Forwarding Letter of Internship Program

June 10, 2008

To

Begum Khaleda Khanam

Professor, Department of Accounting & Information Systems

University of Dhaka.

Subject: Submission of Internship Report .

Dear Sir,

Here is the internship report on “Credit management & Services provided by foreign trade division of the
Trust Bank Limited (TBL): Special focus on Dilkusha Corporate Branch”- the prerequisite of the three month
long internship program.

The internship program has provided me with an opportunity of having an exposure to the working environment
and on the job experience in Credit Management & Foreign Trade Division of the TBBL, Dilkusha Corporate Branch.
I have acquired a sound knowledge and understanding on the basic operation of the Bank.

I have invested my every effort to depict the Credit management & Foreign trade division performance by the TBBL
as well as the financial performance of the Bank. I have aimed this report at the academic purpose only. I will be
grateful and pleased as well having any suggestions, directions and/or recommendations for further improvement
of the report.

Yours faithfully,

ACKNOWLEDGEMENT

I feel immensely pleased to have an opportunity, on the very occasion of submitting my internship report, to thank
a number of individuals for their unprecedented support, cordial co-operation, objective direction and endless
encouragement that have significantly contributed to the preparation of the report.

First and foremost, I would like to thank almighty Allah, the omniscient and omnipotent, who bestowed me the
capability of successful completion of my internship report and the internship as well.

I would like to offer my heartfelt thank and gratitude to my internship advisor Professor Begum Khaleda
Khanam. Her instructive advice and guidance have emerged as stepping-stone in making this report a fruit. This
report has smelt the scent of my creativity only as she entrusted her every belief on my capability and analytical
ability in preparing the report.

My pleasure turns blooming to offer thanks to Mr. Kh. Monwar Hossain, the Manager, the TBL, Dilkusha
Corporate Branch for allowing me to show my practicability in an organizational area under his supervision.
I like to convey something more than thanks and usual gratitude to Mr. Mohammad Mohosin, the VP and sub-
Manager, my supervisor in the Bank. His delightful co-operation, benevolent patronage, intention to make other
knowledgeable, not only fascinated me but also I had had this executive in dream before joining the Bank.

My heartfelt appreciation and thanks should reach the officers-Mr. Toufiq-E-Elahi Chowdhury, Assistant Vice
President ; Mrs. Tahrima Begum, Executive Office; Galib Mahmood, Senior Officer; Md. Jashim Uddin,
Junior Officer, Md. Riazur Rahman, who with their own accord made me one of their own in terms of both work
and love.

And last but not the least; I would like to thank all the personnel working at TBL, Dilkusha Corporate Branch. They
made the environment congenial and favorable for me to understand the task. Without their assistance and co-
operation, this report might not have seen the light of day.

DECLARATION

I hereby declare that the internship report titled

“Credit management & Services provided by foreign trade division

of the Trust Bank Limited (TBL): Special focus on Dilkusha Corporate Branch”
 Is submitted in partial fulfillment of the requirement for the awards of the degree–

Bachelor of Business Administration (BBA)

Department of Accounting and

Information Systems (AIS)

Faculty of Business Studies

University of Dhaka

Is my masterpiece and not submitted for the awards of any other degree/ Fellowship/Recognition and/or the like.

EXECUTIVE SUMMARY

In this study, a fervent appeal has been made to demonstrate and analyze the general banking practice and the
subsequent outcome of the Trust Bank Ltd. (TBL), which is passing its childhood period to establish an iconic
threshold in the banking arena. Despite of being born in the cantonment, the bank is no more recognized as
financial dealer of the armed forces; rather in the passing years, it has aimed at reaching the folk of Bangladesh,
irrespective of their caste and designation.

This report has been originated as the graduation prerequisite of the BBA program at the Faculty of Business
Studies, University of Dhaka. Consulting with both the internship supervisor Professor Begum Khaleda Khanam and
the organizational supervisor Mr. Toufiq-E-Elali Chowdhury, assistant vice president and Mr. Mohammad Mohsin,
sub-Manager, the Trust Bank Bangladesh Ltd. (TBBL), Dilkusha Corporate Branch, have selected the subject matter
of the report.

The report contains (6) chapters. The first chapter of the report describes the introductory words of the internship
report while the second chapter is all about the methodology used in the preparation of the report. The very third
chapter contains the historical background of TBL and chapter four explains the credit management by the bank.
chapter five explain services provided by foreign trade division and ends at chapter six. The concluding chapter
bearing number six contains the findings during the three-month long internship period, recommendations based
on the findings and the overall conclusion.

During the composition of report proper care and uninterrupted concentration has been invested. Moreover,
containing some unintentional mistake and printing error is not unusual. I do hope all to be considerate in this
regard.
Chapter 1

1. INTRODUCTION

1.1TITLE OF THE REPORT:

The Title of the report is - “Credit Management & Service offered by Foreign Trade Division of Trust Bank Limited
(TBL)”.

1.2BACKGROUND OF THE PROJECT:

The economic basement of Bangladesh, a developing country in south Asian region, is known as agriculture. From
the very past history of Bangladesh, it is learnt that the ultimate prospect of the country depends on agricultural
resources. But now-a-days the earlier concept is going beyond a lot. The contribution of agricultural sector to GDP
has gone down from 80% to 21% in three decades and the balance has been backed up by the manufacturing and
industrial sector. To cope up with the present trend of industrialization and development, financing the industries
and increasing saving propensity among people is a must. The banking sector, the fastest growing sector in
Bangladesh, is playing more than talked about role in this regard. It smoothens the industrialization process and
creates employment for a large mass as well. So, selecting and reporting on a member of this sector “Trust Bank
Limited” is obviously a major financial one.

1.3ORIGIN OF THE REPORT:

Now-a-days, education is not just limited to books and classrooms. In today’s world, education is a tool to
understand the real world and apply knowledge for the betterment of the society as well as business. From
education the theoretical knowledge is obtained from courses of study, which is only the half way of the subject
matter. Practical knowledge has no alternative. The perfect coordination between theory and practice is of
paramount importance in the context of the modern business world in order to resolve the dichotomy between
these two areas. Therefore, an opportunity is offered by Department of Accounting & Information systems,
University of Dhaka, for its potential business graduates to get three months practical experience in a business
organization, which is known is as “Internship Program”. Internship Program brings a student closer to the real life
situation and thereby helps to launch a career with some prior experience.

My internship program was conducted at the “Trust Bank Ltd.”, Dilkusha Corporate Branch, Dhaka. This report is
generated under the academic supervision of Begum Khaleda Khanam, Professor, Department of Accounting &
Information systems, University of Dhaka and organizational supervision of Mr. Toufiq-E-Elahi Chowdhury,
Assistant Vice President of Trust Bank Ltd, Dilkusha Corporate Branch.

1.4RATIONALE OF THE REPORT:

This report is a part of my academic program. The BBA program having 120 credits in total contains three (3)
credit hours on the job internship program. The internship program has been set for three (3) months period. I
believe this study will be beside me in future, especially if I get myself involved in banks and other financial
institutions. The program has helped me a lot to understand the organizational atmosphere and behavior.
1.2 Objective of the study

The author of the report was assigned to work in Sonali Bank Ltd, SBL. This paved the way for the
author to get familiarized with the banking activities for the first time indeed. It was an opportunity
to gather experience by working in different departments of the particular branch especially in the
Credit Management in Sonali Bank Ltd. The area of concentration of this report was confined to
investigating different aspects of the Banking Sector as well as problems and prospects concerning
Credit Management.

Specific objectives: SBL

 Finding out the credit management practice by SBL

 To trace the origin of the Credit Management Process of the SBL

 To understand the need and objectives of Credit Management

 To identify the competitive position of the Credit Scheme of SBL

 To realize the practical application of Credit Management in a branch office of the SBL

 To identify the shortcomings of Credit Management Process

  To find if the SBL is following the Bangladesh Bank guidelines and regulations on Credit Risk

 To find whether the branch office is following the rules as per the Head office directions on the
issue of Loan

 To make out if the SBL Credit Management procedure is strong enough to fight the loan
defaulter

 To spot the compatibility of the Credit Management of SBL in economic hurdles

 To mention some suggestions to overcome the Shortcomings of Credit Management if any

1.3 Methodology of the Study

Making of this report has gone through the way of preparing plan, colleting data, and
methods of collecting data, determining the time horizon and ensuring the reliability of the
data collected.
1. 3.1 SOURCES OF INFORMATION:

1. Primary Data:

Data has been collected primarily through correspondence with the personnel working in different desks,
personnel of the head office and other branches.

2. Secondary data:

The main source of published data is the auditors’ statements of financial affairs, which are basically used
internally by the bank and different circulars issued by the head office and Bangladesh bank. Data
regarding the Credit operations of Trust Bank Ltd. were collected from secondary sources like - Annual
Reports, Brochures, Manuals and Publication of The Trust Bank Ltd., Bangladesh Bank Library, BIBM
Library, DSE Library, News paper.

1.3.2. DETERMINATION OF TIME HORIZON:

 In relation to the general banking and financial performance evolution, I have gone through records,
reports and documents used currently by TBL. For the purpose of study, the horizon of three (3) year, from
2005 to 2007, has been chosen. Over the three-year time period, the data relating to the credit
management of the TBL have been evaluated. The basic source of the data is the auditors report used
internally by the bank only.

1.3.3. METHODS OF COLLECTING DATA:

The internship report has been prepared all the basis of “on the job” experience with the Trust Bank Ltd.
Dilkusha Corporate Branch located at Dilkusha, Dhaka. In spite of the scarcity of published data, it has
been tried to make the report informative and handy. The data used in the report have been complied
through different complicated ways- direct questionnaire to executives, continuous search on the ongoing
accountant’s machine, and interview with internal auditor and external auditors report. Working with the
organization for a meager period of three month is the main aspect of acquiring data and information to
evaluate the culture, working environment and similar sort of affairs of the organization.

