on behalf of the Govt.

 Sale & Misc. Services: Locker Service

Encashment/Purchase:  Bank a/c information of
 Savings Certificates. tax payee client according to Secured Locker Service is
 ICB Unit Certificates. demand of NBR. provided in some branches of
 Prize Bonds.  Local Governance Sonali Bank Limited.
 Wage Earner's Support Project. Customers may avail this
Development Bonds. Enlist of Non-Government service and secure their
Insurance company valuables.
 US Dollar Premium &
Investment Bond.
 Lottery tickets of
different Semi-Govt. and
Autonomous Bodies.
 Sanchaypatra.
 Public Service
Commission's application
form.
 Judicial Service
Commission's application
form.
 Exchange of soiled /
torn notes.

14
Chapter – 4
Credit Risk Management
(THEORETICAL DISCUSSION)
_____________________________________________________________________________________________

15
4.1. What is credit?
Credit is a legally binding agreement in which a borrower gets something of significant
worth now and consents to reimburse the bank at some later date with consideration, by
and large with premium. In banking wording, credit refers to the loan and advances
made by the bank to its clients or borrowers.

4.2. Importance of credit:

Credit assumes an essential job in national economy in the accompanying ways-
 It gives working cash-flow to industrialization.
 It help to makes employment opportunity.
 Credit controls practically a wide range of creation exercises of the nation.
 People's purchasing power increments for it.
 It brings social value.
 Cash generation happens for its fruitful execution.
 Business cycle can run well just by the assistance of loaning framework

4.3. Credit management:

Credit management is that the method toward assent credit, setting the terms it's
allowed on, recovering this credit when it's due, and guaranteeing consistence with
organization credit arrangement, among other credit related functions.

4.4. What is credit risk?

A credit risk is the danger of default on an obligation that may emerge from a borrower
neglecting to make required installments. In the first resort, the hazard is that of the
loan specialist and incorporates lost main and premium, interruption to money streams,
and expanded gathering costs. The misfortune might be finished or incomplete. In a
proficient market, more elevated amounts of credit risk will be related with higher
obtaining costs.

4.5. Types of credit risk:

Credit risk is classified within the following manner.

 Credit default risk: The loss of arising from an individual being unlikely to

pay its loan obligation fully or the individual is over ninety days late on any
material credit obligation. Default risk could impact all credit
sensitive dealing, together with loans, securities and derivatives.

16
 Concentration Risk: The risk go with any single exposure or cluster of
exposure with the potential to provide giant enough losses to threaten a bank’s
core operation. It’s could arises within the variety of single name concentration
or business concentration

 Country Risk: The risk arises from sovereign state freezing foreign currency
payment or when its default on its obligations.

4.6. What is credit risk management?

The risk management contains those components. This are-
 Risk identification
 Risk measurement
 Risk monitoring
 Risk control
 Planning and management

4.7. What is credit Risk Management process?

Credit risk management process should cover the entire credit cycle starting from the
origination of the credit in a financial institution's books to the point the credit is
extinguished from the books.  It should provide for sound practices in: 

 Credit processing/appraisal
 Credit approval/sanction
 Credit documentation
 Credit administration
 Disbursement
 Monitoring and control of individual credits
 Monitoring the overall credit portfolio (stress testing)
 Managing problem credits/recovery 

4.8. Credit risk management framework

A typical credit risk management framework in a bank may be broadly categorized into
following main components:

a)  Board oversight

b)  Senior management's oversight

c)  Organizational structure

d)  Systems and procedures for identification, acceptance, measurement of risks

17
e)  Monitoring and control of risk

4.9. GUIDELINES FOR CRM BY BANGLADESH BANK:

In February 2012 department of off-site supervision of Bangladesh bank issued “Risk

Management Guidelines for Banks” (Bangladesh Bank, 2012) for all scheduled bank in
Bangladesh. These Guidelines have been prepared with these international standards in
mind, most notably Principles 17, 18, 19, and 20 of the Core Principles for Effective
Banking Supervision, issued in 2012 by the Basel Committee on Banking Supervision.
The Board of Directors and senior executive officers of each bank are strongly advised
to familiarize themselves with these Principles and apply them throughout their credit
risk management activities

4.10. Credit administration

A typical credit administration unit performs the following functions:

 Documentation
 Credit disbursement
 Credit monitoring
 Credit repayment
 Maintenance of credit files
 Collateral and security documents

4.11. The process of credit rating:

The Bank rates it’s individual risk exposures continuously until these have been
discharged through full payment or otherwise written off. However, actual account
performance is an additional consideration in classifying the exposures into one of the
following eight categories:

 Superior-Low Risk (AAA):

18
 Industry/Business & Financials: Strong industry and business performance is
indicated on the basis of volume trends and operating margins; the account may be
a dominant player in the industry.
 Account Performance: Account is cooperative, pays on time, and provides non-
loan business.

 Security: Facilities are fully secured by cash deposits, government bonds or an

unconditional guarantee from a top-tier international bank or financial institution.

 Good-Satisfactory Risk (AA):

 Industry/Business & Financials: The account’s performance is strong, having
consistently strong earnings within a vibrant industry, good liquidity and low
leverage.
 Account Performance: Account is cooperative, pays on time and provides
non-loan business.
 Security: Security is sub-prime but solid real estate. Aggregate score would be
95 or above.

 Acceptable Fair risk (A):

 Industry/Business & Financials: Financial condition is currently strong
but may be unable to sustain any major or continued setbacks. This
classification indicates strengths below that of the previous category, but
shows consistent earnings and positive cash flow.
 Account Performance: Account is paying, but may be delayed by less than
one month from time to time.
 Security: Security position is satisfactory. Aggregate score would be 75-94.
 Marginal -Watch list (BBB):
 Industry/Business & Financials: These borrowers have an above-average
risk due to strained liquidity, higher than normal leverage, thin cash flow
and/or inconsistent earnings.
 Account Performance: Account is paying, but may be delayed by less than
one month from time to time.
 Security: Security position could be less than satisfactory if default occurs
longer than 3 months. An aggregate score would be 65-74.
 Special Mentions (BB):

19
  Industry/Business & Financials: These borrowers deserve management’s
close attention because of consecutive losses over two years with the
potential to have negative net worth, excessive leverage.
 Account Performance: Account is paying, but may be delayed by less than
three months from time to time.
 Security: Security position could be less than satisfactory if default occurs
longer than 3 months. An aggregate score would be 55-64.

 Substandard (B):

Financial condition is weak, and capacity or inclination to repay is in doubt. These

weaknesses jeopardize the full settlement of loans. An aggregate score would be 45-54

 Doubtful and Bad (Non-performing):

Full repayment of principal and interest is unlikely, and the possibility of loss is
extremely high. The adequacy of provisions must be reviewed at least quarterly and the
Bank should pursue a loan workout arrangement (e.g. restructuring), failing which legal
options should be explored to enforce security to obtain repayment. An aggregate score
would be 36-44.

 Loss (Non – Performing):

The prospect of recovery is poor after exploring all options. Legal procedures have
been initiated. In accordance with Bangladesh Bank guidelines, these accounts should
be written off. An aggregate score would be 35 or less. The deterioration of any loan
account is regarded as a serious development that requires the attention of the Credit
Committee. For this purpose, any account which is downgraded to “Substandard”
should be the subject of a Classified Loan Report. Recovery of Non-Performing Loans
& Investments the NPL Recovery Unit is responsible for all accounts assigned to it by
the Credit Committee. The unit is staffed by seasoned senior officers who undertake the
following activities:

 Review the accounts thoroughly and diagnose business prospects.

 Determine the best way to recover the Bank’s exposure with the least possible
losses.

 Restructure those accounts which are deemed to be cooperative and in temporary

distress.

 Monitor their performance closely until they have substantially complied with the
revised terms including payment of at least six months’ installments; rehabilitated
accounts may be returned to the originating front offices for regular monitoring and
supervision after this prescriptive period.

