Revised Process Document for SRP-SREP Dialogue on ICAAP

(Implementation of 2nd Pillar of Basel II)

May 2013

Bangladesh Bank

Basel II Implementation Cell Banking Regulation & Policy Department Head Office
Basel-II Implementation Cell, Banking Regulation and Policy Department, Bangladesh Bank www.bb.org.bd

INTRODUCTION
Supervisory Review Process (the Second Pillar of Basel-II and III) of Risk Based Capital Adequacy Framework is intended not only to ensure that banks have adequate capital to support all the risks in their business, but also to encourage banks to develop and use better risk management techniques in monitoring and managing their risks. The key principle of the supervisory review process (SRP) is that banks have a process for assessing overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital at an adequate level. Banks must be able to demonstrate that chosen internal capital targets are well founded and that these targets are consistent with their overall risk profile and current operating environment. Bank management will clearly bear primary responsibility and Board of Directors hold the tertiary responsibility for ensuring that the bank has adequate capital to support its risks. The main aspects of a rigorous review process are as follows: a) Board and senior management oversight, b) Sound capital assessment, c) Comprehensive assessment of risks, d) Monitoring and reporting and e) Internal control review. A sound and vibrant SRP for a bank requires three layer structure: i) Strategic Layer: The audit committee of board will be responsible on behalf of the Board of Directors to implement SRP in banks. The committee will monitor the managerial layer. The agenda of each meeting of the audit committee must include the SRP implementation in bank. ii) Managerial Layer: Banks must have an exclusive body naming SRP team which will be constituted by the concerned departmental heads of a bank and headed by Managing Director. The formation and modification of SRP team and its terms of reference (ToR) must be approved by the Board of Directors and to be notified to Bangladesh Bank. The SRP must meet at least bi-monthly to monitor the implementation of SRP. Banks must have also a document (called Internal Capital Adequacy Assessment Process-ICAAP) for assessing their overall risk profile, and a strategy for maintaining adequate capital. This document is also to be approved by the Board of Directors. iii) Operational Layer: The banks must have an operational unit in this respect which will be responsible for collecting information from concerned departments and branches, regulatory correspondences, compiling the required calculations of ICAAP reporting and the tasks assigned by the SRP team.

Supervisory Review Evaluation Process (SREP) of Bangladesh Bank includes dialogue between BB and the banks SRP team followed by findings/evaluation of the banks ICAAP. Principles of SREP include1. The review and evaluation of banks ICAAP and strategies, as well as their ability to monitor and ensure their compliance with minimum Capital Adequacy Ratio (CAR). 2. The banks are expected to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. 3. The regulatory intervention at an early stage to prevent capital from falling below the minimum levels required to support the risk profile of a particular bank and will take rapid remedial action if capital is not maintained or restored. SRP-SREP dialogue stands for an exclusive meeting between the SREP team of BB and SRP team of a bank. The objective of the dialogue is to determine the adequate level of capital needed for a bank by reviewing the ICAAP and strategies of the bank. The dialogue aims to review the process by which a bank assesses its capital adequacy, risk position, resulting capital levels, and quality of capital held. The intensity and frequency of the dialogue depends on the level of complexity and magnitude of the banks activities as well as the difference between the capital requirements assessed by the bank and BB. Terms of reference of the dialogue will be: (1) (2) Minimum capital requirement against credit, market and operational risks. Risks to be covered under SRP e.g. residual risk, concentration risk, interest rate

risk in the banking book, liquidity risk, reputation risk, strategic risk, settlement risk, appraisal of core risk management practice, environmental and climate change risk as well as other material risks, (3) (4) Adequate capital against comprehensive risks. Stress testing exercises and results.

To facilitate the overall process, the banks must submit their ICAAP reporting (reporting format and the list of supplementary documents to be submitted are given in Annexure 12 and 1) to Banking Regulation and Policy Department in both hard and soft format within May 31 of every year. The ICAAP reporting must be approved by the Board of Directors of the banks before submitting to BB. The information provided in the ICAAP reporting will verified by Inspection Departments of BB.

RESIDUAL RISK
Risk Based Capital Adequacy (RBCA) framework and other supervisory regulations on credit risk management allow banks to offset credit or counterparty risk with collateral along with the legal and financial documents. While banks use different techniques to reduce their credit risk, improper application of these techniques give rise to additional risks that may render the overall risk management less effective. Accordingly, these additional risks (e.g. documentation risk, valuation risk) are termed as Residual Risks. Apart from the capital maintained against credit risk under Pillar 1 (Minimum Capital Requirement) of RBCA, additional capital requirement is to be estimated against different aspects of residual risk related to the loans & advances portfolio of banks. In the context of Bangladesh, Bangladesh Bank (BB) has observed that Residual Risk arises mainly out of the following situations: 1. Error in Documentation: Banks collect and preserve documents against loans and advances to have legal protection in case of adverse events like default of loan. Lack of required and duly filled-up documents and erroneous or fake or forged documents will lead to the amplification of overall risk aspects of loan portfolio and the reduction in the strength of legal shield that slacks the ownership of the bank on collateral and consequently hinders the recovery of loan. 2. Error in valuation of collateral: Banks require appropriate valuation of collateral (both physical 1 and financial) and guarantee (bank guarantee and personal guarantee) against loans and advances for mitigation of default probability. The improper valuation or overvaluation of collateral can lead to overstated scenario of risk mitigation for collateralized loan. That will raise the default probability of the loan. For computing capital charge against residual risk, first considerable issue is to determine base for capital charge of a particular loan account. For determining the base for capital charge, following factors are to be adjusted with the outstanding amount of any loan account: i. ii. iii. Provision (general/specific) kept against the loan, Minimum capital already maintained under Pillar I, Value of Collateral (Qualified financial collateral)

Computation of Capital Charge against Residual Risk: Capital charge for each account of loans and advances has to be calculated separately at branch level which will be consolidated at head office level. Banks must preserve the records of capital calculation in this
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Physical Collateral refers to land, building, apartment, moving vehicles, machineries.

regard in both branches and head office which will be verified by BB inspection team. Capital charge will be the multiplied value of base for capital charge and factor weight for documentation error or valuation error. The factor weight will be at the rate of existing minimum CAR set by Bangladesh Bank from time to time. To avoid duplication in capital calculation, when capital charge is imposed for error in documentation on a loan account, no capital charge is required for error in valuation of collateral on that loan account. Yet, if any loan account contains error in valuation of collateral, prudent measures will be taken by the Bangladesh Bank depending on the gravity of the error. The accounts which are fully covered 2 by qualified financial collateral (defined and listed in Annexure-3) that are properly executed 3 in favor of bank will not be considered for capital charge. Moreover, written off loans will not be considered for capital charge in this regard. A standard documentation checklist is put into Annexure-4. If any loan account lacks any or more duly filled-up document specified in the checklist or any or more document of any loan account is found in erroneous or fake or forged shape, that loan account must be considered for capital charge. For loan accounts covered by collateral and free from documentation error, valuation of collateral will be the key consideration. If overvaluation of collateral of any loan account is identified, that account must be reckoned for capital charge. In this regard, each scheduled bank must have own valuation methodology for all types of collateral (physical and financial) which is to be approved by the Board of Directors. Banks will be required to maintain additional capital to minimize valuation error if they do not have own valuation methodology. The calculation methodology4 for capital charge against residual risk is as follows: Base for Capital Charge = Outstanding Amount - Provision (General/Specific) - Minimum Capital Requirement 5 -Value of qualified financial collateral 6. Capital Requirement against Residual Risk = Base for Capital Charge Factor weight for documentation error or valuation error. Capital requirement for each loan account will have to be summed up for determining total capital charge against residual risk that will be reported during ICAAP reporting.
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Fully covered means the value of collateral equals the outstanding amount of loan. Properly executed document refers to properly lien marked document. 4 Sample calculation demonstration is in Annexure-5. 5 MCR of any loan account= Outstanding amount Corresponding risk weight Minimum CAR set by BB 6 It is applicable when the value of qualified financial collateral is less than the outstanding amount of loan.
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CONCENTRATION RISK
Concentration risk arises when any bank invests its most or all of the assets to single or few individuals or entities or sectors or instruments. That means when any bank fails to diversify its loan and investment portfolios, concentration risk emerges. Downturn in concentrated activities and/or areas may cause huge losses to a bank relative to its capital and can threaten the banks health or ability to maintain its core operations. In the context of Pillar-2, concentration risk can be of following two types: I. Credit Concentration Risk: When the credit portfolio of a bank is concentrated within a few individuals or entities or sectors, credit concentration risk arises. II. Market Concentration Risk: When the investment portfolio of a bank is concentrated within a few instruments or any instrument of few companies or any instrument of few sectors, market concentration risk arises.