1.3.4. RELIABILITY OF THE DATA:

The data collected are highly reliable in the sense that all data generated in the report are used exclusively
by TBL. The auditors’ report on the financial statements and the correspondence with different desks
generate the reliable information to compose the report successfully

1.1SCOPE OF THE REPORT :

The report covers the operational and functional area of credit management & the services provided by Foreign
Trade Division of the Trust Bank Ltd. The report may be classified in three broad sections:

• Organizational part
• Literature part
• Project part

In the organizational part the focus has nearly been given on the History and formation of the Trust Bank Ltd., its
structure, strategies and the expansion speed.

The literature part emphasizes the theoretical explanation of consumer banking and its related important
dimension like the major source of Bank’s finance, objective of the consumer banking etc.

On the project part, the prime and almost part, covers the lending procedures, terms and conditions for credit
services, applications of the rules relevant to credit management etc. & the activities of Foreign Exchange Division.

1.2LIMITATIONS OF THE STUDY:

In preparing the report, I have experienced some acute problems that have, to some extent, affected the
presentation of the report. The acute problems were-

a) Lack of information or data:

Bank is a sophisticated business sector. So the bank was not interested to provide me confidential data. As a result
in my report there is a confidential data limitation. Besides, in spite of being listed Bank as its IPO is yet to market,
it has no publicly available annual report. The only report I have had to depend on is the auditor’s reports that are
devoid of explanation and trend analysis. Moreover, the bank has no organized product publicity, documents or
leaflets for all the products.
b) Time constraint:
It is something like impossible to cover the entire credit management & Foreign Exchange phenomena exploiting a
three month time period while an employee or an officer is awarded with one or two year probationary period to do
his or her particular job. Moreover, I was not assigned for a specific task in each day. So I was not able to
understand banking activities deeply.
c) Comparison status:

I have had no opportunity to compare the credit management & Foreign Exchange system of the Trust Bank Ltd.
with that of other contemporary and common size banks. It was mainly because of the shortage of time and
internship nature.

d) Business of the bankers:

Due to the business of the bankers they were unable to give sufficient time to help me regarding the report’s
necessary information. I had to communicate with them repeatedly for the same information.

e) Limitations and restrictions of data:

In some case, it was not possible to get the exact amount and statistical record because of their safety measure.
They follow strict rules and regulations regarding these issues.

f) Lack of using statistical tools:

A satisfactory number of statistical data were not found. It was only possible to use a very few statistical tools
through out the report.
g) Secondary data:
Most of the data used in the report making was collected from the secondary sources.

In spite of all the drawbacks faced, everything has been managed well at the end. I believe the report is a quality
report on general banking and performance analysis of the Trust Bank Ltd. So readers are requested to consider
these limitations while reading and justifying any part of my study.

Chapter 2
2. An overview of Sonali Bank Limited

2.1 Background:

Sonali Bank is the largest state-owned commercial bank in Bangladesh. After the liberation war 1971
the branches of National Bank of Pakistan, Bank of Bhowalpur and Premier Bank branches were
amalgamated to form Sonali Bank.

2.2 Launching of SBL:

Sonali Bank was established in 1972 under the Bangladesh Banks (Nationalisation) Order, through the amalgamation and
nationalisation of the branches of National Bank of Pakistan, Bank of Bhowalpur and Premier Bank branches located in East
Pakistan until the 1971 Bangladesh liberation war. When it was established, Sonali Bank had a paid up capital of 30 million taka. In
2001, its authorised and paid up capital were Tk 10 billion and Tk 3.272 billion respectively. The bank's reserve funds were Tk 60
million in 1979 and Tk 2.050 billion on 30 June 2000.

2.3 Functions at a glance:

Sonali Bank performs all traditional banking functions including deposit mobilization and lending. The bank discharges the treasury
functions as the agent of the Bangladesh Bank. It collects tax, stamp duty and registration fees, operates special savings accounts,
pays salaries to the teachers of schools, madrasahs, and colleges and pension to retired government employees. The bank
provides funding to some income generating and economic development projects namely, Poverty Alleviation Credit Programme,
Female Special Credit Programme, and Agro-based Industrial Credit Programme in the rural areas. It has a large participation in
foreign exchange business and off-balance sheet activities. The total volume of foreign exchange business handled by the bank in
1979 was Tk 14.91 billion and in 2000, it was Tk 67.847 billion, 25.87% of which was related to exports, 32.2% to imports, and
41.93% to remittances. At present, the bank has correspondent relationships with 380 foreign banks/bank offices throughout the
world.

The broad economic areas in which the bank currently lends and the amount of advances to those areas up to 30 June 2000 were
agriculture and fisheries -Tk 25.526 billion, industry (small and cottage, and large and medium)-Tk 43.563 billion, retail/wholesale
trade, hotels and restaurants-Tk 10.75 billion, transport/communication and storage -Tk 175 million, special credit programmes
including poverty alleviation - Tk 2.207 billion, insurance, real estate and trade services - Tk 3.3 billion and others - Tk 70.194 billion.

Sonali Bank monitors its work through a performance budget. It has a marketing intelligence unit and conducts a programme of
human resources development through training and motivation. It introduced the Lending Risk Analysis suggested by the Financial
Sector Reform Programme. Business policies of the bank in the 1990s included fulfilling capital adequacy requirement, mobilizing
deposits in large amounts, and making investments in more profitable ways. The bank diversified its activities in off-balance sheet
items to expand its area of operations and increase non-interest based incomes[7].

The Bank employs more than twenty thousands of persons.

Corporate Profile
Name of the Company : Sonali Bank Limited

Chairman : Quazi Baharul Islam

CEO and Managing Director : S. A. Chowdhury

Company Secretary : Zaheed Hossain

Legal Status : Public Limited Company

 Emarged as Nationalised Commercial Bank in 1972, following the Bangladesh Bank
Genesis :
(Nationlisation) Order No. 1972(PO No.26 of 1972)
Date of Incorporation : 03 June, 2007

Date of Vendor's Agreement : 15 November, 2007

Registered Office : 35-42, 44 Motijheel Commercial Area, Dhaka, Bangladesh

Authorised Capital : Taka 10.00 billion

Paid-up Capital : Taka 09.00 billion

Number of Employee : 20,766

Number of Branches : 1182

Phone-PABX : 9550426-31, 33, 34, 9552924

FAX : 88-02-9561410, 9552007

SWIFT : BSONBDDH
Website : www.sonalibank.com.bd
sbhoid@bdmail.net
E-mail :
sbhoitd@btcl.net.bd

Vision & Mission

Our Vision: Socially committed leading banking institution with global presence.

Our Mission: Dedicated to extend a whole range of quality products that support divergent needs of people aiming at enriching
their lives, creating value for the stakeholders and contributing towards socio-economic development of the country.

Overview of the Bank

Sonali Bank Limited, the largest & leading commercial bank of the country, came into being in 1972 immediately after the
emergence of Bangladesh as an independent state. A fully state-owned enterprise, the bank has been discharging its nation-
building responsibilities by undertaking government entrusted different socio-economic schemes as well as money market
activities of its own volition, covering all spheres of the economy. Sonali Bank Limited singularly enjoys the prestige of being the
agent of the Central Bank of Bangladesh in such places where the guardian of the money market has chosen not to act by itself.
Sonali Bank Limited is governed by a Board of Directors consisting of 9(nine) members headed by a Chairman. The Bank is
headed by the Chief Executive Officer & Managing Director, who is a well-known Banker and a reputed professional. The head
office of the bank along with its corporate structure is located at Motijheel, Dhaka, the main commercial center of the capital.

Some notable features of the Bank are as follows:

Capital Structure:
Authorized Capital : Tk. 1000.00 Core.
Paid up Capital : Tk. 900.00 Core

Branches & Subsidiaries

Total Branches : 1182
Branches in Urban areas : 340
Branches in Rural areas : 840
Overseas Branches : 2
Subsidiaries(UK/USA) : 15
Representative Office : 3
Exchange House : 42
 SONALI BANK
LIMITED
CORE DATA OF SONALI BANK LIMITED FOR THE PERIOD FROM 2000 TO
2008
(TAKA IN MILLION)

Sl.No. Particular 2000 2001 2002 2003 2004 2005 2006 2007 2008
1 Total Assets 237,680 254,084 271,022 266,851 292,182 337,687 352,894 461,964 492,946

2 Total Employees 26,046 25,753 25,237 24,715 24,450 23,933 23,273 22,542 21,839
3 Total Deposits 202,495 215,541 222,222 230,339 252,234 277,079 302,303 328,997 364,386
4 Total Investments 44,225 33,405 43,867 45,490 58,896 43,636 39,978 88,891 95,093
5 Total Loans 133,281 141,993 156,113 155,197 168,283 227,010 241,029 206,348 231,166
6 Financial Equity Capital 5,642 5,706 5,856 5,956 6,106 6,306 (28,444) 21,742 244,718
7 Total Liabilities 232,038 248,377 265,166 260,895 286,075 331,381 381,338 440,223 468,528
8 Total Income 14871 15,883 16,628 16,145 15,758 19,864 23,131 25,710 26,621
9 Total Expense 14074 15,392 15,718 15,606 14,686 15,900 20,125 20,287 25,004
10 Tangible Assets 237,680 254,084 271,022 266,851 292,182 337,687 352,894 396,221 430,703
11 Intangible Assets - - - - - - - 65,743 62,243
Non
performing/Classified
12 Loans 43,977 45,274 45,447 41,097 43,761 46,261 50,533 63,175 61,154
% of Classified Loans
13 to Total Loans 38.65 38.31 33.46 32.00 28.32 22.52 24.44 44.59 31.44

Organ gram
 Board of Directors

CEO & Managing Director

Deputy Managing Director-1 Deputy Managing Director-2

General Managers General Managers

at Head Office - 6 Field GM Office at Divisions- 7

Deputy General Managers Deputy General Managers

at Divisional Head of Head Office at Field Office (GMO, PO and Corp. Br.)