20
Chapter – 5

Credit Risk Management of Sonali Bank Limited

____________________________________________________________________________________

21
5.1. Credit Risk Management of Sonali Bank Limited
The Risk Management Division of the Bank identifies analyses, evaluates and
supervises all risk related work including control/mitigation measure of risks as per
guidelines and direction of Bangladesh Bank with the approval of the Board of
Directors. Recently, a high powered ‘Board Risk Management Committee’ comprising
five members of the Board of Directors has been formed as per the directives
of Bangladesh Bank to strengthen overall risk management activities. Risk
Management Division has introduced Risk Management Checklist (RMC) for attaining
‘satisfactory’ rating on various segments of core risks through proper implementation
of Core Risk Management Guidelines, which is being maintained at all
offices/branches of the Bank. Risk Management Division also prepares half yearly
“Comprehensive Risk Management Report (CRMR)” and monthly “Risk Management
Report (RMR)” to identify analyzes and mitigates the risks relating to bank’s assets,
liabilities, liquidity, earnings and submit it to the Risk Management Committee of the
Bank as well as to Bangladesh Bank for its regulatory compliance. The division
conducts periodic ‘Stress Testing’ to assess Capital to Risk-weighted Asset Ratio
(CRAR) of the Bank considering specific shock factors and shock levels. “Core Risk
Management Guidelines Implementation Policy” has been introduced in line with
MOU signed with Bangladesh Bank. The Risk Management Division also reviews
position of credit rating, abnormal change in AD ratio, recovery position, self-
assessment of internal control and other risk factors associated with banking activities.
Meanwhile, Internal Capital Adequacy Assessment Process (ICAAP) and related
Supplementary Document under Supervisory Review Process (SRP) for the year 2014,
2015 and 2016 have been prepared and submitted to Bangladesh Bank. Besides,
ICAAP for the year 2017 is also in underway. Credit risk within the Sonali Bank
Ltd.'s portfolio is monitored, reviewed and analyzed by the Credit Risk
Management (CRM).
CRM determines the standard of the credit portfolio and assists in minimizing
potential losses. To achieve this objective, CRM formulates acceptable credit
policies associate degreed procedures for the Bank to make sure building and
maintaining quality credits and an economical credit method. Sonali Bank Ltd. has
established Asset-Liability Management Committee (ALCO) confirm the
utmost risk exposure. ALCO also assesses, recommends and controls cross
border/country risk. To manage the Non-Performing Loans (NPL), Sonali Bank
Ltd. has a comprehensive remedial management policy, which includes a
framework of controls to identify weak credits and monitoring of these accounts.

22
5.2. Risk based Capital Adequacy Management of Sonali Bank
Limited
In line with Bangladesh Bank guidelines for determining Minimum Capital
Requirement (MCR) and the Capital Annual Report 2017 DIRECTORS’ REPORT 83
to Risk-weighted Asset Ratio (CRAR) for banks, Basel III guidelines have been
enforced effective from 01 January 2015. Under Basel-III guidelines, the Capital to
Risk weighted Asset Ratio (CRAR) at the end of 2017 stood at 10.35 percent compared
to 10.33 percent of the previous year against regulatory requirement of minimum 10.0
percent. Core capital (Tier 1 capital) held at Tk. 37,166.68 million being 8.07 percent
of total of Risk Weighted Asset (RWA). Supplementary capital (Tier 2 capital) stood at
Tk.10, 517.10 million being 2.28 percent of RWA.

5.3. Implementation of BASEL-II in Sonali Bank Limited

To comply with International best practices and to make the Bank's capital more
risk-sensitive as well as to build the Banking industry more shock absorbent and
stable, Bangladesh Bank provides revised restrictive capital framework "Risk based
mostly Capital Adequacy for Banks" that is effective from first January 2009.
According to the BRPD Circular no-09 dated 31st December 2008, following
specific approaches are suggested for implementing BASEL-II:

• Standardized Approach for calculating Risk Weighted Assets (RWA) against

Credit Risk;

• Standardized (Rule Based) Approach for calculating RWA against Market Risk;

• Basic Indicator Approach for calculating RWA against Operational Risk.

Under the Standardized Approach of the Risk Based Capital Adequacy Framework
(Basel II), Credit Rating is to be determined on the basis of risk profile assessed by
the External Credit Assessment Institutions (ECAIs) duly recognized by
Bangladesh Bank. Along with the present capital adequacy rules
and news Bangladesh Bank (ref. BRPD Circular no.10 dated 25.11.2002) Banks
will start quarterly reporting as per the set of the reporting formats provided by
Bangladesh Bank.
Sonali Bank Ltd. Management is aware of guideline of Bangladesh Bank and
ready for implementing new capital Accord BASEL-II.

5.4. Implementation of BASEL- III in Sonali Bank Limited

To improve the banking sectors ability to absorb shocks arising from financial and
economic stress, whatever the sources, thus reducing the risk of spillover from the
financial sector to the real economy, Bangladesh Bank instructed all the scheduled
banks in Bangladesh through BRPD circular no- 18/2014 to implement BASEL-III
from 1st January, 2015 to 2019 phase by phase. These new global regulatory and
supervisory standards mainly addressed the following areas:

23
  Raise the quality level of capital to ensure banks are better able to absorb losses
on both a going concern and a gone concern basis;
 Increase the risk coverage of the capital framework;
 Introduce leverage ratio to serve as a backstop to the risk-based capital measure;
 Raise the standards for the supervisory review process (Pillar-II); and
 Public disclosures (Pillar- III) etc.

 Accordingly Sonali Bank Limited has started BASEL-III implementation from

January, 2015 and Capital to Risk weighted Asset Ratio (CRAR) of the Bank is being
submitted to Bangladesh Bank as per BASEL- III requirement.
 

5.5. Credit Rating Report of Sonali Bank Limited 

  With Government Support 

Ratings 2017-2018 2016-17

Long Term AAA AAA

Short Term ST-2 ST-1

 Without Government Support

Ratings 2017-2018 2016-17

Long Term A- A-

Short Term ST-2 ST-2

Outlook Stable Stable

5.6. Definition of Credit Rating

Rating Definition

Banks rated in this category are adjudged to be of best quality, offer

AAA highest safety and have highest credit quality.
Risk factors negligible and innocuous, nearest to risk free Government
Triple-A bonds and securities.

24
( Highest Changing economic circumstances unlikely to possess any serious impact
on this category of banks.
Safety)

Highest certainty of timely payment.

Short-term liquidity as well as internal fund generation is
ST-I
extremely sturdy and access to different sources of funds is outstanding,
Safety is almost like risk free Government short-term obligations.

A-
Banks rated in this category are adjudged to offer adequate safety for
Single-A timely repayment of financial obligations.
This level of rating indicates a company entity with adequate credit
(Adequat profile.
e Risk factors are more variable and larger in periods of economic stress
than those rated within the higher classes.
safety)

High certainty of timely payment. Liquidity factors are strong and supported
ST-2
by good fundamental protection factors. Risk factors are very small.

25
5.7. Types of loan offered by SBL
Depending on the varied nature of finance, all the loaning activities are brought
beneath the following major heads:

 Loan (General) :
Short term, Medium term loans allowed to individual/firm/industries for a selected
purpose except for an explicit amount and usually owed by installments fall
into this head. This type of loaning is especially allowed to
accommodate finance beneath the classes (i) massive& Medium Scale trade and
(ii) little .Very often term financing for (i) Agriculture & (ii) Others are also
included here.

 House Building Loan (General):

Loans allowed to individual/enterprises for construction of house (residential or
commercial) fall under this type of advance. The amount is owed by monthly
installment inside a such period. Such advances square measure called Loan (HBL-
GEN).

 House Building Loan (Staff)

Loans allowed to our Bank staff for purchase/construction of house shall be called
Staff Loan (HBL-STAFF).

