Performance Evaluation

Chapter 1 Introduction
An Overview of Credit Administration of by Sonali Bank Ltd.
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1.1 Introduction
Credit, in finance, is a term used to denote transactions involving the transfer of money or other property on promise of repayment, usually at a fixed future date. The transferor thereby becomes a creditor, and the transfer, a debtor; hence credit and debt are simply terms describing the same operation viewed from opposite standpoints. Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately (thereby generating a debt), but instead arranges either to repay or return those resources (or other materials of equal value) at a later date. The resources provided may be financial (e.g. granting a loan), or they may consist of goods or services (e.g. consumer credit). Credit encompasses any form of deferred payment. Credit is extended by a creditor, also known as a lender, to a debtor, also known as a borrower. Credit does not necessarily require money. The credit concept can be applied in barter economies as well, based on the direct exchange of goods and services. A bank is a financial institution that serves as a financial intermediary in the economy. Banking system aggregates a high number of low values deposits to fund enterprises with a smaller number of high value loans. This intermediation through a wellfunctioning bank helps to achieve economic benefits for the depositors, the borrowers and above all the economy. The bank provides depositors higher return, lower risk and greater liquidity of their funds. The bank ensure credit worthy borrowers availability of fund and thus allow to enterprise grow and expand. The economic growth is maximized as the bank channels the countrys scarce financial resources into those opportunities with maximum return. Thus profitable enterprises receive funding, grow and expand. On the other hand loss making enterprises are refused funding and
allowed to go out of the business- thus saving the economy from drainage of resources. The bank must allocate loans effectively for achieving some board objectives of the economy and the prerequisites are to identify reliably those enterprises that can repay their loans and allows loan to those enterprises likely to yield high return and deny loan to those likely to yield low or negative returns.
An Overview of Credit Administration of by Sonali Bank Ltd. Page 2
1.2 Scope
The report title is An Overview of Credit Administration by Sonali Bank Limited. The field of my study is the analysis of Credit Administration of Sonali Bank Limited. This report is based on study carried out on Credit Administration of Sonali Bank Limited using quantitative method. The aim of the study is to find out the credit control system performed by Sonali Bank Ltd. The scope of this report is limited to the overall description of the company, its services and its financial performance analysis. The scope of the study is limited to credit management, functions, and performances. The report will mainly focus on SBLs credit offer and is control and management.
1.3 Objective
The dedications of this report relates with the internship. The internship objective is to gather real-world knowledge and undergoing the corporate working milieu. To this regard this report is envisaging the knowledge and experience mounted up from internship program. The main objective of this report is to give an overview of credit of Sonali Bank Ltd. and evaluate credit performance of the bank. In addition the study seeks to achieve the following objectives: i. ii. iii. iv. To discuss the theoretical development of credit. To give an overview of credit administration of Sonali Bank Limited. To analyze the overall credit performance of the bank. To find out the problem and to provide suggestive measures thereto.
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1.4 Methodology
As the Topic of the report was Credit Administration, so I needed to collect information regarding the credit control procedure. Data was collected from both primary and secondary sources. The details of these sources are highlighted below. Primary Sources: Customer database and historical data of delinquent customers. Interviews with the approval officers. Secondary Sources: Internal Sources SBLs Annual Report SBL Credit Policy External Sources Different books and periodicals related to the banking sector Newspapers Website information Data collecting instruments:
Interview During the investigative research, in-depth interviews were conducted with managers, approval officers and supervisor. Information was composed personally by discussing with the employees of the bank and supervisor. After gathering data, I sorted out the data according to priority and necessity.
1.5 Limitation
Sonali Bank Ltd. is Govt. owned bank as well as its scope of activities is large in scale. So most of the time all staffs of Sonali Bank Ltd. remains busy. Despite their responsibility, they could not cooperate frequently for their business. On the other hand they are not bound and have no accountability to provide all support with my demand. For this reason I faced time constraint. Actually I was not bound to do their workshop; always I am concern about report purpose thinking. Every day I got opportunity to talk on average one hour with my officer that is not adequate to make clear idea about credit risk management of banking sectors and especially for Sonali Bank Ltd. Credit is a confidential matter of the bank. So confidentiality also has imposed a huge restriction. Thats why I have got some impediments to disclose certain numerical information in this report which I have achieved about our clients.
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Chapter 2
Theoretical Development
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Theoretical Background refers to the conceptual basics upon which something is based. Thus the theoretical basis of education is at work here. This part is developed to conceptualize the theoretical background of the report. Many more theories can be explained. The followings are the core to be discussed:
Theoretical Development
Evaluating Bank Performance Credit Evaluation process Commercial and industrial Lending
Figure: 2.1
2.1. Evaluating Bank Performance