Assistant General Managers Assistant General Managers

at Head Office at Field Office
 Other Executives Other Executives
SEO, EO, SO, Officer at Head Office SEO, EO, SO, Officer at Field Office

Other Staffs Other Staffs

at Head Office at Field Office

Head Office

General Manager’s Office General Manager’s Office

At Head Office - 06 At Field Divisions and Local Office - 07

Divisions at HO - 32 Corporate Branch - 22 Principal Office – 42

Regional Office - 19
 Overseas Branch-2 Branch -1158

Board of Directors
Sl No. Name Designation
1. Mr. Quazi Baharul Islam Chairman
2. Mr. Md. Shafiqur Rahman Patwari Director
3. Dr. Nasreen Khundker Director
4. Mr. A.S.M. Nayeem, FCA, FCCA Director
5. Mr. M. Lutfur Rahman Khan Director
6. Mr. K.M. Zaman Romel Director
7. Mr. Kashem Humayun Director
8. Mr. Shaimum Sarwar Kamal Director
9. Mr. Advocate. Sattayendra Chandra Bhakta Director
10. Jannat Ara Henry Director
11. Mr. Suvas Singho Roy Director
12. Mr. Md. Anwar Shahid Director
13. Mr. S.A. Chowdhury CEO & MD
 Head Office

General Manager’s Office General Manager’s Office

At Field Divisions and Local Office -
At Head Office - 06 07

Divisions at HO - 32 Corporate Branch - 22 Principal O

Regional O

Overseas Branch-2 Branch

SIRAJUDDIN AHMED CHOWDHURY

(S. A. CHOWDHURY)

Chief Executive Officer and Managing Director

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:

• Gas bills.
• Electricity bills.
• Telephone bills.
• Water/Sewerage bills.
• Municipal holding Tax.
• Passport fees, visa fees and Travel tax.
• Customs & Excise duties.
• Source tax and VAT.
• Jakat fund.
• Hajj deposit.
• Land development tax.

Payment:

• Pension of employees of Government and other Corporate Bodies.

• Bangladesh Bank employees pension.
• Army pension.
• British pension.
• Students' stipend/scholarship.
• Govt. & Non-Govt. Teachers' salary.
• Food procurement bill on behalf of the Govt.

Social Services:
 • Old age allowances.
• Widows, divorcees and destitute women allowances.
• Freedom Fighters' allowances.
• Rehabilitation allowances for acid survival women.
• Maternal allowances for poor women.
• Disability allowances.

Sale & Encashment/Purchase:

• Savings Certificates.
• ICB Unit Certificates.
• Prize Bonds.
• Wage Earner's Development Bonds.
• US Dollar Premium & Investment Bond.
• Lottery tickets of different Semi-Govt. and Autonomous Bodies.
• Sanchaypatra.
• Public Service Commission's application form.
• Judicial Service Commission's application form.
• Exchange of soiled / torn notes.

Misc. Services:

• Bank a/c information of tax payee client according to demand of NBR.

• Local Governance Support Project.
• Enlist of Non Government Insurance company.

Ready Cash

Features :
• Sonali Bank Ready Cash Card is a Debit Card.
• Cardholder can easily pay utility bills like - Water, Telephone, Gas etc.
• It is easy to remit funds among the participating branches of the Bank.
• Transaction beyond working hours.
• It is a riskless Cash Carrying facility.
• Cashless purchase can be made form specific merchandise points.
 • Only computerized Branches of Dhaka City will deal Ready Cash Card.

• Branches of other Cities and Towns will introduce Sonali Bank Ready Cash Card in due course.
Locker Service
Secured Locker Service is provided in some branches of Sonali Bank Limited. Customers may avail
this service and secure their valuables.

Locker size Yearly Charge (Tk.) Security Deposit (Tk.)

Small 1,200.00
Medium 1,500.00 2,000.00 (refundable)
Large 2,000.00

Locker Service is available in the following branches of Sonali Bank Limited:

Total Branch : 54

ATM Service

ATM service is available in the following branches of Sonali Bank Limited:

Branch Phone no.

1. Local Office. 7170217

2. Ramna Corporate Br. 7162074

3. Prime Minister's Office Br. 9116043

4. Dhaka Cantonment Corporate Br. 9899975,9860068

5. Narayangonj Corporate Branch 9716685

Divisions of SBL
Departmentalization for any bank is important for any organization in order to run
it smoothly and effectively to reach the goal. In other cases, hap hazardous
departmentalization will cause the whole organizational chain inactive and there
will be lack of interrelationship among different divisions. Cooperation will not be
there because of improper departmentalization. Sonali Bank Limited has overcome
these hurdles. SBL has a large number of divisions and it has been maintaining a
pretty good cooperation among them. It has total of 32 divisions and the key
divisions related with the credit management are described here.

AGRO-BASED PROJECT FINANCING DIVISION (APFD)

This division deals with granting loans in agricultural sector. Large poultry farm,
food processing industry, frozen food exporting farm, fish cultivation farm etc are
granted loan under these division. They check the project viability and approve
loan.

Central Accounts Division (CAD)

CAD mainly deals with the account side of the Bank. It deals with all the Head
Office transactions with its branches and other Banks. This division’s activities are
described under the following heads:

a. Income, Expenditure posting: Income and expenditures are

maintained and posted under these heads.

b. Cash Section: Cash section generally handles cash expenditure

for office operations and miscellaneous payments.

c. Bills Sections: This section is responsible for inland bills only.

d. Salary and Wages of the Employees: Salary and wages of the

Head Office executives, officers and employees are given in
this department.

e. Maintenance of Employee Provident Fund: Employee provident

fund accounts are maintained here.
MICRO CREDIT DIVISION

The main function of this division is to grant small amount of loan at lower rate
and including exclusive advantages regarding the interest amount and interest
payment schedule. This division’s functions are such:

a. Receiving proposals

b. Proposing and appraising

c. Getting approval

d. Communicating and sanctioning

e. Monitoring and follow-up

f. Setting price of the credit and ensuring effectiveness of it

g. Preparing various statements for onward submission to Bangladesh

Bank

RURAL CREDIT DIVISION (RCD)

This division mainly deals with sanctioning loan in rural area. As SBL have a large
number of branches in rural areas it is important to maintain proper documentation
and proper investigation. To manage all rural credit related functions this
department does the followings:

FOREIGN REMITTANCE MANAGEMENT DIVISION (FRMD)

The objective of this division is to assist management to make international dealing

decisions and after decision is made, guide branches in their implementation. Its
functional areas are as follows:

a. Maintaining correspondence relationship

b. Monitoring foreign rate and exchange dealings

 c. Maintaining Foreign Currency Account (FC), Non Resident Foreign
Currency Deposit (NFCD) A/C, Resident Foreign Currency Deposit
(RFCD) A/C and reconciliation

d. Authorizing of signing and test key

e. Monitoring foreign exchange returns and statements

f. Sending updated exchange rates to the concerned branches

GENERAL ADVANCES DIVISION (GAD)

This division deals with the short term loan categorized as General Advance (GA).
They set the interest rate and the related collateral in this case. They also set the
time horizon for the recovery of the advances and verify them to ensure the
liquidity of the bank.

INDUSTRIAL PROJECT FINANCING DIVISION (IPFD)

All the industrial loan sanctioning and project viability testing measures are done
by this division. They fix the interest rate for different industry by examining the
project riskiness. They classify the industry project into short term and long term
and impose credit terms into them. They ensure the Bangladesh Bank guidelines to
ensure the priority industry’s growth in Bangladesh.

LOAN RECOVERY AND CLASSIFICATION DIVISION (LRCD)

This department monitors the entire recovery rate and classifies all the loans
outstanding into different categories. Set different technique to recover the
outstanding credits.

PROJECT MONITORING AND REVIEW DIVISION (PMRD)

This division’s key function is to check the project’s viability in different times and
collect up to date data about the project and review the entire project’s current
position and any changes thereof. They alter the payment method and interest rate
according to the economic condition of the country and the economy as whole.

INFORMATION TECHNOLOGY DIVISION (ITD)

SBL operates and keeps records of its assets and liabilities in computers by using
integrated software to maintain client ledger and general ledger. The main function
of this division is to provide required hardware and software. The functions of this
division are:

i. Designing software to support the accounting operation

ii. Updating software, if there is any lagging

iii. Improving software to get best possible output from them

iv. Hardware and software trouble shooting

v. Maintaining connectivity through LAN, internet and Intranet

vi. Providing updated CD’s of online accounts to the branches

vii. Routine checking-up of computer of different branches

HUMAN RESOURCE DEVELOPMENT DIVISION (HRDD)

HRD performs all kind of administrative and personnel related matters. The broad
functions of the division are as follows:

i. Selection and recruitment of new personnel

ii. Preparation for all formalities regarding appointment and joining of the
successful candidates

iii. Placement of manpower

iv. Dealing with the transfer, promotion and leave of the employees

v. Training and development

vi. Termination and retrenchment of the employees

vii. Keeping records and personal file of every employee of the bank

viii. Employee welfare fund running

ix. Arranging workshops and training for employee and executives

INSPECTION AND AUDIT DIVISION (I & AD)

SBL has two Inspection and Audit divisions as it is the largest commercial bank of
Bangladesh it requires a large number of internal audit. This division ensures
proper accounting of deposits and credits in different sectors. It also ensures the
proper documentation regarding every loan. The officers of this division randomly
go to different branches examine the necessary documents regarding each account.
If there is any discrepancy, they inform the authority concerned to take care of that.
They help the bank to comply with the rules and regulation imposed by the
Bangladesh Bank. They inform the Bangladesh Bank about the current position of
the rules and regulation followed by the bank.

VIGILANCE AND CONTROL DIVISION (VCD)

This department acts as the vigilant body to the entire bank. They verify the other
division’s activities and check the reports and the compliance to the rules and
regulations of the Bangladesh Bank. If they find any flaw and sluggishness in any
other division’s assigned jobs they take action against the division and suggest
necessary solution. They control the other division’s activities by applying the
bank’s rules and regulations. They suggest the management different necessary
rules, regulations, policies to smooth the banking activities.