I.

Assessment of Credit Concentration Risk: To assess the credit concentration risk, 1. Sector 7 wise exposure, 2. Group 8 wise exposure (Outstanding amount more than), 3. Single borrower wise exposure (Outstanding amount more than), 4. Top borrower wise exposure (Top 10-50 borrowers will be counted)

following aspects of banks loan portfolio will be considered:

II.

Assessment of Market Concentration Risk: To assess the market concentration risk, 1. Instrument (financial securities) wise investment 9, 2. Sector 10 wise investment in listed instruments, 3. Currency wise investment of foreign exchange portfolio.

following aspects of a banks investment portfolio will be evaluated:

As there is no unanimously agreed tools to measure the concentration risk, following indicators 11 will be applied on the above stated aspects (except top borrower wise exposure) for having comparative picture: (a) Herfindahl Hirschman Index (HHI),

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List of sectors is given in Annexure-6. Definition of group is given in Annexure-7. 9 List of Instruments is provided in Annexure-8. 10 List of sectors will be same as sector classification by Dhaka Stock Exchange and is given in Annexure-9. 11 Brief literature and calculation formula of the indicators are described in Annexure-10.

(b) Simpsons Equitability Index (SEI), (c) Shannon's Index (SI), (d) Gini Coefficients (GC) Determination of Capital Charge against Concentration Risk: Assessing concentration by a single indicator may lead to erroneous alley. Thus, the results of above stated indicator for all aspects of Credit and Market Concentration Risk for any banks will be evaluated by Bangladesh Bank. As high concentration does not always necessarily imply high risk, the SREP team of Bangladesh Bank would apply prudence in evaluating the outputs of the indicators. If all of at least two of the indicators show adverse result (high concentration 12) for at least three aspects, capital charge will be applied at rate of 10% of MCR on the bank against concentration risk.

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Minimum benchmark of concentration for each indicator is shown in Annexure-10.

INTEREST RATE RISK IN THE BANKING BOOK (IRRBB)

IRRBB is the current or potential risk to the interest rate sensitive assets and liabilities of a banks balance sheet as well as the off-balance sheet items arising out of adverse or volatile movements in market 13 interest rate. Volatile movements of market interest rate adversely affect the value of interest rate sensitive assets and liabilities that consequentially results in the loss of equity value. In the context of Pillar 2, the assessment of loss of equity value due to IRRBB is vital as this is the outcome of poor asset liability management that shows the inefficiency of the risk management framework of the bank. Although currently in Bangladesh, there is no efficient and active secondary market for any type of debt instrument (interest bearing financial instrument), the evaluation of IRRBB on the basis of hypothetical scenarios is essential for the appraisal of asset-liability management and effectiveness of the risk management framework of a bank. The susceptibility of banks to IRRBB can be estimated through Simple Sensitivity Analysis and Duration Gap Analysis. The Steps for conducting Simple Sensitivity Analysis: 1. Calculate all on-balance sheet Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL), 2. Plot the RSA and RSL into different time buckets on the basis of their maturity, 3. Calculate the maturity gap by subtracting RSL from RSA (GAP= RSL-RSA), 4. Calculating the changes in the Net Interest Impact (NII) by multiplying the changes in interest rate with the Gap 14. The Steps for conducting Duration Gap Analysis: 1. Estimate the market value 15 of all on-balance sheet rate sensitive assets and liabilities of the bank/NBFI to arrive at market value of equity, 2. Calculate the durations of each class of asset and the liability of the on-balance sheet portfolio, 3. Arrive at the aggregate weighted average duration of assets and liabilities,

Market refers to the fully active efficient secondary market of interest bearing instruments like bills, bonds, debentures, commercial paper etc.
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NII = i Gap

Market value of the asset or liability shall be assessed by calculating its present value discounted at the prevailing interest rate. The outstanding balances of the assets and Liabilities should be taken along with their respective maturity or re-pricing period, whichever is earlier.

4. Calculate the duration GAP by subtracting aggregate duration of liabilities from that of assets, 5. Estimate the changes in the economic value of equity due to change in interest rates on on-balance sheet positions along with the three interest rate changes, change, 6. Calculate surplus/ (deficit) on off-balance sheet items under the interest rate sheet) in the market value of equity on the capital adequacy ratio (CAR), 7. Estimate the impact of the net change (both for on-balance sheet and off-balance

(A brief literature on Duration Gap Analysis and the concerned mathematical formulas are placed into Annexure-11) As long as any efficient, vibrant and active secondary market for any debt instrument would be not established, capital charge is not required for the negative change in the value of based on hypothetical assessment against IRRBB. When required capital charge against IRRBB will be the loss of equity value due to changes in the market interest rate. The capital charge will be calculated by netting off the capital charge for interest rate related instrument under Market Risk of Pillar-1. Yet, BB will keenly analyze the result of Simple Sensitivity Analysis and Duration Gap Analysis of banks. If any adverse output would be observed even from hypothetical scenarios, prudent measures will be taken by the Bangladesh Bank.

LIQUIDITY RISK
Liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit) or when a bank is unable to fulfill its commitments in time when payment falls due. Thus, liquidity risk can be of two types:
1. Funding liquidity risk: the risk that a firm will be unable to meet its current and future cash flow and collateral needs without affecting its daily operations or its financial condition 2. Market liquidity risk: the risk that a firm cannot easily offset or sell a position without incurring a loss because of inadequate depth in the market

In context of Pillar 2 (Supervisory Review Process) of RBCA, the necessity of proper assessment and management of liquidity risk carries pivotal role in ICAAP of banks. In the perspective of Bangladesh, identifying and monitoring the driving factors of liquidity risk is viewed from the following aspects: i. Regulatory Liquidity Indicators (RLIs): Cash Reserve Requirement (CRR), Statutory Liquidity Ratio (SLR), Medium Term Funding Ratio (MTFR), Maximum Cumulative Outflow (MCO), Advance Deposit Ratio (ADR)/Investment Deposit Ratio (IDR), Liquidity Coverage Ratio (LCR), Net Stable Funding Raito (NSFR).

ii. Banks own liquidity monitoring tools 16: Wholesale Borrowing and Funding Guidelines, Liquidity Contingency Plan, Management Action Trigger (MAT).

Computation of Capital Charge against Liquidity Risk: If any bank stands beyond or above the regulatory range in any of the RLIs stated above thorough out the reporting year, capital charge will be imposed to the bank which will be the multiplication of the MCR of the bank and the minimum CAR set by BB from to time. Besides that, any adverse scenario on RLIs of any bank observed by the SREP team of BB, required measures will be taken depending on the gravity of the adversity. Apart from that, if any bank fails to develop any of the own monitoring tools stated above, it will be penalized by capital charge which will be determined by the SREP team of BB.
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Monitoring tools suggested in Managing Core Risks In Banking: Asset-Liability Management (ALM) guidelines issued in 2003.