Deregulation of financial services, competition and consolidation among the banks and nonbanks, and the development of new, innovative financial services are all reasons for continued interest in evaluating bank performance. Unlike in the past, banks can no longer earn legally mandated yield spreads between the average interest rates earned on sources and uses of funds. Nor can banks continue to reap monopoly rents from bank charters that naturally endowed them with a considerable degree of market power. Instead, todays more competitive banking environment is causing banking institutions to evaluate carefully the risks and returns involved in serving the needs of the public. The groups who mare eagerly interested to evaluate the performance of the banks are as follow:
1.
Bank shareholders Bank management Regulators Depositors Business community

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2. Evaluating Body 3. 4. Figure: 2.2

5.
2.1.1 A Framework for Evaluating Bank Performance

Like any corporation, the ultimate measure of a banks performance is the value of its common shares. Maximization of shareholder wealth is a complex issue that involves both internal and external management factors. Internal factors are areas of bank management that the officers and staffs of the bank have under their immediate control. By contrast, external factors are environmental aspects of the banks market over which management has no direct control. The following figure shows the interrelationship between these two performance groups: Bank Share Price
Return/Risk Environment
Economic Condition Market demand
Political Setting Legal Setting
Internal Performance
External Performance
Bank Planning
Market share
Technology
Personal Development Bank Condition
Regulatory Compliance
Public Confidence
Figure: 2.3
2.1.1.1 Internal Performance

Bank Planning Internal Performance Technology Personal development Figure: 2.4 1. Bank planning: As a first step in planning, bank objectives should be stated. Obviously, the ultimate objective of the bank is the maximization of owners equity. Other bank objectives facilitate this result. 2. Technology: Automation of the operation can improve the internal performance of the banks. 3. Personnel development: Because commercial banks require a highly skilled labor force, it is essential that attention be focused on personnel development. Banks must provide opportunities for the continuous training of their employees in the latest banking operation and techniques and must provide means for their employees to keep up with the changes in bank regulation.
2.1.1.2. External Performance

External performance is reflected in the ability of the bank to cope successfully with customers, competitors, regulators and public.
Market Share
External Performance Regulatory Compliance Public Confidence Market share: Market share is the proportion of assets, deposits, loans, and total financial services held by a bank in its business region relative to other banks. Failure to meet market demand normally will result in a decline in market share.
Regulatory compliance: Another dimension of external performance is regulatory compliance. All banks must conform to the laws and regulations of the relevant federal and state authorities. Failure to comply will prompt form supervisory action. Public confidence: Public confidence relates to the markets perception of a banks safety and soundness. No matter how well capitalized a bank is, a loss of public confidence can cause a run on deposits and subsequent closure by regulatory authorities.
2.1.1 3 PRESENTATION OF BANK FINANCIAL STATEMENTS:

Two basic documents grasp the financial data on commercial banks. These are The Report of Condition (i.e., balance sheet) and The Report of Income (i.e., income statement) grasp the 1. The Report of Condition (i.e., balance sheet) The items are
Assets
Liabilities
Balance Sheet
Capital
Investment Securities
Figure: 2.6
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Assets: Cash assets include Vault cash Deposits at central bank Deposits at other banks Cash items in the process of collection
Cash
Figure: 2.8 All of these four categories of assets have one common feature namely, they earn no interest. Interest-bearing bank balances, are highly liquid, earnings assets. Investment securities The next major category of bank assets is investment securities. Loans-the least liquid of banking assets and the major source of risks, are the largest assets category for most banking institutions as well as the primary source of bank earnings. Lease financing agreements substitute for loans I this section of balance sheet. Loans and leases are classified into the following categories:
Loans and Lease
Loan secured by real estate Commercial and industrial loans, including loans to depository institutions Loans to individuals for households, family, and other personal
Figure: 2.9
Other real estate is any other real estate owned by the bank and usually represents properly that has been obtained through collateral foreclosures on problem loans. The final asset category is all other assets. This includes tangible assets-asses without physical substance-such as goodwill recognized in business combination. Liabilities: Bank liabilities consist primarily of the various types of deposit accounts that the institution uses to fund its lending and investing activities. Depository accounts vary in terms of interest payment, maturity, check-writing privileges, and insurability. Different types of depository accounts are-
Different types of depository accounts
Demand deposit NOW accounts Money market deposit accounts Savings deposit accounts Time deposit
Figure: 2.10 Capital: All common and preferred equity capital is the par value of all common and preferred stock outstanding, surplus or additional paid-in capital, retained earnings and capital reserve.
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Income Statement The Income Statement, which shows all major categories of revenue and expenditure, the net profit or loss for the period, and the amount of cash dividends declared, measures a companys financial performance over a period of time. The items of Income Statement are: Interest Income: Interest Expense Noninterest income Income tax expense Net income 2.1.2 ANALYZING BANKS PERFORMANCE WITH FINANCIAL RATIOS: A wide variety of financial ratios can be calculated to assess different characteristics of financial performance. Financial ratios are constructed by forming ratios of accounting data contained in the banks reports of income and condition. Major financia l ratios are: Profit ratios Risk ratios 2.1.2.1 Profit Ratio ROE: Rate of return on equity (%) = (Net income/ Total equity capital) 100 ROA: Rate of return on assets (%) = (Net income/ Total assets) 100 Other profit measures: A number of other profit measures are commonly used in banking, which provides further insight into a banks financial performance. Net interest margin (%) = And we also have to consider Tax-equivalent Yield (TEY) = i/(1-t)
2.1.2.2 Risk Ratio Provision for losses: Each bank provides an estimate of future loan losses as an expense on its income statement. This expense may be related to the volume of loans as: Provision for loss ratio (%) = Loan ratio: The loan ratio indicates the extent to which assets are devoted to loans as opposed to other assets, including cash, securities, and plant and equipment. The ratio of Loan ratio is as follow: Loan Ratio = Net Loan / Total Assets * 100 Two measures particularly important: The amount of charge-offs and the amount of nonperforming assets. The reserve would also be increased by recoveries of previous loan charge-offs, algebraically, we havea. Reserve for loan losses= Reserve for loan losses- Gross charge-offs + Provision for loan losses+ Recoveries b. Net charge-offs = Gross charge-offs + Recoveries
100
2.2 Credit Evaluation process

Banks dont want to make loans to borrowers who cant repay them. Therefore, prior to making loans, banks evaluate the credit risk of prospective borrower and their ability to repay loan. Over the years, the process of credit evaluation has changed. 2.2.1 Credit Scoring Credit scoring is the use of statistical, operational research and data mining models to determine the credit risk of prospective borrowers. Credit score models can be used for-
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Controlling risk selection Managing credit losses Evaluating new loan programs Improving loan approval processing time Ensuring that existing credit criteria are sound and consistently applied Improving profitability 2.2.2 Credit Rating Credit ratings reflect the opinions about the general creditworthiness debt and equity issuers in the capital markets. The ratings also take into account the type of security, collateral and other factors. 2.2.3 Financial Analysis Financial Statement Analysis is the conventional way that banks evaluate business loan for the following two reasons: To determine the financial condition and creditworthiness of potential and existing borrowers. To monitor the financial behavior of customers after credit has been extended
2.2.4 Ratio Analysis