Besides above divisions there are also some divisions which are equally
contributing in the entire banking activities. These are like:

 Board Division (BD)

 Common Services Division (CSD)

 Disciplinary and Appeal Division (DAD)

 Employees Welfare and Transport Division (EWTD)

 Establishment and Engineering Division (EED)

  Legal Matters Division (LMD)

 Managing Director’s Secretariat (MDS)

 Marketing and Development Division (MDD)

 MIS and Statistics Division (MSD)

 Modernization and Restructuring Division (MRD)

 Personnel Management Division (PMD)

 Public Relations Division (PRD)

 Reconciliations Division (RD)

 Treasury Management Division (TMD)

 Sonali Bank Staff College (SBSC)

 Small and Medium Entrepreneurs Division (SME)

Branches and Offices

Type Number Place

General Manager’s Office
Overseas Branches
Representative Office
RMS Facilitate Branches
Sonali Bank (UK) Limited
Sonali Exchange Company Incorporated
6 Dhaka, Chittagong,
Rajshahi, Khulna, Barisal,
and Sylhet.
2 Kolkata and Siliguri.
3 Jeddah, Riyadh, Kuwait.
103 Allover Bangladesh.
7 London, Birmingham,
Luton, Bradford,
Manchester, Camden.
9 Manhattan, Brooklyn,
(SECI) Jackson Heights, Astoria,
Los Angels, Atlanta,
Michigan, Paterson and
Dhaka.

PRODUCTS AND SERVICES OF SBL

SBL is now offering various depository products for mobilizing the savings of the
general people. There are also accounts for force saving from the exporter that is
called Reserve Margin from the export bill. To get the deposit from the little saver
portion of the country, SBL has recently started SDS, EDS, MDS, MES, MSS,
RDS, DBS Deposit Scheme which by this time gained high popularity among the
depositors. These are mentioned below.

1. Deposits:

i. Savings A/C

ii. Daily Profit A/C

iii. FDR A/C

iv. Foreign Currency Account (FC) A/C

v. Non Resident Foreign Currency Deposit (NFCD) A/C

vi. Resident Foreign Currency Deposit (RFCD) A/C

2. Deposit Schemes:
 Sonali Deposit Scheme Education Deposit Scheme Medicare Deposit Scheme

Monthly Earning Scheme Marriage Savings Scheme Rural Deposit Scheme

Double Benefits Scheme

CREDIT SCHEMES AND LOAN PRODUCTS

Consumer Credit Special Small Credit IT Credit

Other Credit Scheme: Probasi Karmosangsthan Rin Prokolpa

Loan for Diagnostics Center

Core Business Area of SBL

i. Corporate Banking
ii. Project Finance
iii. SME Finance
iv. Consumer Credit
v. International Trade
vi. Trade Finance
vii. Loan Syndication
viii. Foreign Exchange Dealing
ix. Rural and Micro credit
x. NGO-Linkage Loan
xi. Investment
xii. Government Treasury Function
xiii. Money Market Operation
xiv. Capital Market Operation

xv. Remittance

Rural Credit
Bangladesh is Primarily an agricultural country. A major portion of her population (about 85%) lives in
the rural areas. About 75% of the active rural population depends on agriculture as the main source of
their livelihood. Agriculture contributes about 22% to the GDP. Majority of the farmers are either small
or marginal. So Credit plays a paramount role to augment the capital base to support agriculture
production. With this end in view. Sonali Bank Limited the largest state owned commercial bank has
been playing a vital role in the socio-economic development & poverty alleviation since 1973. Keeping
in view that Credit is one of the many inputs that complete the cycle of agricultural production Sonali
Bank extending rural credit through 1180 branches over the country.

Sonali Bank Limited introduced indirect rural credit in 1973 through the then IRDP (Now BRDB) there
after continuing lending in the following programs:

01) Crop Loan (Special Agricultural Credit

Program:
As per Government decision this program was introduced in 1977 to
increase crop production (credit to subsistence and marginal farmers as
well as share-croppers for raising seasonal crops). Now this program is
continuing through 707 branches among the farmers of 1639 unions.
Recently Sonali Bank Limited introduced Revolving Crop Credit Limit
System from one branch of each district.
02) Special Investment Program:
This program was introduced in 1993 for creating self employment by
establishing small & medium farms (Poultry, Dairy & Fishery) through
bank finance. Under this program credit is extended through 236 selected
branches over the country. Maximum ceiling of loan is Tk. 5.00 Lac.

03) Farming & off farming program:

This program was introduced in 1994 to involve unemployed rural people
in income generating activities (Poultry, Dairy, Fishery, Horticulture,
Nursery, Beef fattening) by establishing small & medium farms through
bank finance. Credit is extended through all branches over the country.
Maximum ceiling of loan is Tk.15.00 Lac.

04) Krishi Khamar Rin Karmasuchi (Proiect):

This program was introduced is 1993 for creating new employment,
increase national income & Socio economic development by establishing
medium & big project (Poultry, Dairy & Fishery) through bank finance.

05) Pond Fisheries credit Program:

This program was designed to extend bank credit for pisciculture in
derelict ponds/Tanks/water bodies in 1977 Credit is extended through
200 branches over the country. Maximum ceiling of loan is Tk.5.00 Lac.

06) Fertilizer Dealers Credit Program:

This program was introduced to extend bank credit among the approved
fertilizer dealers operating at primary distribution point of BADC for lifting
their quota of Fertilizer from BADc for ultimate distribution among the
farmers in 1981.
07) Sugarcane production loan program in mill
Zone area:
This program was introduced in 1975 to increase sugar production. Under
this program credit is extended to 11 (eleven) sugar mills for ultimate
disbursement among their affiliated farmers.

08) Social Afforestation Program:

This program was introduced in 2004 to increase forestation and to
reduce greenhouse affect. Credit is extended through all branches over
the country. Maximum ceiling of this program is Taka 5.00 lac.

Microcredit

Poverty alleviation has appeared to be the focal point of all policy formulation and
development issues of the nation. As such, it has been globally accepted as an
effective strategy for poverty alleviation in one hand and generating employment
opportunities on the other.

In commitment to reduce poverty in urban, semi-urban and rural areas, Sonali

Bank Limited has started functioning in Micro Credit through a full pledged micro
credit division in its Head Office in the year 2003. Presently, 32 projects/programs
are being run under the control and supervision of this Division.

Among all others programs, Bank-NGO Linkage program and Credit for Urban
Women Micro Enterprise Development (CUMED) in Dhaka City, Goat rearing,
Lamb rearing, Fruit, Herbal, Medicinal and Nursery Project, Micro- enterprise
program- ‘Unmesh’ in Moulavibazar district, MSFSCIP in Kurigram district, Loan
for Disable Persons etc. deserve special mention for channelizing the financial
resources into the various potential avenues of microfinance.

Sonali Bank Limited jointly with Swanirvar Bangladesh, BRDB and ADB has
been providing huge investible funds into the different Upazillas within the
country. 152 Upazillas have been covered by the Rural Livelihood Program (RLP).
Further, this Division has provided taka 179.09 crore to 68 NGO’s under its widely
accepted Bank-NGO Linkage Program on whole sale basis and whose recovery
rate is 100%.

Specially, for the disable people Disable Loan Program has been undertaken to
bring the disable section of the people under the micro credit facilities. The Goat
Rearing Program undertaken by this Division has been running with a remarkable
impact in reducing the rate of massive- scale rural poverty. Sonali Bank has
already disbursed 46.47 crore up to 31 December, 2007.

Further, in order to create employment opportunities and to generate income of the

rural people two loan schemes under the name and style “Rural Small Farming
Loans scheme " and "Rural Small business loan" scheme have been introduced in-
2004 . In both the programs there is a provision of collateral free loan up to Tk.
50,000/- .

In 2006 a new program has been introduced named ‘‘Daridra Bimochane Sahayta
Karmasuchi’’for the extremely ‘Monga’ affected rural people. Moreover, in 2007 a
special program has been introduced for SIDR affected 12 areas in which there is a
provision of collateral free loan up to TK.20,000/-.

Up to December 2007, Tk. 3299.47 crore has been disbursed under various project/
programs of this Division where as this disbursement figure was Tk. 3056.63 crore
up to December 2006.
The key features of some running projects/Programs of Micro Credits given as
follows:

SL. Project/Programs Target group Loan size in Tk. Rate of

Interest
1 Swanirvar Credit Program Poor Landless people 1,000-15,000 9%
2 Crop Godown Credit Project Small & Medium Highest 10,000 9%
Farmers
3 Sonai Bank -BARD, Comilla Priogik Bittahin rural male & Highest 10,000 9%
Gabesana Rin Prokalpa female
4 Sonai Bank- RDA, Bogra Priogik Gabesana Bittahin rural male & Highest 10,000 9%
Rin Prokalpa female
5 Marginal and Small Farms System Crop Marginal, Poor & Small Highest 10,000 9%
Intensification program(MSFSCIP) Farmers
 6 Herbal & Forestry, Medicinal Plant & Bittahin, Poor 5,000-25,000 9%
Nursery Development Credit program Energetic Youth
7 Grameen Khudra Babsa Rin Karmasuchi Poor People Highest 50,000 10%
8 Daridra Bimochane Sahayta Rin Hard Core Poor People 5,000-10,000 8%
Karmasuchi
9 Loans to Disable People Disabled People 25,000-50,000 10%
10 Unmesh Credit Program Micro Entrepreneurs 50,000-2,00,000 9%
11 Goat Rearing Credit Program Small &Medium Highest 50,000 8%
Entrepreneurs
12 Credit for Urban Women Micro Enterprise Urban Women Highest 5,00,000 10%
Development (CUMED) Entrepreneurs
13 Bank-NGO linkage Credit Program Poor People Highest 5000- 11%
50,000(Loan
Wholesaling to NGOs)
14 Khudra Khamar Rin Karmasuchi Small Entrepreneurs Highest 50,000 9%
15 Salt Production Credit Program Actual Salt Producer 5,000-12,500 9%
16 Individual Irrigation / Agriculcural Small, Marginal & 10,000-16,500 9%
Equipment Credit Program Medium Farmers
17 BRDB Crop Credit Program Small, Marginal & 8,000-15,000 8%
Medium Farmers
18 BRDB Integrated Rural Development Co operative Poor Male 1,500-20,000 8%
Program & Female Member
19 BRDB Rural Livelihood Program Small, Marginal & 5,000-20,000 6.25%
Medium Farmers
20 BRDB -Shrimp Culture Credit Program Small, Marginal & 2,333-28,000 8%
Medium Farmers
21 Special Loan for SIDR affected Area SIDR affected People Highest 20,00 8%

Personal Banking
Sonali Bank Limited extends all the major personal banking facilities and services to its customers with
its skilled manpower and largest network of around 1180 branches covering all the urban and remote
rural areas of Bangladesh. Sonali Bank Limited provides Local & Foreign Remittance in quickest
possible time. Foreign remittance is available in both T.C. & Taka draft.