REPUTATION RISK
Reputation risk is the current or prospective risk to earnings and capital that arise from decline in the customer base, costly litigation due to adverse perception of the stakeholders. It can originate from the lack of compliance with industry service standards or regulation, failure to meet commitments, inefficient and poor quality customer service, lack of fair market practices, unreasonably high costs and inappropriate business conduct. In a nutshell, reputation risk arises from the failure to meet stakeholders reasonable expectation of an organizations performance and behavior Reputation risk is a subset of operational risk which can adversely affect the capital base if the driving forces of the risk turn worse. Consequentially, ICAAP of bank must include rigorous process to measure and manage the risk. In context of Bangladesh, the key driving forces of reputation risk in banks are the followings: 1. Credit Rating conducted by ECAIs: Credit rating of the bank in the reporting year mapped with the BB rating grade will be assessed. If the rating grade of any bank is below 2 of BB rating grade, bank will be required to maintain additional capital which will be the multiplication of the MCR with 20% of minimum CAR set by BB from time to time. 2. Internal fraud: Number of internal fraud and the total value in taka will be evaluated. If the case is such that total value in taka from internal fraud in a year (reporting year) cannot be recovered fully or partially by a bank, it will be required to maintain additional capital which will be equal to the unrecovered amount. 3. External fraud: Number of external fraud and the total value in taka will be evaluated. If the total value in taka from external fraud in a year (reporting year) cannot be recovered fully or partially by bank, it will be required to maintain additional capital which will be equal to the unrecovered amount. Banks have to formulate their own Fraud (both internal and external) Management Process to prevent measure, manage and treat internal fraud and external fraud properly. If any bank fails to do so, it will be penalized by capital charge which will be determined by the SREP team of BB. 4. Non-payment or delayed 17 payment of accepted bills (foreign & domestic): Number of such cases and the total value in taka will be examined. If the total value in taka from such cases in a year (reporting year) is greater than or equal to 10% of the total loans and advances, the bank will be required to maintain additional capital charge will be imposed

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Delayed means payment not disbursed within the agreed stipulated time according to the documents or existing rules.

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which is the multiplication of the MCR with 20% of minimum CAR set by BB from time to time. 5. Quality of customer service: As there is no unanimously accepted guidance to quantify customer service quality of the bank, no direct capital charge would be applied. BB expects that banks will develop their own methodology to assess the quality of customer service and conduct yearly evaluation based on that methodology. If any bank fails to do so, the SREP team of BB will apply its prudence to determine capital charge for non assurance of quality customer service.

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STRATEGIC RISK
Strategic risk means the current or prospective risk to earnings and capital arising from imperfection in business strategy formulation, inefficiencies in implementing business strategy, non-adaptability/less adaptability with the changes in the business environment and adverse business decisions. Strategic risk induces operational loss that consequentially hampers the capital base. In this context, strategic risk possesses a significant space in the ICAAP of the banks. The stirring aspects of strategic risk in respect of Pillar 2 of RBCA are as follows: 1. CAMELS rating: CAMELS rating report prepared by BB will be considered. If the rating of any bank falls below 2, banks will be required to maintain additional capital which will be the multiplication of the MCR with 10% of minimum CAR set by BB from time to time. 2. Operating expenses: Operating expenses as % of operating income will be examined. If this percentage exceeds 45% for any bank, it will required to maintain additional capital which will be the multiplication of the MCR with 10% of minimum CAR set by BB from time to time. 3. Classified loans ratio: Classified loans as % of total outstanding loans will be evaluated. If this percentage exceeds 5% for any bank, it will be required to maintain additional capital which will be the multiplication of the MCR with 10% of minimum CAR set by BB from time to time. 4. Recovery of classified loan: Classified loan recovery as % of total classified loans will be assessed. If this percentage falls below 20% for any bank, it will be required to maintain additional capital which will be the multiplication of the MCR with 10% of minimum CAR set by BB from time to time. 5. Written-off Loans: Classified loan recovery as % of total classified loans will be assessed. If this percentage falls below 20% for any bank, it will be required to maintain additional capital which will be is the multiplication of the MCR with 10% of minimum CAR set by BB from time to time. 6. Interest Waiver: Interest waiver as % of total classified loans will be evaluated. If this percentage exceeds 5% for any bank, it will be required to maintain additional capital which will be the multiplication of the MCR with 10% of minimum CAR set by BB from time to time. 7. Cost of Fund: Banks must develop their own methodology of calculating weighted average cost of fund for their business and submit that along with the SRP reporting. If any

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bank fails to do so, it will require maintaining additional capital which will be determined by the SREP team of BB. To determine the cost of fund, the bank must consider the following components: i. Cost of Deposit, ii. Operating/Administrative Cost, iii. Cost of Equity, iv. Cost of Lending. 8. Strategic Plans: Apart from the quantifiable aspects, strategic risk assessment process requires the following elements: i. Deposit growth plan, ii. Loans/advances growth plan, iii. Profit growth plan. Banks must prepare these for at least 3 year time span which will be based on sufficient justification. If any bank fails to prepare any of the above stated document, it will require maintaining additional which will be determined by the SREP team of BB. 9. Rescheduling of loans and advances: According to the BRPD Circular No. 15/2012 dated 23.09.2012, no loans can be rescheduled for more than 3 times. If any bank reschedules any of the loan accounts for more than 3 times, capital charge will imposed against that loan account by netting of provision, MCR, value of qualified financial collateral and capital charge against residual risk. Capital charge will be imposed at the rate of 10% on the residual amount after netting off.

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SETTLEMENT RISK
Settlement risk arises when an executed transaction is not settled as the standard settlement system suggests or within predetermined method. The banks pose to the risk when it fulfills its contractual obligations (payment or delivery), but the counterparty fails or defaults to do the same. Non-receiving or delayed 18 receiving of receivable bills (foreign & domestic) will be evaluated to assess settlement risk. Number of such cases and the total value in taka will be examined. If total value in taka from such cases in a year (reporting year) equals at least 10% of the total loans and advances, capital charge will be imposed which is the multiplication of the MCR with 10% of minimum CAR set by BB from time to time.

As reputation risk, strategic risk and settlement risk are part of operational risk, to avoid duplication in capital calculation, if sum of capital charge against reputation risk, strategic risk and settlement risk becomes greater than the capital charge against operational risk under Pillar 1, netting off the capital charge will be required. In this case, capital charge against operational risk will be deducted from the sum of capital charge against reputation risk, strategic risk and settlement risk to calculate additional capital requirement under Pillar 2.

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Delayed means payment not realized within the agreed stipulated time according to the documents or existing rules.

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APPRAISAL OF CORE RISK MANAGEMENT PRACTICE

Bangladesh Bank introduced core risk management system for assessing the risk management environment and practices in banks in 2003. In that respect, BB identified 6 (six) risk areas which are termed as core risks through issuing industry best practices framework. Those frameworks provided benchmark to be followed by the banks and suggested the banks to develop own assessment methodology for each core risks as well as to calculate own risk rating at least once a year. Thus, rigorous risk management framework of banks would require own assessment methodology and annual review. To ensure the stability of the business model and the soundness of the operational structural, appraisal of risk management structure of a bank is necessary. In this respect, banks must develop their own methodology for assessing each core risk separately which will be approved by Board of Directors. Based on these approved methodologies, each bank will conduct rigorous review on annual basis and derive rating for each risk. Based on these approved methodologies, BB appraisal process will evaluate the risk ratings of the banks and capital charge will be imposed for the below Satisfactory ratings. The capital charge 19 against Appraisal of Core Risk Management Methodology will be as follows: Capital charge will be applied for each risk separately, No capital charge will be imposed for risk ratings of 1 (Strong) and 2 (Satisfactory), For risk ratings of 3 (Fair), 4 (Marginal) and 5 (Unsatisfactory); capital charge will be derived by multiplying the MCR with 15% of minimum CAR set by BB from to time. If any bank fails to develop its own assessment methodology for each core risks and to conduct annual review, it will require maintaining additional capital for regulatory noncompliance. This additional capital will be in excess of the capital charge against Appraisal of Core Risk Management Methodology. Apart from that, core risk ratings of Inspection Departments of BB 20 will also be considered during the process. If any adverse deviation observed between two ratings i.e. rating of BB inspection and that of banks evaluation, supervisory discretion would be applied to determine capital charge in this context.