2.2.4.1 Profitability Ratio:
Return on Assets (ROA) ROA is the most comprehensive measure of profitability, measuring the productivity for shareholders, bondholders and other creditors. It is calculated as follow: ROA= Return on Equity ROE measures the rate of return on the stockholders investment in the corporation. It is calculated as follow:
ROE= Net income/ Shareholders equity Net profit Margin The net profit margin on sales, computed by dividing net income by net sales, is the percent of profit earned of profit earned for each dollar of sales. Net profit margin= Liquidity ratios and measure: Liquidity Ratios' are a class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. Net working capital: Net Working Capital (which is also known as Working Capital or the initials NWC) is a measurement of the operating liquidity available for a company to use in developing and growing its business. The working capital can be calculated very simply by subtracting a companys total current liabilities from its total current assets. Net Working Capital= Current Assets -Current Liabilities. Current assets include stocks, debtors, cash & equivalents and other current assets. Current liabilities include all the short-term borrowings. Current ratio: Current ratio measures the firms ability to meet its short-term obligations. Current ratio= Currents assets/ Current liabilities
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2.2.4.2 Measuring Efficiency

Asset turnover Ratio: The asset turnover ratio is a broad measure of efficiency because it encompasses all assets. And it is calculated as follow: Asset turnover ratio= Net sales/ Total sales
2.2.4.3 Financial Leverage