1. Transfer of fund from one branch to another by

- Demand Draft Savings A/C

- Mail Transfer Daily Profit A/C

- Telegraphic Transfer FDR A/C

2. Transfer of fund on Standing Instruction Arrangement. Trade Finance

3. Collection of cheques through Clearing House/beyond Clearing House.

4. Issuance of Payment Order / Call Deposit.

5. Locker facilities for safe keeping of valuables

6. Corporate Client Services with computerized system at selective branches.

International Finance
Sonali Bank Limited expertise in International Banking has a record of in-house growth over more
than half a century. Its pioneer role in handling foreign trade and foreign exchange transactions ever
before independence of the country still remains unchallenged. With wide network of branches at
home and also a large number of correspondent banks world-wide it is singularly handling the largest
volume of export-import business including home-bound remittances.
Products & Services:

• Export Credit (Pre-shipment & Post shipment)

• Facilitating Supplier's Credit
• LCs (Letters of Credit)
• Guarantees in Foreign Currency
- Bid Bond
- Performance Guarantee
- Advance Payment Guarantee.
• Bill Purchasing/Discounting
• Remittance, collection, purchases & sales of Foreign Currency & Traveller's Cheques.
• NRAT (Non-Resident Account in Taka)
• NFCD A/c (Non-Resident Foreign Currency Deposit)
• RFCD A/c (Resident Foreign Currency Deposit)
• Convertible and Non-convertible Taka Account
• Forward contracts
• Correspondent Banking Relations

Import Finance:

Sonali Bank Limited supports its customers by providing facilities throughout the import process to
ensure smooth running of their business. The facilities are:
a. Import Letter of Credit.
b. Post Import Financing (LIM,LTR etc).
c. Import collection services & Shipping Guarantees.
Interest rate: 12.00% to 14.00%Export Finance :Sonali Bank Limited offers extra cover to its
customers for whole export process to speed up receipt of proceeds.The facilities are:
a. Export Letters of Credit advising.
b. Pre-shipment Export Financing.
c. Export documents negotiation.
d. Letter of Credit confirmation.
Interest rate: 7.00% + 1.00% Service Charge

Industrial Finance
Credit Schemes:
Long term loan for setting up new industrial units and BMRE of existing units including working capital
finance are extended by Sonali Bank Limited to cottage industries, small-medium-large scale
industries and also to self-employed persons with a view to creating employment opportunities,
deployment of resources, increasing GDP and over-all industrial development of the country. Currently
the following credit schemes are on offer by the bank:
Some of the main Credit Schemes:

• Industrial Financing for Thrust Sectors.

• Sonali Bank Industrial Credit Scheme.
• Special Investment Scheme for Cottage and Small Industries.
• Financing Large Scale Industries through Banks' Consortium.
• Financing Software Development and Data Processing.

Designated Branches:
About 100 branches including all the corporate and district headquarters branches are designated to
handle industrial credit.
Thrust Sectors:
Besides the traditional and oft-trodden sectors, Sonali Bank Limited has also come up with very low
rate of interest to finance the following thrust sectors of the economy as identified by the
Government:

• Software development and data processing.

• Agro-based industries (excepting cold storage for preservation of potatoes).
• Manufacture of artificial flowers.
• Frozen foods.
• Gift items (preferably export oriented).
• 100% export oriented finished leather goods.
• 100% export oriented jute goods.
• Jewelry and Diamond cutting and polishing.
• Oil and Gas.
• Sericulture and silk industries.
• Stuffed Toys (preferably export oriented).
• 100% export oriented textile industry (excepting garments manufacturing industries).

Other Viable Industrial Sectors:

• Composite textile (woven & knit fabrics).

• Textile / Acrylic Spinning.
• Sweater Industry .
• Garments Accessories & Washing Plant.
• Denim Fabrics (export oriented).
 • Tourism / Hotel and Resort facilities.
• Hospital & Clinics.
• Other Export linkage industries.
• Power Generating Plant.
• LPG, CNG Filling & Conversion plant.
• Pharmaceutical Ind.
• Plastic Ind.
• Tannery/Rubber Foot wear.
• Other highly rewarding appropriate technology based projects.

Interest Rates:

• Project/Term Loan : 12.00% to 13.00%

• Working Capital : 13.00%
• Schemes

Consumers' Credit

With the steady development of the industrial and the service sectors in Bangladesh, the level of
personal consumption has recorded progressive growth. To cater to the growing demand for consumer
durables, Sonali Bank Limited has launched the "Consumers' Credit Scheme", with the following
features:

• Eligibility: Permanent employees with 5 years service in Govt., Semi-Govt. organization and
Autonomous & recognised bodies.

• Loan Limit: Maximum Tk. 1.00 lac. Debt-equity ratio:75:25 Interest rate(w.e.f. 01, September
2009):14.00%

• Mode of repayment: Monthly installment.

• Period of loan: Maximum 3 years.

• Security:

• a) Hypothecation of consumer goods to be purchased.

b) Letter of guarantee from the employer.
c) No objection certificate & salary certificate from employer.
d) Lien on provident fund/gratuity.

• Designated Branches: All district branches and the corporate branches

IT Finance
IT Project Financing

For growing international markets for software and data processing this scheme provides long
term and short term credit facilities on easier terms to set up and run IT based projects.
 Eligibility:

Entrepreneurs of them at least two with recognized degree/diploma in Computer Science or

Electrical Engineering / Telecommunication / Applied Physics & Electronics, forming a private
limited company may apply. Experience in the related field will be preferred.

Loan Limit:

Maximum Tk. 1.50 million. In deserving cases, up to Tk.10.00 million may be considered.
Debt-equity ratio:80:20

Period of loan:

Maximum 6 years including 1 year grace period.

Security::

In case of Rented premises collateral of immovable at least covering prayed loan is needed. in
case of project with own land & building no collateral security other than the personal
guarantee of the loanees is required. Entrepreneurs offering collateral security will be
preferred.

Or Loan may be consider with personal guaranty of worthy person(s) (Third party) and in such
case original certificates on academic achievements of the sponsor are required. Interest
rate(w.e.f. 01, September 2009):11.00%

IT Export Financing

For export of software and processed data short term finance is extended to existing IT
projects.

Eligibility:

Feasibly implemented and properly staffed IT projects with export L/C or firm contract in hand
may apply. Export through settlite, BTTB confirmation required.

Loan Limit: Tk. 1.00 million. For larger contract higher amount may be considered. Debt-
equity ratio:90:10

Period of loan: L/C or Contract period plus 21 days but not exceeding 180 days from the date
of disbursement.

Security: L/C or Contract period plus 21 days but not exceeding 180 days from the date of
disbursement. Interest rate (w. e. f. 01, September 2009):11.00%

Loan facility for Diagnostic Center

Sonali Bank Limited has launched a new loan scheme for "Diagnostic Center" to promote medical
facilities. The salient features of the scheme are as follows:

Nature of loan : Cash Credit (Hypothecation).

Debt-equity ratio : 60:40
Interest rate(w.e.f. 01, : 14.00%
September 2009)
Primary Security : Stock of Chemicals, X-ray papers, Injection Syringe, Medicine etc.
Collateral Security : Collateral security twice the value of the loan is required.
Period of Loan : One Year.

Investment Bond
1. Wage Earner's Development Bond

2. US Dollar Investment Bond

3. US Dollar Premium Bond

4. Govt. Treasury Bill and Bond

FUNDAMENTALS OF CREDIT
DEFINITION OF CREDIT

The word “Credit” is derived from the Latin word “Creditum” meaning “I
believe”. The term may be defined broadly or narrowly. More generally the term
credit is used narrowly for debt finance. Credit is simply opposite of debt. Debt is
obligation to make future payment. Credit is the claim to receive the payments.
Both are created in the same act of borrowing and lending.

Speaking broadly, credit is finance made available by one party (lender, seller, or
shareholder/owner) to another (borrower, buyer, corporate or non-corporate firm).
Credit can also be defined as the provision of resources (such as granting a loan)
by one party to another party where that second party does not reimburse the first
party immediately, thereby generating a debt, and instead arranges either to repay
or return those resources (or material(s) of equal value) at a later date. In a simple
sentence, it is any form of deferred payment.

MODES OF CREDIT

Loans and advances primarily have been divided into two major groups. One is
continuous credit and another is fixed term loans. Continuing credits are the
advances having no fixed repayment schedule, but have an expiry date at which it
is renewable on satisfactory performance. Fixed term loans are the advances made
by the bank with fixed repayment schedules. The term loans are defined as
follows:

Short term: Up to 12 months.

Medium term: More than 12 up to 36 months.

Long term: More than 36 months.

As initiated by Bangladesh Bank BCD Circular NO. 8 dated 25.04.94 different

kinds of lending were subdivided into 7 categories for fixation of rates of interest
by the individual banks on competitive basis depending on the cost of funds,
prevailing market condition and monetary policy of the country.

I. Agriculture:

Loans to primary producers engaged in farming, fishing, forestry or livestock and

loans to input dealers/distributors fall under this category. Loans to processors or
traders of agricultural products are not to be categorized as agricultural loans.

Agricultural loans may include short, medium and long-term loans as well as
continuing credits. As such it may fall under the head Loan (Gen.), Hire-purchase,
Lease financing.

II. Term Loan for Large and Medium Scale Industry:

This category of advances accommodate the medium and long term financing for
capital structure formation of new industries of the existing units who are engaged
in manufacturing goods and services. Term financing to tea gardens may also be
included in this category depending on the nature and size.

As the financing under this category have fixed repayment schedule it falls under
the head Loan (Gen.), Hire-purchase, Lease Financing.

III. Term Loans to Small and Cottage Industries:

Small industries is presently defined as those establishment whose total investment

in fixed capital such as land, building, machinery and equipment excluding taxes
and duties does not exceeded 30 million taka and investment in machinery and
equipment excluding taxes and duties does not exceed 10 million taka. Cottage
industries also fall within this definition. Medium and long-term weaver credits are
also included under this category.