 Other Loans to Staff:

Loans allowed to staff apart from for House Building shall be sorted beneath head
– workers Loan (Gen).

 Cash Credit (Hypo.):

Advances allowed to individual/firm for mercantilism in addition as wholesale
purpose or to industries to meet up the assets necessities against hypothecation of
products as primary security fall under this type of lending. It is a continuous
credit. It is allowed under the categories (i) "Commercial
Lending" once the client is apart from a trade and (ii) "Working Capital “when the
customer is an industry.

 Cash Credit (Pledge):

Financial accommodations to individual/firms for mercantilism in addition as for
whole-sale or to industries as assets against pledge of products as primary
security fall into this head of advance. it's conjointly agrees continual the
products on rent at a declared rental, which is inclusive of the repayment of
Principal in addition as interest for adjustment of the loan inside a such amount.

 Lease finance:
Lease Financing is one among the foremost convenient sources of feat capital
machinery associate degreed instrumentation whereby a consumer is given the
chance to own a prerogative to associate degree quality typically for associate
degree in agreement amount of your time against payment of rent. It is a term
financing repayable by installment. Time Loan: this can be just one
26
occasion money accommodation for brief amount most twelve months to meet
some specific purpose. The loan is adjustable inside the validity and not renewable
and no transaction is allowed.

 Consumers Credit Scheme: 

It’s a special credit theme of the Bank to finance purchase of consumers' sturdy to
the mounted financial gain cluster to boost their customary of living. The loans are
allowed on soft terms against personal guarantee and deposit of  such share of
equity by the customers. The loan is owed by monthly installment inside a
set amount.

 SOD (General):
Advances allowed to individual/firms against liability (i.e. Lien on FDR/PSP/
BSP/Insurance Policy/Share etc.).This may or might not be SOD (Others):
Advances allowed against assignment never-ending order for execution of written
agreement works falls under this head. This advance is usually allowed for an
explicit amount and specific purpose i.e. it is not a continuous credit. It falls under
the category "Others".

 SOD (Export):
Advance allowed for buying foreign currency for payment against L/Cs (Back to
Back) wherever the exports don't occur before the date essential payment. This is
also associate degree advance for temporary amount that as export finance and falls
under the category "Commercial Lending".

 PAD:
Payment created by the Bank against lodgment of shipping documents of
products foreign through L/C falls under this head. It is associate degree interim
advance connected with import and is usually liquidated against
payments typically created by the party for retirement of the documents for release
of imported goods from the customs authority. It falls under the category
"Commercial Lending".

 LlM:
Advances allowed for retirement of shipping documents and unleash of
products foreign through L/C taking effective management over the products by
pledge in godowns beneath Bank's lock &key fall under this type of advance.
This is conjointly a short lived advance connected with import which as post-
import finance and falls under the class "Commercial Lending".

 LTR:
Advance allowed for retirement of shipping documents and unleash of
products foreign through LC falls under this head. The goods square measure two-
handed over to the bourgeois beneath trust with the arrangement that
sale takings ought to be deposited to liquidate the advances inside a given
period. This can be conjointly a short lived advance connected with import
and called post- import finance and falls under the category "Commercial
Lending".

 IBP:

27
Payment created through purchase of interior bills/ cheqes to fulfill pressing
demand of the customer falls under this type of credit facility. This temporary
advance is adjustable from the proceeds of bills/cheques purchased for collection.
It falls under the category "Commercial Lending".

 Export money Credit (ECC):
 Money accommodation allowed to a client for exports of goods falls beneath this
head and is categorized as "Export Credit". The advances should be liquidated out
of export payoff among a hundred and eighty days.

 Packing Credit (PC):

Advance allowed to a client against specific L/C/firm contract for
processing/packing of products to be exported falls beneath this head and
is categorized as "Packing Credit". The advances should be adjusted
from takings of the relevant exports inside a hundred and eighty days. It
falls under the category "Export Credit".
 F D B P:
Payment made to a customer through purchase/negotiation of a foreign documentary
bills falls under this head. This temporary advance is adjustable from the proceeds of
the shipping/export documents. It falls under the category "Export Credit".
 IDBP:
Payment made against documents representing sell of goods to Local export oriented
industries which are deemed as exports and which are denominated in Local Currency /
Foreign Currency falls under this head. This temporary liability is adjustable from
proceeds of the Bill.
 F B P:
Payment made to a customer through Purchase or Foreign Currency Cheques/Drafts
falls under this head. This temporary advance is adjustable from the proceeds of the
cheque/draft.

5.8. Risk Management activities of SBL

Risk Management activities of Bank can be divided into following ways:
1 Risk Identification
2 Risk Analysis
3 Risk Measurement
4 Risk Price
5 Risk Monitoring and Controlling
6 Risk Mitigation

28
5.9. Risk Management Framework of SBL
Risk management process of SBL is based on the Bangladesh Bank guidelines and the
clear concept of identification, assessment, parameter setting, controlling and
monitoring activities. The primary goals of risk management are to ensure that the
outcomes of risk-taking activities are consistent
with the Bank’s strategies and risk appetite, and
that there is an appropriate balance between risk
and reward in order to maximize return. The Bank’s
enterprise-wide risk management framework
provides the foundation for achieving these goals.
This framework is subject to constant evaluation to
ensure that it meets the challenges and requirements
of the market in which the
Bank operates, including regulatory standards and
industry best practices. The risk management
programs of the Bank’s subsidiaries conform in all
material respects to the Bank’s risk management
framework, although the actual execution of their
programs may be different. The Bank’s risk
management framework is applied on an enterprise-
wide basis and consists of three key elements:

Figure 1: Risk management framework

A. Risk Governance,
B. Risk Appetite, and
C. Risk Management Tools
A. Risk Governance:
SBL has established a robust risk management framework through strengthening risk-
related policies, procedures, processes, control mechanisms and reporting during the
last few years. With a view to preserving and enhancing
resiliency capacity, the Bank continues to increase its risk management capabilities
through investing in people, processes and IT infrastructure. In achieving the objective
of risk minimization in its overall business strategy.

B. Risk appetite
The Bank’s Risk Appetite Framework
combines qualitative and quantitative terms
of reference to guide the Bank in
determining the amount and types of risk it
wishes to
prudently undertake in pursuing the Bank’s
strategic and financial objectives. Key risk

29
appetite measures provide clear idea of risk tolerance and risk limits, which are critical
in implementing effective risk management. For major risks (credit, market, liquidity,
and operational), the key risk appetite measures are supported by management level
limit structures and controls. Management’s dedicated attention to these risks creates a
focus on forward-looking activities that keeps the Bank within its risk appetite on an
on-going basis with respective DGM to analyze, update and sharpen the effectiveness
of the existing policies.

C. Risk Management Tools

Effective risk management deploys tools that are guided by the Bank’s Risk Appetite
Framework and integrated with the Bank’s strategies and business planning processes.

Figure 2: Risk management tools

5.10. Risk Measurement, Monitoring and Management Reporting

System of SBL
 An effective risk monitoring procedure exists in the Bank to identify and
measure all quantifiable and material risk factors;
 SBL has a separate Management Information Systems (MIS) Division which
provides necessary information to Risk Management Division and Senior
Management for understanding the bank’s position and risk exposure in time;
 A strong risk management monitoring culture is underway to address all sorts of
material risks;
 Adequate and accurate reports, containing sufficient information, are being
produced to Senior Management for identifying any adverse trend and
evaluating the level of risk.