Financial leverage refers to the relationship between borrowed funds, such as loans and bonds, and common stockholders equity. Companies with a high proportion of borrowed funds are said to be highly leveraged. Financial leverage increases the volatility of earnings per share and the risk of bankruptcy. Debt Ratio The debt ratio indicates the proportion of a firms total assets that is financed with the borrowed funds. It is calculated by dividing total liabilities by total assets. The easy way to compute total liabilities is to subtract common stockholders equity from total assets. Debt ratio= Total liabilities/Total assets
2.3 COMMERCIAL AND INDUSTRIAL LENDING
Commercial lending is the process of loaning money to established entities, such as a business, partnership, or limited liability corporation. In some cases, commercial lending will take the form of a revolving line of credit that the business can utilize to handle operational costs and other types of working capital needs. At other times, commercial lending will involve the extension of bank loans with a fixed or variable rate of interest and a set of terms, including duration. The process for commercial lending takes a slightly different approach than loan arrangements that focus on the securing of collateral. When institutions that offer commercial loans, the focus is often on the cash
flow of the company first, and the assets that could be used as collateral second. This is helpful for a company that is able to demonstrate a consistent flow of cash over an extended period of time, but has little in the way of physical assets such as property. If the lender evaluates the cash flow and determines that the applicant can demonstrate a reasonable ability to repay the loan according to terms, then the bank loan will likely be granted. Commercial lending institutions also tend to offer a benefit to businesses that is not found with asset-based loans. In general, the interest rate for commercial lending is lower than other types of loans or revolving business credit arrangements. This will mean that the company will pay less for the privilege of receiving financial assistance from a commercial lender. However, it should be understood that most commercial lending institutions have high standards when it comes to the stability of the company, particularly the cash flow. For this reason, a company may find it more difficult to obtain commercial lending in some cases. In addition, an unanticipated change in the cash flow can impact the structure of the revolving line of credit, if the lender determines that the customer can no longer manage the amount of commercial credit extended.
2.3.1 Reducing credit risk: Banks use variety of techniques to reduce their credit risk. Some of the techniques are listed below Avoid making high-risk loans
Collateral: The collateral serves as protection for a lender against a borrower's default that is, any borrower failing to pay the principal and interest under the terms of a loan obligation. If a borrower does default on a loan (due to insolvency or other event), that borrower forfeits (gives up) the property pledged as collateral - and the lender then becomes the owner of the collateral.
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Diversify the loan portfolio: Diversification means making loans to a variety of borrowers whose cash flows are not perfectly positively correlated, and avoiding undue concentration to a borrower, or a particular type of loans whose are related. Documentation: Documentation refers to all the documents needed to legally enforce a loan contract and to protect a banks interest. Guarantees: Guarantees do not eliminate default risk or the riskiness of a loan portfolio. In fact, they may contribute to increased risk as banks substitute financial guarantees for high credit standards or higher rates charged on risky loans. Limit the amount of credit: Limit the amount of credit extended to any single borrower, or groups of borrowers with related cash flow patterns, in order to avoid undue loan concentration. Monitor: monitor the behavior of the borrower after the loan is made to ensure compliance with the loan agreement. Some borrowers have a moral hazard problem and take excessive risks. Other borrowers may be adversely affected by external factors. Therefore, the monitoring should take into account those external factors that might impede the borrowers ability to repay the loan. Transfer of the risk: Transfer is the risk to other parties by selling securitized loans and participations, and by hedging with interest rate and credit derivatives.
2.3.2 SEVEN WAYS TO MAKE LOANS Banks solicit loans: Banks actively solicit loans in person, by mail, and on Internet, offering loans and other service provided by their respective banks. These sales efforts are typical of banks seeking new customers and those trying to cross-sell their services. Buying loans: Banks buy parts of loans, called participations, from other banks. The acquiring banks have pro-rata shares of the credit risks. Commitment: A loan commitment is an agreement between a bank and a firm to lend funds under terms that are agreed upon in writing. Loan commitments specify the
amount of the commitment fee and the amount of funds to be borrowed, but the cost of borrowing depends on the prevailing rates at the time the loan is made. Customer request loans: A customer asks for a commercial. Unfortunately, many potential borrowers are denied loans or do not get what they need because they do not know the information the banks needs in order to grant a loan request. Loan brokers: Loan brokers sell loans to banks and other lenders. Loan brokers are individuals or firms who act as agents or brokers between the borrower and the lender. Overdrafts: An overdraft occurs when a customer writes check on uncollected funds, or when there are insufficient funds in the account to cover the withdrawal. Refinancing: Borrowers refinance loans. The refinancing is at borrowers option, and occurs only when it is their advantage. Collecting loans: Making loan is the easy part of the lending process. Collecting the loans is the hard part. There are two-primary sources of repayment that lenders consider when they make loans. The primary sources of repayment are from (1) the borrowers cash flow (2) the sale of assets being financed. Collater al serves as a secondary source of repayment. 2.3.3 COLLATERAL: Collateral refers to an asset pledged against the performance of an obligation. If a borrower defaults on loan, the bank takes the collateral and sells it. Therefore, it is frequently referred to secondary sources of repayment. Characteristics of good collateral: Durability: this refers to ability of the assets to withstand wear, or to its useful life. Durable goods make better collateral than nondurables. Identification: Certain types of assets are readily identifiable because they have definite characteristics or serial numbers that cannot be removed. Marketability: In order for collateral to be value of the bank, the collateral must be marketable, that is, the asset should not take too much time to be sold.
Stability of the value: Bankers prefer collateral whose values are not like to decline during the period of the loan. Standardization: Standardization indicates the quality of the asset that is being pledged as collateral. Types of collateral: Accounts receivable Pledging Factoring Bankers acceptance Inventory Marketable securities Real property and equipment Guarantees 2.3.4 THE LENDING PROCESS: The process of lending commences before the loan is made. The board of directors prepares a loan policy and considers various risk reduction techniques. With the repayment of the loan, the process comes to an end. It can also be ended if the loan is considered to be uncollectible loan. Both the lender and borrower perform certain tasks over the term of the lending process. Evaluating a loan request: A key part of the lending process involves of the 6 Cs of credit.
Character: Banks must know their customer before they make loan, and character is the place to start. Character refers to a combination of qualities that distinguishes one person or a group from another. It includes, borrowers honesty, responsibility, integrity, and consistency, from which we can determine their willingness to repay loan.
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Capacity: This refers to the success of the borrowers business as reflected in its financial condition and ability to meet financial obligations via cash flow and earnings. Banks generally requires prospective borrower to submit their financial statements and/ or federal and state income tax statements in order to determine their creditworthiness. Capital: Capital represents the amount of equity capital that a firm has that can be liquidated for payment if all other means of collection of the debt fail. Equity capital is equal to total assets less total liabilities. Collateral: Collateral refers to assets that are pledged for security in a credit transaction. The fact that borrower may lose their collateral if they default on their loans serves as an incentive for them to perform in accordance with the loan contract. Conditions: Conditions refer to external factors that are beyond the control of a firm, but that may affect their ability to repay debts. Compliance: While the previous Cs concerned the borrower, compliance applies to the lender. Compliance with court decisions, laws, and regulations is an increasingly important part of the lending process.
2.3.5 MONITORING AND LOAN REVIEW: After the loan has been granted, the bank must monitor the loan to determine if the borrower is complying with the terms of the loan agreement. Part of the monitoring process is a loan review. This is an internal audit system for the lending functions of the bank. The loan review helps to identify potential problems with the particular loans, and weakness in loan procedures. 2.3.6 PAYOFFS OR LOSSES: One of four things can happen to an outstanding loan: (1) It can be repaid on schedule (2) It can be renewed or extended (3) The bank sell the loan to another investor, and (4) The loan can go into default and the bank may sustain losses.
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Chapter 3
Administration of Credit by Sonali Bank Limited
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A Bank Credit Administration strategy is to determine the risk appetite of the bank. Banks focus should be to maintain a credit portfolio keeping in mind the risk absorbing capacity. Thus its strategy will be invigorating loan processing steps including identifying, measuring, containing risks as well as maintaining a balance portfolio through minimizing loan concentration, encouraging loan diversification, expanding product range, streamlining security, insurance etc. as buffer against unexpected cash flow.
3.1 Single borrower/ Group limits/ large loan/ Syndication