Bangladesh Bank gives interest subsidy at 3% to the Banks on loans extended

under this category. No short term or continuing credits is to be included in this
category. Like the Large and Medium Scale Industry it is also allowed in the form
of Loan (Gen.), Hire-purchase, Lease Financing.

IV. Working Capital:

Loans allowed to the manufacturing units to meet their working capital

requirements irrespective of their size big, medium or small fall under this
category. These are usually continuing credits and as such fall under the head Cash
Credit.

V. Export Credit:

Credit facilities allowed facilitating export of all items against Letter of Credit
(L/C) or confirmed export orders fall under this category. It is accommodated
under the head Export Cash Credit (ECC), Packing Credits (PC), Foreign
Documentary Bill Purchased (FDBP), and Local Export Bill Purchased etc.
VI. Commercial Lending:

Short term loans and continuing credits allowed for commercial purposes other
than export fall under this category. It includes import financing, financing for
internal trade, service establishment etc. no medium and long-term term loans are
accommodated here. These categories of advances are allowed in the form of:

 Loan against import merchandise (LIM)

 Payment against import documents (PAD)

 Secured overdrafts (SOD)

 Cash Credit (CC)

 Loan (Gen.)

VII. Others:

Any loan that does not fall in any of the above categories is considered under the
category “Others”. It includes:

 Transport equipment

 Construction works including housing (commercial / residential)

 Work order finance

 Personal loans etc.

CREDIT MANAGEMENT OF SONALI BANK LIMITED

Credit Planning

Credit planning implies efficient utilization of scarce (loanable fund) to generate

earning for the bank. Constituents of credit planning are forecasting of deposit
collecting sources, forecasting of loanable fund, allocation of fund in a prudent
way, taking decision about the collateral, setting interest rate, decides time limits
for different loans.
Credit planning has got a serious importance because loanable fund comes out of
deposit mobilized from the people. So safety of people’s money should be ensured
carefully and efficiently. Unplanned lending may create hazard in two ways.
Firstly, excess lending may create liquidity crisis for the bank. Finally, too much
conservative lending may make the loanable fund idle. But cost-bearing fund again
incurs operating cost for the bank.

Excess liquidity led by unplanned inadequate lending push the profitability to

decline. Planned credit helps to maintain conformity with the national priority.

Unplanned credit may upset the total economic stability from macro economic
point of view either by making inflation or deflation. The recent banking failure in
USA was primarily due to credit default. Credit default or credit crunch causes
from the mismanaged credit systems.

PORTFOLIO MANAGEMENT OF CREDIT

Portfolio management of credit implies the deployment of loanable fund among

alternative opportunities through proper allocation. The objective of portfolio
management of credit is the best and efficient management of loan to ensure
profitability. Designing the size and pattern of loan portfolio with accuracy is a
tough job. Even then, a prudent loan portfolio management can be done by careful
consideration of the factors mentioned in the following:

 Bank’s Capital Position

 Deposit mix (Tenure of deposit)

 Credit environment

 Influence for monetary and fiscal policies

 Credit needs of the respective commanding area

 Ability and experience of the bank personnel to handle the loan

portfolio
In designing a loan portfolio, nine things should be decided. These are given
below:

i. Assessing the credit culture of an institution

ii. Setting portfolio objectives and risk tolerance limits

iii. Establishing a portfolio management information system

iv. Formulating portfolio segmentation and risk diversification objectives

v. Analyzing adequately loans originated by other lenders

vi. Establishing aggregate policy and underwriting exceptions systems

vii. Subjecting portfolios to stress tests

viii. Maintaining independent controls

ix. Analyzing portfolio risk-reward trade-offs

With each and every coin of loan, there is an involvement of risk. So the quantum
of risk should be spread over the various types of loan though diversification.
Diversification of credit can be made by extending credit to different sectors, to
different geographical area, to different line of product or business and allocating
the loanable fund into different type of credit.

Again the construction of credit into a particular sector or area, product or business
should also be observed carefully. If credit is already been concentrated to a
particular streamline mentioned earlier that should be avoided.

Finally, the type and tenure of deposit should be analyzed carefully in determining
the loan portfolio of a bank. How much quantum of fund will be earmarked for
long term lending and how much for short term depends to a large extent on the
deposit structure.

LENDING FUNCTION AND OPERATION

Preliminary Screening of a Credit Proposal

Screening means critical diagnosis of a credit proposal at the very initial stage. It
should be made carefully just after the proposal comes to the bank. At the time of
screening of a credit proposal the preliminary screening should be done on the
following premises:

 Quality of management and the entrepreneurial background of the sponsors

 Equity strength i.e. own capital positions

 Line of business, it’s future prospects and the existing position of the
respective industry

 Required technology, machinery, equipment and their availability

 Location, whether the infrastructural facilities are available

 Potential contribution to the overall economic development of the country

 Security proposed to be given and the gentility of the title of documents

Analyzing the above matters, it is to be convinced that the credit proposal satisfies
all the key elements of a sound lending policy such as:

i. Limit on total outstanding loans

ii. Geographic limits

iii. Credit concentrations

iv. Distribution by category

v. Type of loans

vi. Maturities

vii. Loan pricing

viii. Lending authority

ix. Appraisal process

 x. Maximum ratio of loan amount to the market value of pledged securities

xi. Financial statement disclosure

xii. Impairment

xiii. Collections

xiv. Financial information

SELECTION OF BORROWER

Selection of borrower is a very significant part of a credit decision. The borrower

should be analyzed prudently. Degree of risk has an inverse relationship with the
selection of borrower. Selection of right borrower reduces the risk of non-
repayment of the loan. To the contrary, degree of risk of non-repayment increases
with the selection of wrong borrower. In our country, the huge volume of non-
performing loan is mainly the result of failure in selecting right borrower. So if it is
found that, line of business is prospective and profitable but the potential borrower
is not right one, the proposal should not be entertained. There are some parameters
for selection of borrower. Some ‘C’s commonly expresses the parameters. And
thus the criteria for selection of a borrower are popularly known as 6 ‘C’s such as:

Character:

The outcome of analyzing the character is to have overall idea about the integrity,
experience, and business sense of the borrower. Two variables; interaction /
interview and market research are used to analyze the character of the borrower.

I. Interaction/ interview: the indicators are

a. Prompt and consistent information supply, information given

has not been found false (willingness to give information)

b. CIB also reveals business character

c. Willingness to give owns stake/equity and collateral to cover

 d. Tax payer

II. Market Research:

a. Information on business is verified

b. Dealing with supplier and or customer as supplier is also a kind

of lender; the payment character can also be verified.

Capital

For identifying the capital invested in the business can be disclosed using the
following indicators:

a. Financial statements

b. Receivable, payable, statements to practically assess the business

positions. Net worth though financial statements or from declaration of
assets and liabilities

Capacity (Competence)

Capacity of the borrower in running the business is highly emphasized in the time
of selecting a good borrower. As the management of the business is the sole
authority to run the business that is use the fund efficiently, effectively and
profitably. The indicators help to identify the capacity of the borrower:

a. Entrepreneurship skills i.e. risk taking attitude shown by equity

mobilization.

b. Management competencies both marketing and products detail, ability to

take decision.

c. Resilience or shock absorption: Connection, Back up (if first time falls

second lines come to help.)

Collateral
The assets offered as collateral are the second source of repayment and it is offered
to the bank is to cover the additional risk that arise due to the default culture.

Cash flow

Cash flow is the vital factor that is used to identify whether the borrower will have
enough cash to repay the loan or advance. Cash keeps the liquidity to ensure
repayment. The credit officers try to identify the annual cash flow from the
submitted statements.

If the borrower’s found satisfactory in terms of all C’s only then it is suggested to
entertain the borrower.

PRICING OF LOAN

Pricing of loan is a great important element in banking business. Because through

pricing, bank usually create margin. So it is to be determined carefully. In pricing,
four components are to be calculated prudently otherwise pricing of that loan will
create a definite loss for the bank. The components are:

i. Interest expense or cost of fund:

The interest to be given to the depositor and to central banks for borrowing

ii. Administrative Cost

iii. Cost of Capital:

Return expected by the investors for their capital invested in the bank

iv. Risk Premium

Addition of the first three elements will provide the “Prime rate” beyond which a
bank can never go for lending.

Magnitude of the risk premium creates margin for the bank. And this rate of risk
premium may vary from person to person and even from sector to sector
depending upon the value or importance of the client and the prospective priority
of the sector. Once upon a time, it was dictated by the Central Bank but now-a-
days, in compliance with the open market operation this power has been delegated
to the enlisted commercial banks.

CONCEPTS OF ACCONTING – FINANCIAL STATEMENTS

1. Concepts of Accounting

The basic concepts of accounting are:

a. Money measurement f. Dual aspect concept

concept
g. Time period concept
b. Entity concept
h. Matching concept
c. Cost concept
i. Materiality concept
d. Conservatism concept
j. Going concern concept
e. Consistency concept

2. Financial Statements and its Analysis

Financial statement is the end use of financial accounting. Financial statements

are prepared by collecting, formulating and compiling the accounting data in a
consistent and logical accounting procedure. Very popularly we used to
understand the financial statements simply by the Balance sheet and income
statement. But financial statement is in fact a purpose oriented financial picture.
There are generally five parts of a financial statement. These are:

i. Retained Earnings Statement

ii. Fund flow Statement

 iii. Cash flow Statement

iv. Profit and Loss account

v. Manufacturing account (in case of Manufacturing Co.)

Analysis of financial statement is the process of evaluating significant

relationship between the components of the financial statement. The purpose of
analysis is to obtain a better understanding of the firm’s position and
performance.

3. Assessment of working capital

The capital, which is needed to meet current obligation and to finance day-to-
day operational expenditure of a firm, is working capital. Assessment of
working capital bears great importance because excess working capital incurs
cost for the firm and in reverse, shortage of working capital may totally upset
the smooth operation of the firm.