5.11. Three major Sections of Credit Risk Management of SBL

Credit Risk Management are organized in the following three major sections
 Credit Assessment
and Risk Grading B. Preferred
A. Policy
 Approval Authority Organizational
Guidelines
 Segregation of Structure
 Lending Guidelines
Duties
 Internal Audit
30
 Role of Senior  Organizational  Credit
Management Structure of Credit Administration
 Role of the Credit Officials  Credit Monitoring
Risk  Credit Recovery
C. Procedural Guideline
 Management
Committee

5.12. Evaluation of loan proposal and risk assessment:

Risk is measured before sanction of loan as per credit risk management guidelines
along with traditional method and lending. Decision is made on that measured risk.
Besides this, measurement of risk is also reviewed annually. Risk analysis statement
must be submitted with every loan proposal. So, the following duly filled in form/data
must have to be submitted with any kind of proposal such as new loan, renewal and
enhancement:-
a) Data collection checklist
b) Limit utilization form
c) Credit Risk Grading Score sheet
d) Credit Risk Grading Form
e) Internal credit risk rating system

5.13. Credit policy of SBL

A credit policy incorporates all tenets identifying with loan and advances made by the
bank to the borrowers. It incorporates sorts of credit stretched out by banks, technique
for making a decision about the credit value of borrowers, the guarantee or securities
that are acknowledged by the banks, etc. These approach rules allude to all credit
offices reached out to clients including situation of assets on the interbank showcase or
different exchanges with money related establishments. Albeit, in contrast to other
business banks, there is no recommended and distributed manual or strategy rules with
respect to credit the board in SBL, it pursues a few guidelines which are extremely
fundamental for credit the executives. All credit expansion of the bank must agree to
the necessities of the Bank Organizations Act 1991 and Bangladesh Bank guidelines as
corrected every now and then.

 Approach to the Bank:

At the point when a borrower ways to deal with SBL for an advance s/he is required to
satisfy the accompanying criteria-

 S/he must be a customer of this bank.

 S/he needs to apply legitimately depicting the motivation behind the credit sum
required and his/her ability of reimbursement.

31
Subsequent to getting the application from the customer, the branch supervisor filters
the papers and chooses if s/he will be took into consideration a development or not.
Therefore director experiences the accompanying procedure.

 Borrower selection :
In borrower selection emphasis is given initially on 3Ms, which are

. Man: The manager should study the person applied for associate advance. For

this s/he gathers data concerning he applicant’s character,
credit goodness and position. To evaluate the credit goodness of borrowers SBL
follows some basic principles of loaning. These are safety, liquidity,
diversification, gain, quality, integrity, dependableness etc. The
manager will get data from Branch Records, Credit data Bureau (CIB)
of Bangladesh Bank, Personal interviews with the shopper, Credit Report,
Market data, monetary Statements (Balance sheet, financial gain statement) etc.

 Management: Management is that the heart of the business. Therefore a careful

judgment should be created concerning it. It’s sought-after if
there are enough consultants and technical knowhow within the management of the
firm. Management’s integrity is additionally got to be evaluated.

 Money: If management is heart of the business, cash is blood that is

another very important issue to survive. A credit manager has to analyze the debt-
equity quantitative relation of the firm. S/he conjointly has to make certain if
there are ample assets to recover the advance.

 Financial Data Analysis:

Also, the credit manager needs to think about financial statement at least three years.
For this s/he takes help of various ratio, for example, liquidity ratio dissolvability ratio,
productivity ratio and movement ratio. S/he likewise needs to inspect ledger
explanation of the candidate all around distinctly. Notwithstanding investigation, the
manager should visit the business concern to get a genuine picture of it.

a. Industry Investigation: In this part, the manager is required to contemplate the

business behavior, which incorporates market demand, competitors and government
barriers

b. Lending risk analysis: It is an efficient and basic approach to evaluate lending risk,
which covers every one of the variables depicted previously. Here a structure must be
finished by the loaning officer. In the event that loaning risk is observed to be low,
financing should be possible and the other way around.

On the off chance that the candidate is observed to be alright in the wake of
experiencing all the above procedure, the branch manager sends it with other vital

32
papers to the credit division of the Head Office with his/her very own proposal. The
credit division after examination, sends it to the Board (on account of sum in excess of
10 lac) or to the credit advisory group. The credit committee consists of Managing
Director, one General Manager and one Deputy General Manager from International
Division. . If the Board/ Credit Committee agree, the proposal is accepted and is sent
back to the credit division. The credit division informs it the branch manager.
Following this the branch manager, maintaining other law and regulation sends a
sanctioning letter to the applicant

 Security & Facility Offer Letter (FOL)

1. Preparation of facility offer letter.

2. Processing security offer letter.
3. Preparation and dispatch of security documents.
4. Charge creation of registrar of joint stock companies.
5. Creation of legal equitable mortgage of loan.
6. Co-ordinate legal matters with lawyers.
7. Attending customer queries regarding FOL.
8. Issuance of Bank certificate.
9. Coordinate search and inspection report.
10. Responding to auditors of customers.
11. Renewal of hold letters.
12. Cancellation of facilities.
13. Circulation security tracking list to senior management on a monthly basis after
having RM s comments.
14. Update and monitor one off facilities of trade services.

 Preparation and Dispatch of Facility Offer Letter:

1. Receive approval for CARM (Credit and Risk Management) application through
lotus notes.
2. Review the approval terms of CRM.
3. Check whether the facilities are in line with Bangladesh Bank and banking
companies act directives.
4. Check the CIB (Credit Information Bureau) report from Bangladesh Bank,
Memorandum of articles & association and search report.
5. Prepare FOL in standard format as per set up service level agreement (SLA).
6. Hand over the draft FOL to the respective RM (Relationship Manager) for checking
amendment and conformation.
7. Discuss with RM regarding different issues of the FOL.
8. Finalize the FOL.
9. Mail the FOL along with security papers to the client for their signing.
10. Receive the duplicate FOL duly signed by the as an indication of the acceptance of
the letter.
11. Update SLA tracking, security -tracking list.
12. Review fees will be finalized according to the FOL terms.

 Issuance of Bank Certificate:

33
1. Receive request from customer or from the auditor issuance of Bank's certificate.
2. Verify the signature.
3. Prepare the certificate as the standard format.
4. Realizes charges and VAT.
5. Take signature from the authorized signatories of the bank.
6. Keep a copy of the certificate in credit file.

 Cancellation of Facilities:

1. Check the CARM approval for cancellation of facility.

2. Send lotus notes to related departments and RM for “no claim” confirmation.
3. Upon recipient confirmation from concern departments, delete securities, limits &
pre facility from SBL.
4. Prepare memorandum of satisfaction for vacation of Charges.
5. Advise lawyer for preparing the Deed of Redemption for mortgage.
6. Cancel the securities and transfer them to central store.

 Loan Disbursement:

1. Receive customers request letter and verify the signature.

2. Check FOL for terms and condition.
3. Check the invoices.
4. Process the loan.
5. Disburse the loan through A5 debit/Credit vouchers.
6. Send the customers advice through courier.
7. File the documents after final checking.

 Loan Rollover:

1. Review customers request letter and verify the signature.

2. Check FOL for terms and conditions.
3. Process the rollover.
4. File the documents after final checking in credit file.