The limit for single client/ group under one obligator will be as under: The total credit facilities by a bank to any single person or a group shall not exceed 35% of the banks total capital subject to the condition that the maximum outstanding against fund based financing facilities (funded facilities) shall not exceed 15% of the total capital. Non-funded credit facilities, e.g. letter of credit, guarantee etc. can be extended to a single large borrower. But the total amount of the funded and non-funded credit facilities shall not exceed 35% of the banks total capital. In case of export sector, single borrower limit shall be 50% of the banks total capital. But funded facilities in the form of export credit shall not exceed 15% of the total capital. Large Loan: Loan sanctioned to any individual or enterprise amounting to 10% or more of banks total capital shall be considered as large loan. In order to determine the above maximum ceiling for large loans, all non-funded credit facilities e.g. letter of credit, guarantee etc. shall also be considered to arrive 50% credit equivalent. In case of credit facilities provided against government guarantees, the aforementioned restrictions shall not apply.
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Banks shall collect the information on their borrowers from Credit Information Bureau (CIB) of Bangladesh Bank to ensure that credit facilities are not provided to defaulters. Banks shall perform Credit Risk Grading (CRG) before sanction or renewing large loans. While sanctioning or renewing of large loan, a bank shall assess borrowers overall debt repayment capacity. At least top 25 clients of the bank to be rated by an outside agency. Syndication Syndication means joint financing by more than one bank to the same clients against a common security basically, to spread the risk. It also provides a scope for an independent evaluation of risk and focused monitoring by the agent/ lead bank. In syndication financing banks also enter into an agreement that one of the lenders may act as Lead Bank, who has to co-ordinate the activities at various stages of handling the proposal i.e. appraisal, sanction, documentation, sharing of security, disbursement, inspection, follow-up, recovery etc.
3.2 Events of Default

Bank will have the right to call back the loan in the event of default under the following circumstances: Failure to repay. Breach of Covenants of the loan agreement. Bankruptcy or liquidation or insolvency event affecting the borrower. Occurrence of a material adverse change in the financial position of the borrower. Any change in GOB directives, which in opinion of the lenders would prejudice the Borrowers ability to meet the financial obligations in respect of this facility. Any security interest over any asset of the borrower becomes enforceable or any execution or distress is levied against, or any person is entitled to or does take possession of the whole or any part of the assets or undertakings.
3.3 Credit Assessment