Practically, working capital becomes obvious for the following reasons:

a. For purchase of raw materials, stores and spares

b. For making advance payment to the raw material suppliers

c. Blocking of fund in work-in-process and finished goods

d. Blocking of fund with sundry debtors

e. For meeting day to day cash expenditures

ASSESMENT:

Required components of working capital are to be computed prudently, for

example, for a manufacturing concern, need for working capital can be assessed by
calculating the major components:
 i. Projected annual sales viii. Credit allowed to customer in
days
ii. Yearly consumption of
raw materials ix. Credit received from
suppliers in day
iii. Annual labor charges
x. Annual selling and
iv. Overhead costs
administrative experience
v. Stock of raw materials
xi. Annual depreciation
vi. Stock in process
xii. Closing inventory
vii. Stock of finished goods

The days or tied up period for stock of raw material (Local/ imported), stock in
process, stock of finished goods, credit allowed to customers, credit received from
suppliers should be considered very prudently.

A sample format can be shown for easy understanding of working capital

assessment:

Components: Tk.
Annual Consumptio n of RM × Tied up period
1. Stock of R.M. = = ***
360

Cost of Production × Tied up period

2. Stock in Process = = ***
360

Cost of Sales × Tied up period

3. Stock in finished goods = = ***
360

Cost of Sales × Tied up period

4. Credit allowed to customer = 360
=***
 ***

Less:
Annual R.M consumptio n × Tied up period
5. Credit received from suppliers = 360
= ***

Gross requirement of working capital ***

Less:

6. Margin (Negotiable with the client) ***

Net requirement of Working Capital ***

Note:

Cost of production = RM + DL + OH + Depreciation

Cost of Sales = Cost of Production + Selling and Admin. Exp – closing inventory

Working Capital requirement may vary case to case depending upon the nature of
industry, length of operating cycle, seasonal nature of industry, credit practice in
purchase and sales, company policy relating to depreciation, dividends and
expansion, Govt. policy relating to taxation, nature of raw materials – local or
imported, perishable or non-perishable etc.

CREDIT SCORING SYSTEM

Credit scoring system is a modern approach for assessing the credit worthiness of a
potential borrower. Credit scoring system helps to produce a rating, which provides
an indication of a company’s management ability and financial strength. CRG used
as the tool for scoring a credit.
DOCUMENTATION OF LOANS AND ADVANCES

Immediate after sanctioning of loan, documentation is to be made properly before

disbursement of loan. Documentation formalities are commonly known as
completion of “Charge Document” in the banking world. Type of documents to be
signed by the client varies depending upon the nature of loan and advances given.
Some common documents are listed below:

i. Demand Promissory (DP) Note

ii. Letter Arrangement

iii. Letter of Agreement

iv. Letter of continuity (in case of continuous loan)

v. Letter of pledge (in case of Pledge)

vi. Letter of Hypothecation (in case of Hypothecation)

vii. Letter of Undertaking

viii. Letter of Debit Authority

ix. Letter of Installment (in case of term loan to be paid in installment)

x. Letter of Guarantee (Personal Guarantee)

CREATION OF CHAEGE OVER SECURITIES

As a safety measure, bank has to create charge over the securities against the risk
of non-repayment of loan. Here in this chapter, the most common modes of charge
creation are defined below in a very brief from:

1. Pledge

According to the section 172 of the Contract Act, when a borrower

surrenders his business goods to the banker’s custody as the security of loan
given by the bank then it is called pledge. The pledged goods remain with
the possession and control of the bank and the client draw the goods in case
 of need with the permission of the bank by repaying adequate amount of
loan. Bank usually permits drawing power (DP) to the borrower to draw the
goods from its custody after checking the stock report. In case of default,
bank deserves the right to realize the loan by selling the pledged goods.
Bank creates this charge based upon the letter of pledge which has been
taken from the bank borrower before disbursement.

2. Hypothecation

When loan is given to the borrower against hypothecated possession of

goods then it is called Hypothecation. The physical possession and control
remain with the borrower’s custody. Bank creates charge over the
hypothecated goods in case of default. For creation of this charge bank takes
the letter of hypothecation from the borrower.

3. Lien

Lien is the right of the creditor to retain the goods or properties given by the
borrower to the creditor as the security against the loan. The creditor
deserves the right of lien until the debt is paid. Lien can be of two types.

Particular lien:

In particular lien, the creditor can retain goods only introspect of a particular
debt.

General lien:

As per the declaration under section 171 of the Contract Act 1872, the
creditor in absence of any contract on any contract to the contrary exercise
lien and retain the security of any goods bailed to them for a general balance
of account.

In the event of default by customer, the banker can sell the goods or
securities retained after giving a reasonable notice.

4. Assignment
 Assignment is the transfer of a right, property or debt, existing or future by
one person to another person. In banking the usual subject of assignment is
“auctionable claims”. Common types of assignments are:

i. Book debts

ii. Contract money due from Govt. or semi Govt. bodies

iii. Supply bills

iv. Life insurance policies

5. Set-off

Right of set-off is the right of a banker to combine all the accounts of a

customer to realize the debt. Set-off accrues to the banker as a result of
banker-customer relationship. If a customer maintains more than one
account with the bank, usually bank obtains a prior letter of set-off so that
bank can combine them at its discretion without giving any notice to the
customer. The judgments in different cases reveal that bank can combine
more than one account of a customer maintains with different branches of
the same bank.

6. Mortgage

As per the declaration of the transfer of Property Act 1882 under section 58
(a) mortgage is the transfer of an interest in specific immovable property for
the purpose of securing the repayment of money advance or to be advanced
by way of loan, existing or future debt, or the performance of an engagement
which may give rise to a pecuniary liability. The transferor is called the
mortgagor and the transferee is called the mortgage. The mortgagor gets
back all his rights to the mortgaged property on repayment of loan due there
on. Mortgage may be of different types, such as:

i. Registered or simple Mortgage

ii. Equitable Mortgage

iii. English Mortgage

 iv. Anomalous Mortgage etc.

Among these, first two are used more frequently.

i. Registered or Simple Mortgage:

Where without delivering possession of the mortgaged property, the

mortgagor binds himself personally to repay the debt. The mortgagee
(Bank) can sell the property by obtaining decree from the court.

ii. Equitable Mortgage:

Where mortgagor delivers the documents of title of immovable

property with intention to create a security thereon, the transaction is
called mortgage by deposit of the deeds or equitable mortgage.

LOAN CLASSIFICATION AND PROVISIONING

Classification:

Classification of loan is mandatory for all scheduled commercial banks. It has

become obvious due to the bad culture of fabricating the income by window
dressing of the financial statement of the commercial banks. It has been observed
that sometimes bank income is being calculated by showing the unrealistic
expected income. To protect this ill practice, classification of loan has come to
effect basing upon a standard criterion.

Loans are classified into three categories or the basis of the length of overdue.
These are:

i. Substandard:

If the loan regains overdue for 9 months and above

ii. Doubtful:

If the loan remains overdue for 24 months and above

iii. Bad or Loss:

If the loans remain overdue for 36 months and above

The criteria of loan classification are:

a. Overdue

b. Required payment

c. Limit overdrawn

d. Legal action

e. Qualitative judgment

Provisioning:

Specific Provision:

After getting list of the classified accounts where no loss is anticipated, partial or
total loss is anticipated, audit report by Audit division and Bangladesh Bank,
previous and current portfolio by external auditors and branch managers comments
on the classified accounts, Head office credit division prepares a list of credit
accounts which are considered to be totally or partially be unrecoverable.

Rate of Provisioning

Sonali Bank Limited in the time of loan provisioning to get the real picture of the
income mainly follows the Bangladesh Bank guideline. The rate of provisioning
used in SBL is summarized in the following table:

Class Rate of Provisions

Short Term Agriculture Credit All other Credits

Unclassified 5% 1%
Substandard 5% 20%
Doubtful 5% 50%
Bad or Loss 100% 100%

Class Rate of Provisions

Consumer Financing Other Consumer Financing HF and

than HF and LP LP

Unclassified 5% 2%
Substandard 20% 20%
Doubtful 50% 50%
Bad or Loss 100% 100%

Accounting Procedure of Interest on Classified Loan

The accounting procedure in dealing the interest earned on the classified loan is
very important because the treatment may overestimate the earning of the bank.
The accounting procedures followed in SBL are pointed out below:

a) If any credit or advance is classified as substandard or doubtful, the interest

will be charged on the credit account but such interest is not transferred to
the income account rather it is kept on the interest suspense account.
 b) If any loan or advance is classified as Bad and Loss, the interests of that
account are suspended instantly. If any suit is required to be filed for
recovery of such credit, then it is filed on the total amount of the principal
including the interest calculated up to the period before the suit is filed. Such
interest is kept on the interest suspense account.

c) If any classified loan or part of that loan is recovered, the interest will be
adjusted first then the original loan will be adjusted.

Supervision Monitoring and Recovery of Credit

Recovery of loan ensures the recycling of fund. Non-recycling of fund leads a bank
or financial institution to become stagnant. So, recovery of loans and advances is a
must. But the scenario of loan recovery is undoubtedly poor and inefficient in our
financial system. Willful non-repayment of loan has become a culture in our
country. This is mainly because of inadequate, inefficient and even absence of
supervision and monitoring system.

No doubt, a baker before sanctioning a loan carefully evaluates and appraises the
loan proposal of the borrower to determine their “Bank ability” on the basis of the
principles of sound lending but simply an appraisal of loan proposal is not a
guarantee against risk of non-payment by the borrowers. This is only a part of the
job. The other and equally important responsibility of the lending Banker is to
follow up and supervise the use of the credit.

So, a banker while sanctioning any loan should ensure that the credit facility is
allowed to the genuine economic purpose, money lent is properly used for the
generation of income through increased economic activities and borrowed money
is repaid in time. All these can be ensured through an effective supervision and
follow up system of the advances.
The two terms supervision and follow up are closely related. These two terms seem
to be the same, but there is a slight difference between these two terms. According
to prominent writer of books on banking these are explained as follows:

I) Supervision gives more emphasis on proper end use. Supervision

keeps track of the end use of fund lent. It includes adequate arrangement by
Banks for maintaining close contract with the borrower and his activities in
order to remain well informed about the position and progresses of the
purpose financed and offer appropriate guidance to the borrower, where
necessary.

II) Follow up gives emphasis on timely recovery of the advances. Follow

up includes efforts to ensure that the terms and conditions of the advances at
pre-disbursement, disbursement, post disbursement and recovery stages are
complied with and money lent is repaid as per schedule of repayment. It also
includes efforts to regularize the irregular advances. Recovery of advances
largely depends on the effective follow up.