See example in Annexure-12. Inspection Departments of BB refers to Department of Banking Inspection-1, 2 & 3; Bangladesh Financial Intelligence Unit, Department of Foreign Exchange Inspection.
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ENVIRONMENTAL AND CLIMATE CHANGE RISK

Environmental and climate change risk refers to the uncertainty or probability of losses that originates from any adverse environmental or climate change events (natural or manmade) and/or the non-compliance of the prevailing national environmental regulations. This is a facilitating element of credit risk arising from environmental issues. These can be due to environmental impacts caused by and / or due to the prevailing environmental conditions. These increase risks as they bring an element of uncertainty or possibility of loss in the context of a financing transaction. Environmental and climate change risk can hamper the business stability of the borrowers in respect of both- i) profitability and ii) reputation. Consequentially, the extent of risk for the banks will be higher. To evaluate this risk, Sector Environmental Due Diligence (EDD) Check List specified in Guidelines on Environmental Risk Management (ERM) issued vide BRPD Circular No. 01/2011 dated 30/01/2011 will be used. For the loans under the sectors specified in the guidelines and which will have EnvRR 21 of High (H)will be considered for the capital charge against this risk. Base for capital charge will be: Outstanding Amount - Provision (General/Specific) - Minimum Capital RequirementValue of qualified financial collateral- Capital Charge against Residual Risk (if any)- Capital Charge against Strategic Risk (if any). Bank will require maintaining additional capital at the rate of 10% on the base for capital charge. If 50% or more of the loans which are eligible for EnvRR are found unrated in the reporting year, the SREP team of BB will determine the additional capital charge appropriate for the bank.

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EnvRR- Environmental Risk Raitng

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OTHER MATERIAL RISK

SRP requires that the banks internal capital allocation process should cover all risks which have not been identified earlier but are material for the institution. The institution needs to consider all risks not specified above but it can be captured in the institutions operation and can be regarded as material. Risks may be appeared which are specific to the institution and derived from its non-standard activities or clientele but fall outside the scope of specified risk definitions under Pillar 1 and 2. The institution is free to use its own terminology and methodology to identify and charging capital for other material risks, although it should be able to explain these to BB in detail, along with the related risk measurement and management procedures. The responsibility of bank is to map out other relevant risk factors to elaborate an adequate risk identification mechanism. The institution needs to examine the materiality of the identified risk and the result of the assessment. In the context of an institutions activities, all risks which affect the achievement of business objectives should be considered material. Other risks (such as Accounting Risk, Human Resources Risk, Natural Disaster Risk) are usually difficult or impossible to quantify, thus their measurement and management typically call for qualitative methods. Therefore, institutions are advised to elaborate detailed methodologies for their evaluation and management which enable the revealing of risks and help to keep them under control. BB would take a stand on this matter in during SRP-SREP dialogue on the basis of submitted documentation.

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CAPITAL PLANNING
Capital planning is a dynamic and ongoing process that, in order to be effective, is forward-looking in incorporating changes in a banks strategic focus, risk tolerance levels, business plans, operating environment, or other factors that materially affect capital adequacy. Capital planning assists the banks Board of Directors and senior management to: i) identify risks, improve their understanding of the banks overall risks, set risk

tolerance levels, and assess strategic choices in longer-term planning, ii) identify vulnerabilities such as concentrations and assess their impact on capital, iii) integrate business strategy, risk management, capital and liquidity planning decisions, including due diligence for a merger or acquisition, iv) have a forward-looking assessment of the banks capital needs, including capital needs that may arise from rapid changes in the economic and financial environment. The most effective capital planning considers both short- and longer-term capital needs and is coordinated with a banks overall strategy and planning cycles, usually with a forecast horizon of at least five years. Banks need to factor events that occur outside of the normal capital planning cycle into the capital planning process; for example, a natural disaster could have a major impact on future capital needs. The capital planning process should be tailored to the overall risk, complexity, and corporate structure of the bank. The banks range of business activities, overall risks and operating environment have a significant impact on the level of detail needed in a banks capital planning. A more complex institution with higher overall risk is expected to have a more detailed planning process than an institution with less complex operations and lower risks. While the exact content, extent, and depth of the capital planning process may vary, an effective capital planning process includes the following components: 1. 2. 3. 4. Identifying and evaluating risks Setting and assessing capital adequacy goals that relate to risk Maintaining a strategy to ensure capital adequacy and contingency planning Ensuring integrity in the internal capital planning process and capital adequacy

assessments. Banks are required to submit capital growth plan 22 of next 5 (five) years as part of their ICAAP reporting to Bangladesh Bank. The capital growth plan must be well justified and approved by the Board of Directors.

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Format for Capital Growth Plan is provided in Reporting Format

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STRESS TESTING
Impact on capital of stress testing will be detected through stress testing and it would be included in risk profile of a bank. The comparison between the regulatory capital (minimum as well as adequate) requirement and the results of stress testing of the banks would be made. Stress test is used to measure the vulnerability or exposure to the impacts of exceptional, rare but potentially occurring events like - interest rate changes, exchange rate fluctuations, changes in credit rating, events which influence liquidity, etc. The following methods can be employed for measuring the impact of the above factors in an SRP context: a) Simple sensitivity tests determine the short-term sensitivity to a single risk factor, b) Scenario analyses involve risk parameters (with low but positive probability) which change along a pre-defined scenario and examine the impact of these parameters. As a starting point the scope of the stress test may be limited to simple sensitivity analysis. Following different risk factors can be identified and used for the stress testing : a) interest rate, b) forced sale value of collateral, c) non-performing loans (NPLs), d) share prices, e) foreign exchange rate and f) liquidity Stress test shall be carried out assuming three different hypothetical scenarios: a) Minor level shocks: These represent small shocks to the risk factors. The level for different risk factors can, however, vary. b) Moderate level shocks: It envisages medium level of shocks and the level is defined in each risk factor separately. c) Major level shocks: It involves big shocks to all the risk factors and is also defined separately for each risk factor.

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ANNEXURE- 1: Supplementary Documents

(1) (2) (3) (4) (5) (6) (7) (8) (9) Internal Audit Report of bank, Capital growth plan, Valuation methodology, Assessment Procedure and evaluation report of Each Core Risk, Wholesale Borrowing and Funding Guidelines, Liquidity Contingency Plan, Management Action Trigger (MAT), Fraud Detection and Management Process, Methodology of assessing customer service and Evaluation report

(10) Methodology for calculating weighted average cost of fund, (11) Deposit growth plan, (12) Loans/advances growth plan, (13) Profit growth plan, (14) Stress Testing Report (Soft copy), (15) Copy of the Board Resolution through which the Statements on ICAAP under Supervisory Review Process have been approved.

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ANNEXURE-2: Qualified Financial Collateral

In the context of Pillar 2, following instruments/items will be treated as Qualified Financial Collateral: 1. Cash, 2. Fixed Deposit Receipt (FDR)/Mudarabah Term Deposit Receipt (MTDR), 3. Gold, 4. Treasury Bill, 5. Treasury Bond, 6. Savings Certificate, 7. Any other financial instrument which is readily encashable in full value.