A thorough credit and risk assessment is to be conducted prior to the granting of loans and at least annually thereafter for all facilities. The results of this assessment shall be present in a credit appraisal that originates from Relationship Manager / Accounts officer (RM) and approved by Credit risk Management. The RM should be the owner of the customer relationship and will be held responsible to ensure the accuracy of the entire credit application submitted for approval. RM shall follow the banks lending guidelines and shall conduct due diligence on new borrowers, principals and guarantors and shall conduct due diligence on new borrowers, principals and guarantors. Know your customer and money Laundering The Credit Officers or Relationship Manager must know their customers and conduct due diligence on new borrowers, principals and guarantors to ensure such parties are in fact who they represent themselves to be i.e. Know Your Customer. Banker-Customer relationship would be established through opening of accounts. Proper introduction, photographs of the account holder/signatory etc. and other required papers as per banks policy are to be obtained during opening. Physical verification of the address is to be made. A declaration regarding approximate transaction in the account is to be obtained during opening of account. Information regarding business pattern, nature of business, volume of business etc. is to be ascertained. Any suspicious transaction must be timely addressed and brought to be notice of Head Office/ Bangladesh Bank as required and appropriate corrective measures to be taken as per the direction of Bank Authority / Bangladesh. Money Laundering Policy Guidelines to be strictly followed at all stage. Credit proposal shall contain summarizing of the results of the RMs risk assessment and include, as a minimum, the following details: Amount and type of loan(s) proposed. Purpose of loans.
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Loan structure (Tenor, Covenants, Repayment schedule, Interest) Security arrangements.
In addition the following risk areas are to be addressed: Borrowers Analysis: Borrowers experience, business skill, management team and succession should be properly reviewed in credit proposal. Industry analysis: Any issues regarding the borrowers position in the industry, overall industry concerns or competitive forces shall be addressed and the strengths and weakness of the borrower relative to its competitor shall be identified. Supplier/Buyer Analysis: Any customer or supplier concentration shall be addressed, as these will have a significant impact on the future viability if the borrower. Historical Financial Analysis: An analysis of a minimum of 3 years historical financial statements of the borrower shall be presented. Projected financial performance: A projection of the borrowers future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Account Conduct: For existing borrowers, the historic performance in meeting repayment obligations (trade payments, checks, interest and principal payments etc.) should be assessed.
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Adherence to lending guidelines: Credit applications should clearly state whether or not the proposed application is in compliance with the Banks Lending Guidelines. Mitigating Factors: Mitigating factors for risks identified in the credit assessment should be identified. Loan structure: The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. Security: A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed. Name lending: Credit proposals should not be unduly influenced by an over reliance on the sponsoring principals reputation, reported independent means or their perceived willingness to inject funds into various business enterprises in case of need.
3.4 Credit risk Grading

The Credit Risk Grading is a collective definition based on the pre-specified scale and reflects the underlying credit risk for a given exposure. A credit risk grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure. Credit Risk Grading is the basic module for developing a Credit Risk Management System. Functions of Credit Risk Grading: Well managed credit risk grading systems promote bank safety and soundness by facilitating informed decision making. Grading systems measure credit risk and differentiate individual credit and group of credits by the risk they pose. This allows bank
management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns. Use of Credit Risk Grading: The credit Risk grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligator, credit portfolio of a unit, line of business, the branch or the bank as a whole. As evident, the CRG outputs would be relevant for individual credit section, wherein either a borrower or a particular exposure is rated. The other decisions would be related to pricing (credit-spread) and specific features of the credit facility. These would largely constitute obligor level analysis. Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a bank. It is also relevant for portfolio level analysis. The proposed CRG scale consists of 8 categories with short names and numbers. The following is the proposed Credit risk Grade matrix based on the total score obtained by an obligor. Table: 3.1 Credit risk grading matrix No. 1 Risk Grading Superior Short Name SUP

Score
100% cash covered Government guarantee International Bank Guarantee
2 3 4 5 6 7 8 Good Acceptable Marginal/ watch list Special mention Sub-standard Doubtful Bad & loss GD ACCPT MG/WL SM SS DF BL
85+ 75-84 65-74 55-64 45-54 35-44 <35
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Credit Risk Grading should be completed for all exposure of the bank as per Credit risk Grading Manual of the bank other than those covered under Consumer and Small Enterprise Financing Prudential Guidelines and also under The Short Term Agricultural And micro credit. The early Alert report should be completed in a timely manner by the RM and forwarded to CRM for approval to affect any downgrade. After approval, the report should be forwarded to Credit Administration, which is responsible to ensure the correct facility/ borrower Risk Grades are updated on the system. The downgrading of an account should be done immediately when adverse information is noted, and should not be postponed until the annual review process.
3.5 Approval Authorities