Previously, advances were security oriented and allowed to traditional sectors. The
Bankers were security conscious and little emphasis was given to the purpose and
use of credit. With the changed circumstances, the concept of lending has been
changed. It now covers a wide range of economic activities both in traditional and
non-traditional sectors and both in urban and rural areas. Many of the borrowers do
not have asset holding to meet up the so-called security. It, therefore, logically
follows that in the absence of the traditional security, an effective system of
supervision and follow-up needs to be ensured. If effective supervision and follow-
up can be ensured, no advance can become stuck-up and even the most
conservative banker will not have to any anxiety for recovery of the money lent.

Credit monitoring implies that the checking of the pattern of use of the disbursed
fund to ensure whether it is used for the right purpose or not. It includes a reporting
system and communication arrangement between the borrower and the lending
institution and within department, appraisal, disbursement, recoveries, follow-up
etc.

The Credit officer checks on the following points:

 a. The borrower’s behavior of turnover

b. The information regarding the profitability, liquidity, cash flow situation and
trend in sales in maintaining various ratios

Recovery can be ensured or at least making close supervision and monitoring can
increase rate of recovery. Supervision should be started from the starting point of a
credit proposal. Supervision can be done in two stages:

i. Pre-finance Stage Supervision :

In this stage, supervision should be made –

 To select the right borrower i.e. credit worthiness of the

borrower

 To be sure about the business prospect

 To see whether any misstatement made by the borrower etc.

ii. Post finance stage Supervision:

Post finance stage supervision is sometimes synonymous to the

monitoring. Monitoring is a continuous process of overseeing the
borrower, his business, his trend in repaying the loan. In this stage,
supervision and monitoring should be made-

 To see whether the borrower draws the sanctioned credit

regularly

 To see whether the loans are being properly and fully utilized

 To see whether the borrower repays the loan regularly

 To see whether any significant change happens in the

management of the borrower

 To see whether the borrower maintains close contact with bank

regularly
  To see whether any significant change happens in the
borrower’s business plan

 To make the borrower aware about the timely repayment of

loan

 To take necessary step in case of need

It has proved that supervision and monitoring help to develop a cooperative

attitude between the borrower and the bank. Moreover, close supervision and
monitoring make the borrower loyal to the bank and thus supervision and
monitoring ensure the recovery of loan.

Management of Delinquent Client

When a problem loan is detected the responsible loan officer takes the corrective
action and tries to minimize the loan losses allowing different facilities to the
client. The steps practices in Sonali Bank Limited to manage the delinquent loan
are:

a) Persuasion:

This is the first step practiced in the SBL to manage the problem loan. This
steps involves –

 Open discussion with the borrower about the problem he is facing

 Discussion with third party to find out the underlying reasons

 Issuing “First reminder” letter to inform the due date and ever due
installments

 If the party doesn’t response issuing “Second reminder” and then

“Third reminder” letter

b) Negotiation:
 If the persuasion failed, the loan officer negotiates a plan of action with the
borrower to try to extract both the bank and the borrower from possible loss.
This calls for certain sacrifices on the part of the bank and borrower in their
mutual interest. The plan of action in SBL consist of –

 Revise loan agreement

 Concession of interest (if the client was difficult to manage)

 Reschedule of the loan and giving installment facility to repay the

overdue amount beside the regular installment

c) Litigation:

If after rescheduling the loan and or failed to negotiate with the delinquent
client, SBL go for taking legal action against the delinquent client to recover
the loan. The branch managers send a letter to the Head Office credit
department informing the borrower’s reluctance to repay and negotiate the
loan.

 Filing case against the client

 Assigning the loan officer for assisting the lawyer

As soon as an account is classified the branch manager will send a detailed

report of delinquent client to the Head Office’s Particular Credit Division.
After that, a monthly report on all delinquent facilities is to be sent to the
Head Office Credit Division jointly signed by the Branch manager with the
second officer/ credit officer. Beside this the branch manager should include
the action plan taken against the delinquent account and status report.

OPERATION RESULT OF SONALI BANK LIMITED

Growth of Credit in SBL

Credit Distribution:
 Credits are provided in different fields in different names. Sonali Bank Ltd
provides various types of credits to their clients. Credit disbursement in
2007-2008 given below in different categories:

Credit 31.12.08 31.12.07 Change In (%) Total (%)

Types Change in advance
Loan
(General)
Industrial
Agricultural
Other
Loans And
Advances

Recovery of Credit

Division C.L Target Recover Recover Bad Target Recover Recovery

y y (%) & y
(%)
Loss
LO
IPFD
Dhaka
Barisal
Sylhet
Rajshah
i
Khulna
Ctg.
Total

RPOFITABILITY ANALYSIS OF A BANK

Many banks will have to take and manage higher risks in order to make acceptable
returns. It will be increasingly important for a bank to be able to measure the risk
taken to produce acceptable return during the coming period of challenging extent
factors and deregulation. A bank performance will affect its valuation in the
market, its ability to acquire other banks or to be acquired at a good valuation in
the market and its ability to be funded in the deposit and financial markets.

ROE Model:

A bank’s ROE is derived from its return on assets (ROA) and its leverage
multiplier. ROA, which is net income divided by total assets, should reflect the
bank management’s ability to utilize the bank’s financial and real resources to
generate net income. Many regulators believe ROA is the best measure of bank
efficiency. Since ROA is lower of financial intermediaries than of most non-
financial businesses, most intermediaries must utilize financial leverage heavily to
increase ROE to a competitive level. The leverage multiplier to be applied to ROA
is calculated by dividing assets by equity (assets minus all liabilities, borrowing
and preferred stock).

Measuring Returns of a Bank:

Bank management’s primary objective is to maximize the value of the owner’s

investment in the bank. Useful information on the appropriate trade-off between
returns and risk is obtained from restively efficient markets for most publicly held
banks. The management of the smaller banks seeks to achieve the highest returns
for the risk level deemed appropriate by the owners and top management.
However, the steps of measuring returns of a bank are as follows:
  The first return measurement is the Interest Margin in percentage term,
which income minus interest expense divided by earning assets (all
securities and loans)

 Interest income less both interest expense and other expenses divided by the
revenue is leveled the Net Margin.

 This net margin limes the Asset Utilization (revenues divided by assets)
equals the ROA. It is important to note that is asset utilization figure is
strongly affected by how much a bank has invested in earning assets.

 When the ROA is multiplied by the Leverage Multiplier (asset divided by

equity capital) is the most important measurement of banking returns
because it is the ROE. The ROE (net income divided by the equity capital) is
the important measurement of returns because it is influenced by how well
the bank has performed on all other return categories and indicates whether a
bank can complete for private sources of capital in the economy.

Measuring Risks of a Bank:

Risk measurement is related to return to return measurement because a bank must

take risks in order to earn adequate returns. Four categories of risks are generally
computed in bank:

i. Liquidity Risk:

A bank’s liquidity risk refers to a comparison of its liquidity needs for

deposit outflows and loan increases with its actual and potential
sources of liquidity, from either selling an asset it holds or acquiring
an additional liability. It is computed by dividing short term securities
with the deposits. The trade-off that generally exists between returns
and risks are demonstrated by observing that a shift form short term
into long term securities or loans would raise a bank’s return but
would also increase its liquidity risk. The inverse would be true if
short term securities were increased. Thus, high liquidity ratio for the
sample bank would indicate a less risky and less profitable bank.
 ii. Interest Rate Risk:

The bank’s interest rate risk is related to the changes in interest rates.
The ratio of interest sensitive assets to interest sensitive liabilities is
the measure of interest rate risk. Particularly in the period of wide
interest rate movements, this ratio reflects the risk the bank is willing
to take so that it can predict the future direction of interest rates. The
difficulty of predicting interest rates, some bank has concluded that
the way to minimize interest rate risk is to have an interest sensitivity
ratio to close to 100 percent.

iii. Credit Risk:

Credit risk measures the risk of medium quality loans into assets. The
relative amount of past due loans or loan loss would be a better
measure but such data are not available. The credit risk is higher if the
bank has more medium quality loans, but the returns are usually
higher too.

iv. Capital Risk:

Capital risk is measured by dividing capital by the risk assets. Capital

risk indicates the risk of creditors can be shifted to the owners if the
company is in jeopardized condition. The higher the capital risks the
higher the safety for the creditors and the inverse is also true.

The capital risk is inversely related to the leverage multiplier and

therefore of the ROE. When a bank chooses (assuming this is allowed
by its regulators) to take more capital risk, its leverage multiplier and
ROE will be higher, if other factor remains unchanged. If the bank
choose (or is forced to choose) to lower capital risk, its leverage
multiplier ROE will be lower.

PROFITABILITY ANALYSIS OF SONALI BANK LIMITED

Sonali Bank Ltd had a record of successful year. It earned remarkable profit in
2008. Profitability of a bank depends on ROE. But we can not avoid risk factors in
case of a bank, because too much risk taking may harm the interest of the
depositors. Here ROE model is applied for the profitability analysis of SBL.

MEASURING RETURNS OF THE SONALI BANK LIMITED

Interest Margin:

Interest margin indicates the net interest income into earning assets. Bank’s main
earning source is its interest income. The higher the interest income is, the higher
the possibility for the bank to survive. Interest margin for the bank is increasing
trend for years, which is a good sign for the bank. In the year 2008 it was about
……..

Net Margin:

Net margin is the net income for the bank after covering all the expenses. Sonali
Bank Limited made an exclusive profit in 2008 it was about …………By
comparing the interest margin and net margin we can envisage the real source of
earnings of this bank. In the year 2007 it was ………….due to ………..

Category Equation 2008 2007 2005 2004

Interest
Margin
Net Margin
Asset
Utilization
Ratio
Return on
Assets
(ROA)
Leverage
multiplier
Return on
Equity
(ROE)

Note:

• Earning assets = Money at call and short notice, investments, advances

• Net interest income = Interest and discount – interest paid on deposit

• Net income = Net profit after tax

• Revenue = Interest paid + Operating Income

• Assets = Total Assets

• Equity = Paid up capital + Retained Earnings

MEASUREMNET RISKS OF SONALI BANK LIMITED