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ANNEXURE-3: Documentation Checklist

Documentation should be viewed as a process of ensuring shield against risk of nonrepayment of loan comprehensively in 03 (three) dimensions: i) ii) iii) The Type of Borrower The Type of Loan or credit facilities & The Type of Security Arrangement

General Documents: In General, required papers and documents to be obtained/maintained irrespective of type of borrower, loan and security are: 1. 2. 3. 4. 5. 6. 7. 8. 9. Demand Promissory Note Letter of Authority Letter of Arrangement Letter of Disbursement Letter of Revival Personal Networth statement Copy of National ID Credit Approach in Business Pad of the Borrower Credit Application in prescribed format duly filled in

10. Photograph of the Borrower 11. Up to date CIB Report 12. Credit report of the Borrower/Supplier 13. Liability Declaration of the borrower along with an Undertaking that they have no liability with any bank or financial institution excepting as declared. 14. Undertaking stating that, they will not avail any credit facility from any other bank or financial institution without prior consent of the bank. 15. Undertaking stating that customer does not have any relationship as Director or Sponsor with the bank. 16. Undertaking stating that customer shall not sell or transfer the ownership of the business/factory/shop until bank dues are fully paid or without NOC of the bank. 17. Credit Risk Grading Score Sheet (CRGS) 18. Post-dated cheque covering the credit facility 19. Acceptance of the Borrower to the Sanction Letter 20. Proper Stamping

22

Specific Charge Documents and Papers to be obtained: A. As per type of Borrower: SL Type of Borrower 1. Individual Borrower Document Letter of Guarantee of a Third Person Personal Net-Worth Statement (PNS) of Guarantor Personal Net-Worth Statement (PNS) of the Borrower Letter of Guarantee of the Spouse of the Borrower Trade License (up to date) Personal Net-Worth Statement (PNS) of Proprietor Trade License (up to date) Partnership Deed (Registered) Letter of Guarantee of the partners Personal Net-Worth Statement (PNS) of Partners Letter of Partnership. Partnership Account Agreement. Trade License (up to date) Memorandum & Articles of Association (Certified by RJSC) List/Personal profile of the Directors Certificate of Incorporation Form XII Certified by RJSC (Particulars of Directors) Board Resolution in respect of availing loans & execution of document with Bank Letter of Guarantee of the Directors Personal Net-Worth Statement (PNS) of Directors Deed of Mortgage & Hypothecation for creation of Charge on fixed & floating assets (existing & future) with RJSC Modification of charge with RJSC through form 19. Certified copy of charge creation certificate from RJSC Undertaking stating that the borrower shall not make any amendment or alteration in Memorandum & Article of Association without prior approval of Bank. Approval of the Bank for any inclusion or exclusion of Directors in & from the company Certificate of Commencement (In case of Public Limited Company) Joint venture Agreement (In case of Joint Venture company) BOI Permission (In case of Joint venture company)

2. Proprietorship Firm 3. Partnership Firm

: :

4. Limited Company

23

B. As per type of Loan / Credit facility: SL 1. Type of Loan CC (Hypo) : : : : : : : : Document Letter of Hypothecation of stock in Trade Supplementary Letter of Hypothecation IGPA to sale Hypothecated goods Letter of Continuity Periodical Stock Report Letter of Disclaimer form the owner of rented Warehouse Insurance Policy cover note Letter of Pledge IGPA to sale Pledged goods Letter of Continuity Periodical Stock Report Letter of Disclaimer form the owner of rented Warehouse Insurance Policy cover note Letter of Continuity Insurance Policy cover note Bid Document/ Tender Notice Letter of Awarding Assignment of Bills against work order The Financial Instrument duly discharged on the Back Lien on the Financial Instrument Letter of Continuity Lien on the Scheme Deposit Letter of Continuity Term Loan Agreement Letter of Installment Letter of Undertaking Amortization Schedule Insurance Policy cover note Power of attorney for developing the property Letter of Installment Letter of Undertaking Amortization Schedule Letter of Allotment of Flat or Floor Space Tripartite Agreement among Purchaser, Developer and Bank (If under construction) Undertaking of the borrower to the effect that he will mortgage the flat/floor space favg the Bank at the moment the same is registered in his name by the seller.(If Under construction) Agreement between Land Owner & Developer Sharing Agreement between Land Owner & Developer Copy of approved plan of construction from concerned authority. PNS of the Borrower PNS of the Guarantor Letter of Guarantee of the Guarantor Letter of Guarantee of the Spouse of the Borrower

2.

CC (Pledge)

3. 4.

Overdraft (General) SOD (Work Order) SOD (FO)

5.

6. 7.

SOD (Scheme Deposit) Term Loan

8.

Home Loan for purchase of Flat or Floor Space

9.

Consumers loan/ Personal Loan

24

10. 11.

SME/Small Loan Lease Finance

12.

Hire Purchase Loan

13.

House Building Loan

14.

House Building Loan(To Developer)

: : : :

Insurance Policy cover note As per type of borrower & nature of security Lease Agreement Lease Execution Certificate Quotation / Price Offer duly accepted by borrower BRTA Registration Slip (In case of Motor Vehicle) Insurance Policy cover note Hire Purchase Agreement Quotation / Price Offer duly accepted by borrower BRTA Registration Slip (In case of Motor Vehicle) Insurance Policy cover note Letter of Installment Letter of Undertaking Amortization Schedule Approved Plan form the competent authority Power of Attorney for development of property Agreement between Land owner & Developer Sharing Agreement between Land owner & Developer Copy of approved plan of construction from concerned authority Letter of Installment Letter of Undertaking Amortization schedule Copy of Title deed of the property on which construction will be made Copy of Bia deed (previous deed in support of Title deed) Acceptance of L/C issuing Bank (duly verified) Letter of Indemnity Counter Guarantee Bid Document or the document where requirement of Guarantee stated Paripassu Sharing Agreement Facility Agreement Escrow Account Agreement Creation of Paripassu Sharing charge with RJSC Participation Letter Subordination Agreement Deed of Floating charge on the Balance for Escrow Account Accepted Mandate Letter Information Memorandum Participants Commitment Letter Letter of Trust Receipt Insurance Policy Cover note

15. 16.

IDBP Guarantee Facility Syndicated Loan

: : : :

17.

18.

LTR

25

C. As per Type of Security: SL 1. Type of Security Corporate Guarantee : Hypothecation of : Stock/Receivable s Pledge of goods : in Trade Assignment of : Bill Lien on Financial : Instrument like FDR etc. : 8. Mortgage of : Landed Property Document Corporate Guarantee of Guarantor Company on Non-Judicial Stamp Resolution of the Board of the Guarantor Company (Memorandum of the Guarantor company must permit to do so.) regarding Guarantee. Letter of Hypothecation IGPA to sale hypothecated Stock / Receivables Letter of disclaimer form the owner of Rented Warehouse Letter of Pledge IGPA to sell pledged goods Letter of disclaimer form the owner of rented Warehouse Assignment of Bill by the beneficiary through IGPA Letter of Acceptance of Assignment by the work giving authority Original Work Order The Instrument duly discharged on the back of it. Letter of Lien (1st Party Lien - if the Borrower is the owner of the Instrument, 3rd Party Lien- if the Owner of the Instrument is one other than Borrower) Letter of Authority to encash the instrument as & when needed by the Bank Confirmation of Lien (Marking of Lien) from the issuing Bank. NOC of the Company in case of Sponsors Share Confiscate Request Form (Form19-1) duly signed by the pledgor. Pledge Request form (Bye Law 11.9.3) duly signed by the holder of the share. Pledge setup Acknowledgement from Brokerage House CDBL generated copy of Pledge Setup Pari Passu Security Sharing Agreement among lenders. NOC from existing lenders if the property/assets are already under pari pasu sharing. Certificate of RJSC on creation of charge on Fixed & floating assets of the company. Form XIX for modification of charge on Fixed & floating assets with RJSC Original Title Deed of the property Certified copy of Purchase Deed along with Deed - Delivery receipt duly endorsed (In absence of original Title Deed) Registered Partition Deed among the Co-owners (if required) Mortgage Deed duly Registered along with Registration Receipt duly discharged Registered IGPA favoring Bank to sale the property Bia Deeds of the mortgaged property Certified Mutation Khatian alongwith DCR Record of Rights i.e. CS, SA, RS Parcha, Mohanagar Jorip

2.

3.

4.

5.

6.

Lien on Demated Stock/Shares

7.