 Loan Repayment:

1. Receive customer's request letter verify the signature.

2. Check FOL for terms and conditions.
3. Cross the letter with red ink and write “entry passed on”.
4. Process the repayment through A5 debit/credit.
5. File the documents after final checking in repayment file

5.14. Process of Credit Sanction Followed by Sonali Bank Ltd:

The following procedure have to be compelled to be followed for giving advances
to the client. These are: a. Party’s application b. filling form-X c.  grouping CIB
report from Bangladesh Bank d. process loan proposal e. Project appraisal f.
Head office approval g. Sanction letter h. Documentation i. Disbursement

34
a. Party’s Application

Initially receiver had to submit associate application to the respective branch for

loan, wherever he must clearly specify the explanation for
loan. When receiving the application from of borrower bank officer verifies all the
data rigorously. He additionally checks the account maintains by the receiver with
the bank. If the officer becomes glad then he offers form-X (prescribed form of
bank) to the possible receiver.

b. Filling Form –X

When satisfying with party’s application the person have to be compelled to fill

Form-X. It’s the prescribed form provides by the respective branch that
contains info of the receiver. It contain name with its factory location, official
address and phone number, details of past and present business, its action and
failures, type of loan required etc.

c. Collecting CIB Report from Bangladesh Bank

After receiving the application for advance, Sonali Bank Ltd: sends a letter

to Bangladesh Bank for getting a report from there. This report is named CIB
(Credit information Bureau) report.
Sonali Bank Ltd: usually seeks this report from the head office for every kind of
investment. The aim of this report is to being knowing that whether or
not the receiver has taken loan from the other bank.

d. Processing Loan Proposal

After receiving CIB report from Bangladesh Bank, then respective branch

prepare associate investment proposal, that contains terms and conditions of
investment for approval of Head office. Documents those are necessary
for sending investment proposal are:

Necessary Documents 
While advancing cash, banks produce a lot of documents that are needed to be
signed by the borrowers before the disbursement of the loan. Of them
some are technically known as charge documents. Necessary steps and documents:
 
 Application form signed by the client.
 Acceptance of the term and conditions of sanction advice.
 Trade license.

35
 In Case of Partnership firm, copy of registered partnership deed duly certified as true
copy or a partnership deed on non-judicial stamp of taka-150 denomination duly
notarized.
 Demand promissory notes.
 Letter of hypothecation of stocks and goods.
 Letter of hypothecation of books debts and receivable.
 Letter of hypothecation of plant and machinery.
 Personal letter of guarantee.

e. Project Appraisal

It is the pre-investment analysis. Project appraisal in the banking sector is important for
the following reasons:
 To achieve organizational goals
 To recommend if the project is not designed properly
 To justify the soundness of an investment
 To ensure repayment of bank finance

f. Head Office Approval

At the point when Head Office get evaluation from the branch at that point, Head
Office again assesses the venture. On the off chance that it is by all accounts a suitable
one, the Head Office sends it to the Top managerial staff for the endorsement of the
speculation. The Top managerial staff considers the proposition and takes choice
whether to support the venture or not. In the event that the Top managerial staff affirms
the speculation, the Head Office sends the endorsement to the concerned branch. The
separate officer of Head

Office assesses the task by setting up a rundown named "Top Sheet" or "Official
Outline" and after that he sends it to the Head Office credit division for the
endorsement of the advance. The Head Office credit division considers the proposition
and takes choice whether to support the speculation or not. On the off chance that the
board of trustees affirms the speculation, the Head Office sends the endorsement to the
concerned branch.

g. Sanction Letter

After getting the approval of the Head Office the branch issues sanction letter to the
borrower. A sanction letter contains:
 Name of borrower,  Purpose,
 Facility allowed,  Rate of interest

36
h. Documentation

If the receiver accepts the sanction letter, the documentation starts.

Documentation may be a written statement of reality evidencing bound transactions
covering the legal aspects punctually signed by the approved persons having
the position. The most common documents used by the Sonali Bank Ltd: for
sanctioning different kinds of investment are:

 Joint Promissory  Letter of Continuity,  Status Report,

Note,
 Trust Receipt,  Letter of
 Letter of Hypothecation,
Arrangement,  Counter Guarantee,
 Letter of Guarantee,
 Letter of  Stock Report,
Disbursement,  Documents Relating
 Letter of Lien, to Mortgage.
 Letter of Installment,

I. Disbursement

After sanction and completion of all formalities the several officer disburses the

loan. The officer writes cheque and provides it to the borrower. For this borrower
must open associate account through that he/she will withdraw.

5.15. Methods used to mitigate credit risk of SBL:

 Based on the policies strategies are developed by the bank to mitigate credit risk.
 Credit risk is mitigated by appropriate credit appraisal systems before lending and
proper collateral or guarantees are taken to hedge the risk.
 Risk management system is put in place for better management of credit risk and a
risk rating is installed which is in compliance with BB guidelines.
 The risk management function is reviewed periodically usually every quarter.
 The rating system for term loans is annual.

5.16. Recovery of loan & advance of SBL:

Sonali Bank’s mostly depends on the recovery of its outstanding amount. Outstanding
amount includes both principal and interest because, 80% of bank’s earnings comes
from advances. A poor recovery rate indicates the weak condition of the banking
operation and vice versa.

5.16.1. Loan recovery programs:

37
When Sonali Bank sanctions loans and advances to its customers, they clearly state the
Repayment pattern in the loan agreement. But some credit holders do not pay their
credit in due period. The public banks have to face this sort of problems. This situation
is also found in Sonali Bank. To overcome the problem of overdue loan, the bank has
taken particular loan recovery programs. Recovery Programs taken by Sonali Bank
Limited:
a. Establishing credit supervision and monitoring cell in the bank
b. Re-structuring the loan sanctioning and distributing policy of the bank
c. Sanctioning loans and advances against sufficient securities as best as possible
d. Giving more powers to the branch manager in credit management decision making
process
e. Offering a package of incentives to the sound borrowers
f. Giving more emphasis on short term loans and advances
g. Imposing restrictions on loans and advances for sick industries
h. Taking legal actions quickly against unsound borrowers as best as possible within
the period specified by the law of limitations.

5.16.2. Loan recovery procedure:

Recovery procedure may be a extended one that needs efforts of the bank, society
and legal establishments. It additionally takes time and cash. the
most responsibility of bank manager and advance / loan officer is to recover the
outstanding loan in
Sonali Bank. The loan recovery procedure is split into many steps. They are
as follows:
o Reminder:
Reminder to the client is given through a proper line. A
letter is written and properly signed on the bank’s papers. This letter is issued
several times to prompt the honorable loaner to repay his/her outstanding
portion.

o Demand Notice:
Demand notice is issued before one month being due of outstanding loan or
installment. It’s sent to the borrower.

o Legal Notice:
If the borrower doesn't repay their individual loans and interest when maturity
being received the demand notice by the bank; then bank sends legal notice
under registered with acknowledgement by post to the borrowers. Before taking

38
 any action against the borrower the bank ought to send legal professional notice
to him.

o Special Notice:
Besides the higher than 2 notices, a special notice signed by DC, TNO is
send to the respective borrower to stay mental pressure on him for repaying the
loan.

o Field Recovery:
Loan officer tries to recover loan through I.O. receipt by visiting the spot and
houses of the borrower.

o Case Filing:
If all the procedure except action of bad loan becomes unsuccessful then
certificate case is filed against the borrower.. If the recipient is within
the following category then the case must be filed with priority:
 Unwilling to repay loan though he's financially solvent.
 Each effort of loan recovery becomes failure.
 Damaging to the interest of loan.

o Loan recovery with the help of interest exempting:

The loan quantity that becomes quite double in principal and interest and
which isn't possible to recover with the assistance of legal actions then this
loan will be recovered by exempting interest. By this the loan are often recover

39
Chapter- 6
Data Analysis
(Trend analysis, Ratio analysis & Regression analysis)
_____________________________________________________________________________________________

6.1. Trend Analysis and Ratio Analysis:

6.1.1. Trend of Loan and advance:
Year 2013 2014 2015 2016 2017
Loan and Advance 343451 337554 346346 384538 423218
( million )

40
 Loan and A dvance ( million )
450000
423218
400000 384538
350000
343451 337554 346346
300000
Taka in Million

250000
200000
150000
100000
50000
0
2013 2014 2015 2016 2017

Graph1: Trend of loan and advance (2013-2017)

In this chart it is shown that in 2013 amount of loan and advance which was 343451
million, was increase gradually to 423218 million in 2017. Which indicate that the
trend of loan and advance of sonali bank is upward.
6.1.2. Trend of classified loan:
Year 2013 2014 2015 2016 2017
Classified loan 103769 86437 86849 109115 149302
( million )

Classified loan ( million ) The amount of classified loan was decreasing

160000 149302 from 2013 and then started increase in 2016.
140000
109115 The amount of classified loan and advance
Taka in Million

120000
103769
100000 86437 86849 increased from 109115 million in 2016 to
80000
60000 149302 million in 2017. The amount of
40000 classified loan of Sonali bank was large in 2017
20000
0 which indicate risk for the bank.
2013 2014 2015 2016 2017

Graph 2 : Trend of classified loan (2013-2017)

Rate of Classified loan

40.00% 6.1.3. Trend of Rate of Classified loan:
35.28%
35.00%
30.21%
Year 2013 2014 2015 2016 2017
30.00% Rate of Classified loan 30.21%
28.37% 25.61% 25.08% 28.37% 35.28%
25.61% 25.08%
25.00%
Percentage

Here. In 2013 rate of classified

20.00%

15.00% loan was 30.21% in 2013

10.00%

5.00%
41

0.00%
2013 2014 2015 2016 2017
decreased in 2014 at 25.61%,
in 2015 the rate of classified
loan was decreased at 25.08%
from 2016 rate of classified
loan started to increase from
28.37% to35.28% in 2017.

Graph3 : Rate of classified loan (2013-2017)

6.1.4. Trend of Classified Loan Recovery:

year 2013 2014 2015 2016 2017
Classified Loan Recovery( Million ) 51765 45063 27263 12880 10912

Classified Loan Recovery

Here, the amount of
60000
classified
51765
50000 loan recovery is decreased in
45063
a
40000
significant amount from
Taka in MIllion

51765
30000 27263
million in 2013 to 10912
20000 million
12880
10912 in 2017 this indicate that
10000
Sonali
0 bank’s amount of classified
2013 2014 2015 2016 2017
loan
recovery is low.

Graph 4: Classified loan recovery (20013-2017

6.1.5. Percentage of NPLs to Total Loans and Advances:
Year 2013 2014 2015 2016 2017

42
 Percentage of NPLs to Total 30.21% 25.61% 25.08% 28.37% 35.28%
Loans and Advance

Non-performing loan ratio

35.28%
30.21% 28.37%
25.61% 25.08%

Ratio 2013 2014 2015 2016 2017

Graph 5: Non-performing loan ratio from 2013-2017

Here, NPL ratio measure the effectiveness of receiving repayments on its loans. NPL
ratio of Sonali Bank was gradually decreased from 2013 to 2016 but in 2017 is
increased at 35.28% that indicate bank is in credit risk.
6.1.6. Return on Asset:
Year 2013 2014 2015 2016 2017
Return on asset 0.45% 0.68% 0.06% 0.14% 0.58%
Here, ROA in
Return on asset 2013 and 2014
which was 0.45%
and 0.68%
indicate good
0.68% profitable position
0.58% but in 2015 and
2016 which was
0.45% only 0.06% and .
Ratio

14% ratio was

very low and
indicate poor
performance. But
0.14% in 2017 the ratio
of ROA is 0.58%
0.06%
2013 2014 2015 2016 2017
which indicate
good profitability
rate.

Graph 6: Return on asset from 2013-2017

43
6.1.7. Return on equity:
Year 2013 2014 2015 2016 2017
Return on 9.89% 11.05% 0.99% 2.18% 10.63%
Equity

Return on Equity

11.05%
10.63%
9.89%
Ratio

2.18%
0.99%
2013 2014 2015 2016 2017

Graph 7: Return on equity from 2013-2017

Here, ROE in 2013 and 2014 which was 9.89% and 11.05% indicate good profitable
position but in 2015 and 2016 which was only 0.99% and 2.18% it was very low and
indicate poor performance. But in 2017 the ratio of ROE is 10.63% which indicate
good profitability rate.
6.1.8. Return on Loan and Advance
Year 2013 2014 2015 2016 2017
Return on Loan 7.58% 7.88% 8.78% 7.14% 6.85%
and advance

Return on Loan and advance

8.78%
7.58% 7.88%
7.14% 6.85%
ratio

2013 2014 2015 2016 2017

Graph 8: Return on loan and advance from 2013-2017

In this chart it shows that return on loan and advance is slightly increase from 7.58% in
2013 to 8.78% in 2015 and decease in 2017 at 6.85%. This indicate that rate of return
from loan and advance was low in 2017.

44
6.1.9. Capital Adequacy Ratio (CAR)
Year 2013 2014 2015 2016 2017

Capital Adequacy 7.59% 12.24% 10.08% 10.33% 10.35%

Ratio (CAR)

Capital Adequacy Ratio (CAR)

12.24%
10.08% 10.33% 10.35%
Ratio

7.59%

2013 2014 2015 2016 2017

Graph 9: Capital adequacy ratio from 2013-2017

In this chart CAR ratio is increasing from 7.59% in 2013 to 10.35% in 2017. Bank with
high CAR is consider safe and likely to meet its financial obligation.
6.1.10. Credit Deposit Ratio
Year 2013 2014 2015 2016 2017
Credit 50.07% 43.39% 39.99% 37.28% 39.76%
Deposit
Ratio

Credit Deposit Ratio

50.07%
43.39%
39.99% 37.28% 39.76%
ratio

2013 2014 2015 2016 2017

Graph 10: Credit deposit ratio from 2013-2017

In this chart, credit deposit ratio is decreasing gradually per year. It decrease from
50.07% in 2013 to 39.76% in 2017. This indicate that the bank was not efficient
enough to make credit through proper use of the deposit. It is the ratio of how much a
bank lends out of the deposits it has mobilized. It indicates how much of a bank's core
funds are being used for lending, the main banking activity. A higher ratio
indicates more reliance on deposits for lending and vice-versa.

45
6.2. Composition of total Loans and Advances of SBL:
Loans and advances constitute the largest portion in asset side of SBL’s Balance Sheet
which was Tk. 423,218.35million or 34.12 percent of total assets in 2017. SBL has
continued its lending operations in productive and priority sectors covering agriculture,
industry, SME, trade and commerce. The Bank has extended credit to Government,
public and private sectors in line with national priority. The percentage of total loans
and advances against total deposit (AD ratio) is 39.76%. Details of loans and advances
are given at notes to the accounts. The amount of classified loans and advances stood at
Tk. 149,302.80 million in 2017 as against Tk. 109,114.86 million in 2016. Percentage
of nonperforming loans of SBL was 35.28 in 2017 which was 28.38 percent in 2016.
SBL’s loans and advances increased by 10.06 percent from Tk. 384,538.12 million in
2016 to Tk. 423,218.35 million in 2017.

Table 1: Composition of total loan and advance of the SBL

6.3. Industry wish loans and advances:

46
Sonali bank limited provide 7% loan and advance in agro based industrial credit , 19%
in international trade ,4% in SME finance, 39% in general advance and others 11% in
rural credit , 3% in micro credit and 17% in industrial credit.

Chart 1: Industry wish loan and advance

6.4. General Credits:
SBL is playing a vital role in the national economy by extending various credit
facilities to both public and private sector organizations and entities. In the year 2017,
the Bank disbursed loans amounting Tk. 38,907.00 million to the private sector which
was Tk. 44,558.60 million in 2016 under general credit head. On the other hand,
classified loans under general credit amounting to Tk. 2,810.80 million have been
recovered during the year which was Tk3, 854.10 million in 2016. A tabular
presentation shows the overall position of General Credit of the Bank.

Table 2: General credit of SBL

6.5. Division wish loan and advance:

47
Sonali bank provide 62% of loan and advance to Dhaka division, 2% in Barishal, 9% in
Chittagonj ,7% in Rajshai, 8% in Sylhet, 2% in Khulna, 10% in Rangpur.

Chart 2: Division wish loan and advance

6.6. Sector wise loan and advance:
Sonali bank provide 84% loan in government sector, 15% in private sector and 1% in
other public sector.