Pari-Passu Security

26

parcha (if within Mohannagar Area) B.S. Khatian Affidavit to be sworn by the owner of the property before 1st class Magistrate that he has valid title in the property and not encumbered otherwise Upto date Rent Receipt Uptodate Municipal Tax Payment Receipt (if property within Municipal Area) Upto date Union Parishad Tax Payment Receipt (if property within UP) Approved Plan of Construction from concerned authority (if there is any construction upon the land) Original Lease Deed (In case of Lease hold property) Allotment Letter favoring Lessee (in case of Leasehold Property) Mutation letter favoring Lessee (in case of Leasehold Property) NOC of the competent Authority for Mortgage. NEC along with search fee paid receipt Board Resolution of the Mortgagor company duly supported by the provision of Memorandum & Article of Association (when one company Mortgage for the loan of other company) Photograph of the Mortgaged Property Location Map Survey Report from professional Surveyors Physical Visit Report by Bank Officials Lawyers opinion in respect of acceptability of the property as collateral security Lawyers satisfaction certificate regarding appropriateness of mortgage formalities

Documentation relating to Bank to Bank Loan take over process : 1. Photo copies of security documents like mortgaged property documents, Corporate Guarantee etc. 2. Lawyers Opinion regarding acceptance of the securities 3. Liability position of the borrower from the existing bank 4. Confirmation Letter of existing bank about redemption of mortgage and handing over of all original security deeds & documents directly after adjustment of loan through Pay Order. 5. Undertaking of the owner of the property that they will mortgage the property after being redeemed by existing bank.

27

ANNEXURE-4: An Illustration on Calculation of Capital Charge against Residual Risk

ABC bank has a standard corporate loan of BDT 1.00 Crore (outstanding amount) which is unrated and partially covered by properly lien marked FDR. The value of FDR is BDT 0.40 Crore. At the time of SRP evaluation, the bank finds that the loan file lacks some documents listed in the standard documentation checklist. So, this loan will be considered for capital charge.

Formula for Base for Capital Charge = Outstanding Amount - Provision (General/Specific) Minimum Capital Requirement -Value of qualified financial collateral

Here, Outstanding Amount Provision Minimum Capital Requirement (MCR) Value of qualified financial collateral = 1.00 Crore, = 1.00 Crore 1% = 0.01 Crore = 1.00 Crore 125% 10% = 0.125 Crore = 0.40 Crore

So, Base for Capital Charge = (1.00 - 0.01 - 0.125 - 0.40) Crore = 0.465 Crore

Capital Requirement against Residual Risk = Base for Capital Charge Factor weight for documentation error or valuation error = 0.465 Crore 10% = BDT 0.0465 Crore

Explanations: 1. Standard loan refers to the loans defined as standard in BRPD Circular No. 14/2012 dated September 23, 2012, 2. As the example demonstrates a standard corporate loan, general provision will be

applied at the rate of 1% as instructed in BRPD Circular No. 14/2012 dated September 23, 2012, 3. As the loan is unrated, the risk weight is 125% and existing minimum Capital

Adequacy Ratio is 10% (Ref: Guidelines on Risk Based Capital Adequacy-December 2010, Page-12; BRPD Circular No. 10/2010 dated March 10, 2010)

28

ANNEXURE-5: Sector Classification for Credit Concentration Risk

1. RMG, 2. Textile, 3. Knitting, 4. Leather, 5. Ship Building, 6. Ship Breaking, 7. Agriculture 23, 8. Agro based industries, 9. Fuel and Power, 10. Frozen Food, 11. Pharmaceuticals, 12. ICT, 13. Banks and NBFIs, 14. Insurance, 15. NGOs and MFIs, 16. Capital Market Intermediaries, 17. Real Estatea. Commercial, b. Residential. 18. Telecommunication, 19. Trading, 20. Healthcare, 21. Loans to Professional, 22. Consumer Loan, 23. Staff Loan, 24. Transportationa. Manufacturing, b. Service. 25. Others

23

Agriculture includes poultry, hatchery, dairy, fishery, forestry and all primary agricultural sub industries.

29

ANNEXURE-6: Definition of Group

Group of Companies: A number of companies being run under the umbrella of a company or a group of common promoters/directors can be termed as group of companies. Moreover, if family relation of any promoter of any company is the promoter of another company, both of the companies will be considered in the same group.

30

ANNEXURE-7: List of Instruments

1. Deposit in Banks and NBFIs, 2. Savings Certificate, 3. Treasury Bill, 4. Treasury Bond, 5. Corporate Bond, 6. Debenture, 7. Share/Stock, 8. Others.

31

ANNEXURE-8: Sector Classification for Listed Instruments

1. Bank 2. Cement 3. Ceramics Sector 4. Corporate Bond 5. Debenture 6. Engineering 7. Financial Institutions (NBFIs) 8. Food & Allied 9. Fuel & Power 10. Insurance 11. IT Sector 12. Jute 13. Miscellaneous 14. Mutual Funds 15. Paper & Printing 16. Pharmaceuticals & Chemicals 17. Services & Real Estate 18. Tannery Industries 19. Telecommunication 20. Textile 21. Travel & Leisure 22. Treasury Bond

32

ANNEXURE-9: Indicators for Assessing Concentration Risk

1. Herfindahl Hirschman Index (HHI): The HerfindahlHirschman Index is named after economists Orris C. Herfindahl and Albert O. Hirschman. The formula for quantifying HHI is as follows:

HHI = si2
i

si = Share (%) of each element across the total cluster. 1.1. Measurement: a. b. c. d. HHI 0.01 indicates homogeneous concentration, HHI > 0.01 to 0.1 indicates satisfactory concentration, HHI > 0.1 to 0.18 indicates moderate concentration, HHI > 0.18 indicates high concentration

2. Simpsons Equitability Index (SEI): Simpson s Equitability Index (SEI) is a simple mathematical measure that characterizes diversity of elements within a defined cluster. It is also termed as Simpson s Diversity Index. The formula to calculate SEI is as follows:

SEI =
Given that,

D S

Where,

D =

p
i

2 i

D = Diversity of elements across the cluster, p = Proportion of the elements across the cluster, S = Number of elements within the cluster, 2.1. Measurement: a. b. c. d. SEI = 1 indicates equitable concentration, SEI > 0.70 to < 1 indicates satisfactory concentration, SEI > 0.30 to < 0.70 indicates moderate concentration, SEI > 0 to < 0.30 indicates high concentration.

3. Shannon's Index: Shannon's Index (SI) is another popular diversity index which is also known as Shannon's diversity index, the Shannon-Wiener index, the Shannon-Weaver index and the Shannon entropy. SI applies natural logarithm to assess the diversity of the elements within a defined cluster. The formula to calculate SI is as follows:

33

SI =

H LogS

Where,

H = pi2 Log
i

Given that, H = Diversity of elements across the cluster, p = Proportion of the elements across the cluster, S = Number of elements within the cluster, 3.1. Measurement: a. b. c. d. SI = 1 indicates equitable concentration, SI > 0.60 to < 1 indicates satisfactory concentration, SI > 0.20 to < 0.60 indicates moderate concentration, SI > 0 to < 0.20 indicates high concentration.

4. Gini Coefficient (GC): The Gini coefficient (also known as the Gini index or Gini ratio) is a measure of statistical dispersion can be used to measure the concentration among the porfolios of a bank. GC measures the inequality among values of a data cluster. A GC of zero expresses perfect equality, where all values are the same and a GC of one (100 on the percentile scale) expresses maximal inequality among values. The formula to calculate GC is as follows:

G=

2 i n
i =1 i =1 n

y y
i

n +1 n

Given that, G = Gini Coefficient, i = Element serial, y = Value of element, n = Total number of elements 4.1. Measurement: a. b. c. d. G = 0 indicates equitable concentration, G > 0 to < 0 .40 indicates satisfactory concentration, G> 0.40 to < 0.80 indicates moderate concentration, G > 0.80 to 1indicates high concentration.