48
Chart 3: Sector wish loan and advance

49
6.7. The impact of credit risk management on Sonali Bank’s
profitability:
6.7.1. Hypothesis of the study:
H0 = there is no significant impact of credit risk management on bank’s
profitability
H1= there is significant impact of credit risk management on bank’s profitability.

The main objective of this research is investigate the impact of credit risk management
in bank’s profitability. To find this relationship between two elements, I select one
depended variable and three independent variables.

Depended variable: Return on equity

Independent variables: Non-performing loan ratio, Capital adequacy ratio and Credit
deposit ratio

So the model of this equation will be:

ROE= a + b1*NPLR + b2*CDR + b3*CAR …………………………………… (1)

6.7.2. Data input and Regression line:

Year Return on Non-performing Credit deposit Capital adequacy

Equity loan ratio ratio ratio
2017 10.63 35.28 39.76 10.35
2016 2.18 28.37 37.28 10.33
2015 0.99 25.08 39.99 10.08
2014 11.05 25.61 43.39 12.24
2013 9.89 30.21 50.07 7.59

Table 3: Table of data input

50
 Regression Line
60

50

40
Ratio

30

20

10

0
2017 2016 2015 2014 2013
Axis Title

Return on Equity Non performing loan ratio

Credit deposit ratio Capital adequacy ratio

Graph 11: Regression line

6.7.3. Result of research and interpretation:

6.7.3.1. Regression Analysis: XRegression Statistics
6.7.3.2. Multiple R 6.7.3.3. 0.9993317
6.7.3.4. R Square 6.7.3.5. 0.9986638
46
6.7.3.6. Adjusted R Square 6.7.3.7. 0.9946553
83
6.7.3.8. Standard Error 6.7.3.9. 0.3605112
57
6.7.3.10. 6.7.3.11.
6.7.3.12.

Table 4: Summary of regression analysis

Coefficient of correlation (R): In this table the value of R= 0.9993317 which

expresses that there is high degree of positive relationship between the dependent
variable ROE and the independent variables NPLR, CAR, CDR. So it can be said that
credit risk management effect on banks profitability.
R Square: The term R Square is the multiple coefficient of determination interpreted
as the proportion of variability in the dependent variable that can be explained by the
estimated multiple regression equation. Hence, when multiplied by the 100, it can be
interpreted as the percentage of the variability in Gross Premium that can be explained

51
by the estimated regression equation. Here R Square= 0.99866(99.9 % expressed in
percentage) indicates 99.9% of the variability in obtained ROE is explained by the
independent variables NPLR, CDR and CAR.
Adjusted R Square: If a variable (say for „NPLR‟) is added to the model, Adjusted R
Square =0.994655383 becomes larger even if the added variable is not statistically
significant. The Adjusted R Square compensated for the number of independent
variables in this model.
Standard Error: Standard Error of Estimate shows how much error or variability
stands between the estimated result and actual forecasted result. Here the value is
0.360511257
That show the amount of variability of our estimated result and the actual result of the
observation.

6.7.3.13. C
oefficient analysis:
Coefficients Standard Error t Stat P-value

Intercept -90.01267113 3.679585266 -24.4627219 0.026009596

NPLR 0.886619017 0.047152131 18.80337102 0.033824818

CDR 1.057924424 0.04541494 23.29463465 0.027312261

CAR 2.647955422 0.143375276 18.46870324 0.034436567

Table 5: Summary of coefficient analysis

From this table, we got the parameters of the regression line. Here, the constant ‘a’ is
-90.01267 and the slopes b1, b2 and b3 are 0.8866, 1.05792 and 2.647956 respectively.
From these data the regression equation can be constructed as:

ROE= -90.01267 + 0.8866*NPLR + 1.05792*CDR + 2.647956*CAR

Intercept: Intercept, it gives the mean or average effect of all the variable excluded
from the model on the depended variable. Although its mechanical interpretation is the
average value of the depended variable when the independent variables are set equal to
zero. In this equation intercept is -90.01267 that’s mean in the absence of independent

52
variable NPLR, CDR and CAR on an average dependent variable ROE will be
-90.01267.
Non-performing loan ratio: The equation implies that a unit change in the
independent variable NPLR causes the dependent variable ROE to change by an
amount of.0.8866 when CAR and CDR are constant. It also shows that this factor is
significant because the p value is 0.03382 which is below 0.05.

Credit deposit ratio: The equation also implies that a unit change in the independent
variable CDR causes the dependent variable ROE to change by an amount of 1.05792
when NPL and CAR are constant. As b2 is positive, this movement of the dependent
variable ROE with the independent variable NPLR will be in the positive direction.
That is when the amount of CDR will increase, ROE will increase and vice versa.
This factor is significant because the p value is 0.0273 which is below 0.05.

Capital adequacy ratio: In the equation we get the other coefficient of net regression
as 2.647956. This indicates that when NPLR and CDR are constant, ROE will change
by 2.647956 unit when CAR increase by one unit. And it also indicate that there is a
positive relation between ROE and CAR when other independent variable remain
constant. This factor is significant as the p value is 0.0344 which is below 0.05.

6.7.3.14. 6.7.3.15.
6.7.3.16. 6.7.3.17. 6.7.3.18. 6.7.3.19.
Anova
tes
t:X
AN
OV
A
6.7.3.20. 6.7.3.21.
6.7.3.22. 6.7.3.23. M 6.7.3.24. 6.7.3.25.
df SS S cance
F
6.7.3.26. 6.7.3.27.
6.7.3.28. 6.7.3.29. 3 6.7.3.30. 6.7.3.31.
Regression 3 97.1405116 2.380 49 30924
1705 .1

53
 4 38
86
6.7.3.32. 6.7.3.33.
6.7.3.34. 6.7.3.35. 0 6.7.3.36. 6.7.3.37.
Residual 1 0.12996837 .1299
6836
6
6.7.3.38. 6.7.3.39.
6.7.3.40. 6.7.3.41. 6.7.3.42. 6.7.3.43.
Total 4 97.27048
6.7.3.44.

Table 6: table of anova test

F-Test: F test is used to determine whether a significant relationship exists between
dependent variable named ROE and the set of all independent variables such as NPLR,
CAR and CDR.
F-test is referred to the test of overall significance. In this ANOVA model, the
hypothesis for the F-test involves the parameters of the regression models:
Ho (Null Hypothesis): β1= 0
H1 (Alternative Hypothesis): β1≠ 0
The sampling distribution of MSR/MSE is an F-distribution with p degrees of freedom
in the numerator and (n-p-1) in the denominator. The summary of F- test is given
below:
F = MSR/MSE = 32.38017054/ 0.129968366 = 249.14
Tabulated F test: F α(k-1, n-k) = 215.7073

If F calculated> F α(k-1, n-k), the null hypothesis is rejected. That is, the model is
significant. In our regression model F test is 249.14 and tabulated F test is 215.7073 so
F test is greater than tabulated F test. So our multiple regression model is significant.

Significance of aptitude test:

At a significance level of .05 any independent variable having a significant level around
.05 will regard as significant. In our aptitude test significance level of 0.046530924is
significant.
Significance of overall model:
At a significant level of .05 the overall model will be significant if the F ratio is large
enough and the significance level is around .05. In our test the F ratio is 249.14 which
is large enough to describe the overall test and the significance level is 0.046530924.
So we can conclude that the overall relationship is significant.

54
Here we accept alternative hypothesis. Thus there is a relationship between ROE and
the credit risk management.

There is significant impact of credit risk management on Sonali bank’s

profitability.