34

ANNEXURE-10: Duration Gap Analysis

Duration Gap analysis is one of the most traditional management techniques and has been developed by banks to analyze the mismatch or re-pricing risk in the banking booki in particular. An advantage of gap analysis is that it is a simple method, which is fairly easy to communicate to management. Gap analysis measures the arithmetic difference between the interest-sensitive assets and liabilities of the banking book in absolute terms. Gap analysis shows the cash flows, including on a cumulative basis, of a portfolio, sub portfolio or product by maturity segment based upon the contractual maturities of financial instruments or assumptions regarding them. Gap report shows the exposure that is released during a particular time period and the exposure that is outstanding during a particular time period. Using gap analysis, the earnings sensitivity of the banking book to interest rate movements can be derived. When the value of interest-sensitive liabilities exceeds that of interest-sensitive assets, including off-balance-sheet positions, there is a negative or liabilitysensitive gap. This means that if market interest rates rise, net interest income is adversely affected. Conversely, a positive or asset sensitive gap means that if market interest rates fall, net interest income is adversely affected. The vulnerability of an institution towards the adverse movements of the interest rate can be measured by using duration GAP analysis. The banks shall follow the following steps in carrying out the interest rate risk on net worth: a. Estimate the market value of all on-balance sheet rate sensitive assets and

liabilities of the bank/NBFI to arrive at market value of equity. b. Calculate the durations of each class of asset and the liability of the on-balance sheet Portfolio. c. Arrive at the aggregate weighted average duration of assets and liabilities d. Calculate the duration GAP by subtracting aggregate duration of liabilities from that of assets. e. Estimate the changes in the economic value of equity due to change in interest rates on on-balance sheet positions along with the three interest rate changes. f. Calculate surplus/ (deficit) on off-balance sheet items under the interest rate change. g. Estimate the impact of the net change (both for on-balance sheet and off-balance sheet) in the market value of equity on the capital adequacy ratio (CAR).

35

h. Market value of the asset or liability shall be assessed by calculating its present value discounted at the prevailing interest rate. i. The outstanding balances of the assets and Liabilities should be taken along with

their respective maturity or re-pricing period, whichever is earlier.

Duration is the measure of a portfolios price sensitivity to changes in interest rates. Longer the duration causes larger the changes in the price for a given change in the interest rates. Larger the coupon lower would be the duration and smaller would be the change in the price for a given change in the interest rates. Market Value (MVt) or Present Value (PVt) n CFt = (1+YTM)t t=1 Where CFt = Coupon/Cash flow at time t t = remaining periods of time to maturity , YTM = the yield to maturity of the security, and n = the number of cash flows.

Yield To Maturity (YTM):

WhereCF = Coupon/Cash flow F = Face Value P t Duration n t=1 n t=1 = Purchase Price = Years to maturity

D=

tCFt (1+YTM)t 100 =

tCFt (1+YTM)t

100

n CFt MV or PV t (1+YTM) t=1 Where CFt= cash flow at time t, t = the number of periods of time until the cash flow payment, YTM = the yield to maturity of the security generating the cash flow, and n = the number of cash flows.

36

Weighted Average Duration The duration GAP is measured by comparing the weighted average duration of assets with the weighted average duration of liabilities (leverage-adjusted).

Weighted Average Duration of Assets(DA) DA Where Wa = value of the asset a divided by the Total assets Da = duration of the asset a n = total number of assets n = WaDa a=1

Weighted Average Duration of Liability(DL) DL n = WlDl l=1

Where Wl = value of the liabilities l divided by the Total liabilities Dl= duration of the liabilities l n = total number of liabilities l Duration Gap

37

DGAP = DA MVL MVL DLMVA MVA MVA MVA MVA  

The Changes in the Market Value of Equity.

Where i = The change in the interest rate, y = The effective yield to maturity of Total Assets, TA = Total Assets

ANNEXURE11: Calculation of Capital Charge against Appraisal of Core Risk Management Methodology
Core RiskRating of Core Risk ManagementPerc entageMCRCa pital

38

60.00ICT1 0%0.00 60.00ICT10 %0.00 ICT10%0. 00 ICT10%0.00  10%0.00 0%0.00 0.00 0.00

39

ANNEXURE-12: Reporting Format for Submission of Statements on ICAAP under Supervisory Review Process

CONFIDENTIAL
UNDER evsK Kvvbx AvBb, 1991 Statements on ICAAP under Supervisory Review Process As on DATE OF SUBMISSION

NAME OF BANK

Information requested in this return is required under section 13 and section 45 of evsK Kvvbx AvBb, 1991. The return should be submitted to Bangladesh Bank within the specified date advised by Bangladesh Bank. Note. This return is to be prepared in accordance with the completion instructions issued by Bangladesh Bank.

We endorse that this return is, to the best of our knowledge and belief, accurate and proper.

.. Managing Director/ Chief Executive Officer

.. Chief Financial Officer

.. Name

..... Name

.. Chief Risk Officer

.. ... Head of SRP Team

.. Name

...... Name

Name and telephone number of responsible person(s) who may be contacted by Bangladesh Bank in case of any query. .. Name ... Telephone Number ... E-mail:

40

(NAME OF BANK)

List of SRP Team Members

Sl. no. 1 2 3 4 5 6 7 8 9 10

Name

Designation

Contact No. (Direct).

e-mail adress

*** The SRP team has been formed in accordance with the board resolution no. .......... dated ......... *** Statements on ICAAP under Supervisory Review Process have been approved through the board resolution no. .......... dated.........

41

Adequate Capital Requiremnt for year of -------

Sl. No.

Particulars of Risks

Capital Requirement (Tk. Crore)

1 2 3 1 2 3 4 5 6 7 8 9

Credit Risk Market Risk Operational Risk A) Minimum Capital Requirement under Pillar-1 Residual Risk Concentration Risk Liquidity Risk Reputation Risk Strategic Risk Settlement Risk Evaluation of Core Risk Management Environmental & Climate Change Risk Other material risks B) Additional capital required under Pillar-2 C) Total Capital Requirement (A+B) for the year 2010

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00

Capital Charge for Residual Risk

Outstanding Amount of Total Loans & Advances Outstanding Amount of Total Loans & Advances Eligible for Capital Charge Total Provision (Genral & Sepcific) MCR against Total Loans & Advances Total Value of Qualified Financial Collateral Total Base for Capital Charge Capital Requirement against Documentation Error Capital Requirement against Valuation Error Capital Requirement against Residual Risk

0.00

Capital Charge for Concentration Risk

Credit Concentration Risk

Sector wise exposure
Sector Amount P2 Log P P2 Log P Sector RMG Textile Knitting Leather Ship Building Ship Breaking Agriculture Agro based Industries #DIV/0! #NUM! #DIV/0! Loans to Professional Fuel and Power Frozen Food Pharmaceuticals ICT Banks and NBFIs #DIV/0! #NUM! #DIV/0! Others Insurance

#DIV/0! #NUM! #DIV/0! NGOs and MFIs

#DIV/0! #NUM! #DIV/0! Capital Market Intermediaries

#DIV/0! #NUM! #DIV/0! Real Estate

#DIV/0! #NUM! #DIV/0!

#DIV/0! #NUM! #DIV/0! Telecommunication

#DIV/0! #NUM! #DIV/0! Trading

#DIV/0! #NUM! #DIV/0! Healthcare

#DIV/0! #NUM! #DIV/0! Consumer Loan

#DIV/0! #NUM! #DIV/0! Staff Loan

#DIV/0! #NUM! #DIV/0! Transportation

#DIV/0! #NUM! #DIV/0!

#DIV/0! #NUM! #DIV/0! Total

Commercial Amount P Log P 2 P Log P

2

Residential #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0!

Manufacturing #DIV/0! #NUM! #DIV/0!

Service 0.00 #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0!

#DIV/0! #NUM! #DIV/0!

#DIV/0! #NUM! #DIV/0!

#DIV/0! #NUM! #DIV/0!

Number of Sectors

27 HHI SEI SI Gini Coefficient #DIV/0! #DIV/0! #DIV/0!

Group wise exposure

Cluster Tk 200 crore and above Tk 175 crore and Tk 150 crore and above but below Tk. 200 above but below Tk. 175 crore crore #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! Tk 175 crore and above but below Tk. 150 crore #DIV/0! #NUM! #DIV/0! Tk 150 crore and above but below Tk. 100 crore #DIV/0! #NUM! #DIV/0! Tk 100 crore and above but below Tk. 75 crore #DIV/0! #NUM! #DIV/0! Tk 75 crore and Tk 50 crore and above but below Tk. 50 above but below Tk. crore 25 crore #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! Tk. 25 crore and below Total

Amount 2 P Log P P2 Log P Number of Clusters

#DIV/0! #NUM! #DIV/0! 9

#DIV/0! #NUM! #DIV/0!

0.00 #DIV/0! #NUM! #DIV/0!

HHI SEI SI Gini Coefficient

#DIV/0! #DIV/0! #DIV/0!

Single borrower wise exposure

Cluster Tk 200 crore and above Tk 175 crore and Tk 150 crore and above but below Tk. 200 above but below Tk. 175 crore crore #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! Tk 175 crore and above but below Tk. 150 crore #DIV/0! #NUM! #DIV/0! Tk 150 crore and above but below Tk. 100 crore #DIV/0! #NUM! #DIV/0! Tk 100 crore and above but below Tk. 75 crore #DIV/0! #NUM! #DIV/0! Tk 75 crore and Tk 50 crore and above but below Tk. 50 above but below Tk. crore 25 crore #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! Tk. 25 crore and below Total

Amount P2 Log P 2 P Log P Number of Clusters

#DIV/0! #NUM! #DIV/0! 9

#DIV/0! #NUM! #DIV/0!

0.00 #DIV/0! #NUM! #DIV/0!

HHI SEI SI Gini Coefficient

#DIV/0! #DIV/0! #DIV/0!

Market Concentration Risk

Instrument (Financial Securities) wise Investment
Instrument Amount P2 Log P 2 P Log P Number of Instruments Deposit in Banks and NBFIs #DIV/0! #NUM! #DIV/0! 8 Savings Certificate Treasury Bill Treasury Bond Corporate Bond Debenture Shares Others Total 0.00 #DIV/0! #NUM! #DIV/0!

#DIV/0! #NUM! #DIV/0!

#DIV/0! #NUM! #DIV/0!

#DIV/0! #NUM! #DIV/0!

#DIV/0! #NUM! #DIV/0!

#DIV/0! #NUM! #DIV/0!

#DIV/0! #NUM! #DIV/0!

#DIV/0! #NUM! #DIV/0!

HHI SEI SI Gini Coefficient

#DIV/0! #DIV/0! #DIV/0!

Sector wise Investment in Listed Instruments

Sector Amount 2 P Log P 2 P Log P Sector Bank Cement Ceramics Sector Corporate Bond Debenture Engineering Financial Institutions (NBFIs) #DIV/0! #NUM! #DIV/0! Tannery Industries Food & Allied Fuel & Power Insurance IT Sector

#DIV/0! #NUM! #DIV/0! Jute

#DIV/0! #NUM! #DIV/0! Miscellaneous

#DIV/0! #NUM! #DIV/0! Mutual Funds

#DIV/0! #NUM! #DIV/0! Paper & Printing

#DIV/0! #NUM! #DIV/0! Pharmaceuticals & Chemicals

#DIV/0! #NUM! #DIV/0! Services & Real Estate

#DIV/0! #NUM! #DIV/0! Telecommunication

#DIV/0! #NUM! #DIV/0! Textile

#DIV/0! #NUM! #DIV/0! Travel & Leisure

#DIV/0! #NUM! #DIV/0! Treasury Bond Total

Amount P Log P P Log P Number of Sectors

2 2

0.00 #DIV/0! #NUM! #DIV/0! 22 #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0! #DIV/0! #NUM! #DIV/0!

HHI SEI SI Gini Coefficient

#DIV/0! #DIV/0! #DIV/0!

Currency wise Investment of Foreign Exchange

Currency Amount P2 Log P 2 P Log P Number of Instruments USD #DIV/0! #NUM! #DIV/0! 8 GBP #DIV/0! #NUM! #DIV/0! EUR #DIV/0! #NUM! #DIV/0! AUD #DIV/0! #NUM! #DIV/0! JPY #DIV/0! #NUM! #DIV/0! CAD #DIV/0! #NUM! #DIV/0! Others #DIV/0! #NUM! #DIV/0! Total 0.00 #DIV/0! #NUM! #DIV/0!

HHI SEI SI Gini Coefficient

#DIV/0! #DIV/0! #DIV/0!

Capital Requirement against Concentration Risk

Top borrower wise exposure

Cluster Amount Percentage Top 10 Borrower #DIV/0! Top 20 Borrower #DIV/0! Top 30 Borrower #DIV/0! Top 40 Borrower #DIV/0! Top 50 Borrower #DIV/0! Other #DIV/0! Total 0.00

Capital Charge for Liquidity Risk

Cash Reserve Requirement (CRR) Statutory Liquidity Requirement (SLR) Medium Term Funding Ratio (MTFR) Maximum Cumulative Outflow (MCO) Advance Deposit Ratio (ADR) Liquidity Coverage Ratio (LCR) Net Stable Funding Raito (NSFR)

Capital Requirement against Liquidity Risk

** The outputs for each of the above indicators will be the annual average.

Capital Charge for Reputation Risk

Credit Rating of the Bank Capital Charge for Credit Rating Internal Fraud Number Total amount Unrecovred amount Capital Charge External Fraud Total amount Unrecovred amount Capital Charge Non-payment or delayed payment of accepted bills (foreign & domestic) Number of evidences Total amount Capital Charge Capital market perception Category of Listing in DSE Capital Charge Capital Charge for Quality of Customer Service

Capital Requirement against Reputation Risk

0.00

Capital Charge for Strategic Risk

CAMELS Rating of the Bank Capital Charge for CAMELS Rating Operating Expenses as % of Operating income Percentage Capital Charge Classified loans and advancs as % of total loans and advances Percentage Capital Charge Classified loan recovery as % of total classified loans Percentage Capital Charge Written-off loans as % of total classified loans Percentage Capital Charge Interest waiver as % of total classified loans Percentage Capital Charge Rescheduling of loans and advances more than 3 times Number Total outstanding Provision (General & Specific) MCR Value of qualified financial collateral Capital Requirement against Residual Risk Capital Charge

Capital Requirement against Strategic Risk

0.00

Capital Charge for Settlement Risk

Non-receiving or delayed receiving of receivable bills (foreign & domestic) Number of evidences Total amount Capital Charge

Capital Requirement against Settlement Risk

0.00

Capital Charge for Evaluation of Core Risk Management

Core Risk CRM ALM ICC AML FEX ICT Total Capital Requirement Rating MCR Capital requirement 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Capital Charge for Environmental & Climate Change Risk

Outstanding Amount of Total Loans & Advances Outstanding Amount of Total Loans & Advances Eligible for Capital Charge Total Provision (Genral & Sepcific) MCR against Total Loans & Advances Total Value of Qualified Financial Collateral Capital Requirement against Residual Risk Capital Requirement against Strategic Risk Total Base for Capital Charge Capital Requirement against Environmental & Climate Change Risk

Capital Charge for Other Material Risk

Capital Growth Plan

2013 2014 2015 2016 2017

Tier-1 (Core Capital ) Fully Paid-up Capital/Capital lien with BB Statutory Reserve Non-repayable Share premium account General Reserve Retained Earnings Minority interest in Subsidiaries Non-Cumulative irredeemable Preferences shares Dividend Equalization Account Other (if any item approved by Bangladesh Bank)
Total Tier-1 Capital

Tier-2 (Supplementary Capital) General Provision (Unclassified loans + SMA + off Balance Sheet exposure) Assets Revaluation Reserves up to 50% Revaluation Reserve for Securities up to 50% Revaluation Reserve for equity instruments up to 10% All other preference shares Subordinated debt Other (if any item approved by Bangladesh Bank)
Total Tier-2 Capital

Total Regulatory Capital

Basel-II Implementation Cell, Banking Regulation and Policy Department, Bangladesh Bank www.bb.org.bd