Chapter 7
Findings, Recommendation, SWOT Analysis,
Conclusion
______________________________________________________________________

55
7.1. Findings:
 The amount of providing loan and advance to the customer of Sonali bank
limited are increasing yearly gradually and because of poor credit risk
management the amount of bad loan / classified loan is also increasing
gradually per year.
 The amount of classified loan was quite low in 2014 and 2015 but in 2017 the
amount is grater then previous 4 years and the rate of classified loan are same
also. It indicate poor credit risk management of Sonali bank.
 The amount of classified loan recovery is consistently decreased per year so it
indicate bad performance on loan and advance.
 Non-performing loan ratio of Sonali bank in recent year is high which indicate
bank is in credit risk.
 ROA and ROE are in satisfied level compared to previous two years.
 Return on loan and advance is looks like quite similar compared to last five
year.
 Capital adequacy ratio of Sonali Bank limited is safe and it indicate it will able
to meet its obligation.

56
  Credit deposit ratio of Sonali bank is almost constant. It indicate that the
performance of using deposit to banks activities is not varied much.
 Sonali bank provide least amount of loan and advance in micro credit and SME
finance.
 Sonali bank provide lager amount of loan and advance in Dhaka division and
least amount in Barisal and Khulna division.
 Sonali bank does not keep enough provision for loan and advance and their
performance on loan and advance are not satisfactory.

7.2. SOWT Analysis:

57
Strengths
 Branches all over the country to serve
its client.
 Very strong connection with
Bangladesh bank.
 They have compared association with
different banks so the bank can give
administrations of their clients.
 Strong local remittance executive’s
frameworks.
 Energetic and smart team
Collaboration.
 Good Management
 Lending rate is competitive
 Cooperation with one another
 Membership with SWIFT
 Good banker client relationship
 Strong Financial Position
 Strong position in CAMEL rating
 Huge business region
 Service charges are reasonable
 Strong corporate personality
 Youthful energetic workforce
Opportunities:
 The bank can offer increasingly
creative product and services then
different banks
 Since Sonali Bank Ltd. has such a
large number of branches it can
influence much of a stretch impact the
financial area.
 Being a vast Bank it can give
expansive investment
 Growth of sales volume
 Launching own ATM card
administrations
 Expansion of banking administrations
into other diverse administrations
 Expansion online banking
 Experienced Managers
Weakness
 The administrations are moderate.
 Slow modernization because of its
gigantic size.
 Low salary scale contrasted with
industry
 Lack of legitimate inspiration,
training and work rotation
 Lack of experienced representatives in
junior dimension the executives
 Lack of own ATM administrations
 Tendency to leave the bank in quest
of flexible environment
 Lack of capable employee r in some
division
 Limited promoting and exposure of
bank's product and services
 Absence of solid promoting activities
 Diversification
 Outdated Software and Hardware at
Branches
 Office condition isn't great as private
bank condition.
Threats
 Increase in the challenge in banking
division.
 Increase in the utilization of current
innovation and administrations like
online banking, mobile banking,
internet banking and so on.
 Recent events like cheats and stealing
where representatives were
discovered included
 Upcoming Banks/Branches.
 Similar items are offered by different
banks.
 Default Loans.
 Financial Crisis.
 Government has been controlling
industrial credit.
 Recession of worldwide economy.
 Intensification of rivalry in the
business.
58
7.3. Recommendations:
 Concentrated credit disbursement to some selective division could endanger the
bank’s credit portfolio. So, the bank management should provide loans &
advances to all the divisions for balanced economic growth.
 SBL should disburse more credit from its deposit to eligible borrower by
developing new and alternative schemes.
 Sonali Bank Limited should also concentrate on providing more credit in Tea
Loan and Small loan sector. Concentration more in some specific sectors could
cause risks & hamper the sustainability of the bank.
 Sonali Bank Limited should be more concerned about controlling the classified
loans & advances. In order to minimize the amount of NPL the bank should
provide loans to creditworthy borrowers and effective monitoring and recovery
system should be developed.
 Before granting loan the officials should be more conscious about browsers
information.
 In the credit department, strict supervision is necessary to avoid loan defaulters.
Bank official ought to do regular visit to comes.
 Central monitoring system should be more active to maintain classified loan to
a minimum level.
 All of the branches of SBL should be more digitalized.
 Space of some branches should be increase.
 An uninterrupted network system has to be ensured. It will save the officials
from much hassle and will save the time.
 Vaults security should increase and all branch should have high Tec security
system.

59
7.4. Conclusion
I have focused and analyzed on Credit Risk Management of Sonali Bank Limited. The
banking sector in any country plays a vital role in economic activities. Bangladesh is no
exception of that as its financial development and economic development are closely
related. That is why the personal business banks are taking part in important role during
this regard.
This report focused and analyzed on Credit Risk Management of SBL. Sonali Bank
Ltd. is much different in any terms. Its activities are vast and in cases unique to any
other bank. Its deposits and loans are huge compared to other banks. It finances
government projects, provides unique services to people in need, even in places it
works as central bank. This Bank usually makes call for the welfare of general public
despite risk of credit exposure.
The bank has established a sound credit risk management and credit risk mitigation
policy. Compliance with Basel II and Basel III norms helps the Bank to enhance their
profitableness through higher credit risk management systems.
In recent years, the bank has been exposed to credit risk due large scale loan defaults.
Top managements malpractice and mismanagement caused less return on investment.
From the discussion in this report, it has become clear that credit risk management is a
complex and ongoing process and therefore Banks or any financial institutions must
take a serious approach in addressing these issues.
So SBL can focus on their strengths to materialize the opportunities hidden for them in
the banking industry and also they can work on their weakness to develop the product
effectively and grab additional chance hidden within the industry.
With their strengths SBL can also reduce the threats existing in the market. They have
strengths with their solid brand image and experience and skills as well, with which
they are being SBL to satisfy the customers with their wide range of products and
services.

60
 Bibliography & References
o Akter, R. & Roy, K.J. (2017), The Impacts of Non-performing Loan on
Profitability: An Empirical Study on Banking Sector of Dhaka Stock Exchange.
Daffodil International University, pp. 126-131.

o Ndka, s. & Islami, M. (2016), The Impact of Credit Risk Management in the
Profitability of Albanian commercial banks During the Period 2005-20015, pp.
449-451.

o Hossain, J. (2014), Credit risk management practices in banks: a study on Basic

bank Limited. University of Dhaka, pp. 7-8, pp.35-47.

o Ahamad, I. ( 2014), An Internship Report on “ Credit Risk Management Practice of

Sonali Bank Limited”

o Ibtasum, M. (2018), Credit control of Sonali Bank, Khustia branch, Islamic

university, Khustia, pp. 44-55.

o Annual report of Sonali Bank Limited (2013-2017)

o Website:
o Sonali Bank Limited: https://www.sonalibank.com.bd/

61
 Appendix
 Data input in the excel for regression:

year Return Non Credit deposit Capital adequacy

on performing ratio ratio
Equity loan ratio
2017 10.63 35.28 39.76 10.35
2016 2.18 28.37 37.28 10.33
2015 0.99 25.08 39.99 10.08
2014 11.05 25.61 43.39 12.24
2013 9.89 30.21 50.07 7.59

 Summary output:

Regression Statistics
Multiple R 0.9993317
R Square 0.998663846
Adjusted R Square 0.994655383
Standard Error 0.360511257
Observations 5

 Anova table:

ANOVA
  df SS MS F Significance F
Regression 3 97.1405 32.3802 249.1 0.046530924
Residual 1 0.12997 0.12997
Total 4 97.2705      

 Coefficient analysis:
X  Coefficient Standar t Stat P- Lowe Upper Lower Upper
s d Error valu r 95% 95.0 95.0%
e 95% %
Intercept -90 3.67959 -24.463 0.02 -137 -43.26 -136.8 -43.259
6
NPLR 0.887 0.04715 18.803 0.03 0.287 1.485 0.287 1.48574
4 4 7 5
CDR 1.058 0.04541 23.294 0.02 0.481 1.635 0.480 1.63498
6 7 9
CAR 2.648 0.14338 18.468 0.03 0.826 4.469 0.826 4.46971
7 4 7 2

62
63