The authority to sanction loans shall be clearly delegated to Senior Executive by the MD & Board based on the executives knowledge and experience. Approval authority shall be delegated to individual executives and not to committees to ensure accountability in the approval process. The following guidelines should apply in the approval of loans: I. Credit approval authority shall be delegated in writing from the MD & Board (as appropriate), acknowledge by recipients and records of all delegation retained in CRM. II. III. Delegated approval authorities shall be reviewed by board/ MD from time to time. The role of credit committee shall be restricted to only review of proposal i.e. recommendations or review of banks loan portfolios. IV. All credit risk shall be authorized by executives within the authority limit delegated to them by the MD. V. All large loans shall be approved by the Board/ MD/ DMD/ Head of credit/ delegated Head office credit executive. VI. MD/DMD/ Head of Credit Risk Management must approve and monitor any cross border exposure risk. VII. Any breaches of lending authority should be reported to MD, DMD, Head if Internal Control and Head of CRM.
VIII. IX.
Authority will be delegated to each individual in writing by the MD The MD will have the right to exercise lending authority delegated to other executives having authority lower than him.
X.
Any credit proposal that does not comply with lending guidelines, regardless of amount should be identified is Credit Application and referred to Head Office with justification for approval
Table: 3.2 Periodical statements to be submitted to Senior Management, Board: Monthly: Sl. No. Statement Submitted by 1. Summary of new facility, renewal and enhancement approved and declined. 2. Variance analysis of foreign exchange business CRM Division MD CRM Division To MD
Quarterly: 1. 2. Statement of top 20 defaulters Summary of classification loans and advances 3. 4. MIS on risk grading Summary of sectorial loan portfolio position CRM Division CRM Division MD MD RAM Division RAM Division Board Board
3.6 Approval process

The responsibility for preparing the credit proposal would rest with the RM (Branch) within the Corporate & Marketing Department. Credit proposal shall be recommended for approval by the RM to head of Corporate and Marketing who in turn will recommend to Head of Credit.
In approval process the Bank segregates its relationship management/ marketing from approving authority. Credit application received by the relationship manager (Branch) will be assessed and credit proposals prepared by the Relationship Managers Team. If the proposed facilities are found viable and complying all terms of credit guidelines by the Relationship managers team, the proposal will be sent to the Head of Corporate & Marketing at Head Office along with recommendation within 3 working days. The proposal on receipt by the Head of corporate & marketing will be forwarded to the Head of Credit Risk management who in turn distribute to the respective credit manager at Head Office to scrutinize, analyze and prepare the proposal with due diligence along with their observation and place it to the head of Credit Risk Management. All credit application shall be disposed by CRM Division within 7 working days. Credit Risk Management Division have been divided into separate departments for handling Medium & large, Project Loan, Lease Finance, Garments, SME, Consumer Finance. Corporate & Marketing division and Credit Risk Management Division shall separately maintain credit files. The recommending or approving Executives shall be responsible and accountable for their recommendations or approval. All proposals where facilities are up to 3% of the banks capital shall be approved at the CRM level, facilities up to 7% and 10% of capital shall be approved by Deputy Managing Director and Managing Director respectively, proposals in excess of 10% of capital to be approved by the Board. I. Proposal forwarded by RM (Branch Manager) to Head of Corporate & Marketing in duplicate. Head of Corporate will in turn recommend the proposal to the Head of Credit Risk Management. HOC/CRM Executives advise the decision as per delegated authority to RM (Branch manager). HOC supports & forwards to Deputy Managing Director. DMD advise the decision as per delegated authority to HOC. DMD support and forwards to MD. MD advises the decision to DMD/Head of Credit. MD presents the proposal to Board. Board advises the decision to MD. of the delegated authority HOC to advise the decision
II. III. IV. V. VI. VII. VIII.
**Regardless
(approval/decline) to RM (Branch Manager) and HOCB.
Page 32
Figure: 3.1 Approval Process

Relationship Manager (RM) Assessment of credit application and preparing credit proposal
Recommended to
Head of Corporate (Marketing)
Forwarded to
Head of Credit/CRM Team Approved/Declined as per delegation
Beyond capacity recommended to
Deputy Managing Director Approved/Declined as per delegation
Credit Committee
Managing Director Approved/Declined as per delegation
Board of Directors Approved/Declined
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3.7 Credit Administration

The credit administration function is critical in ensuring that proper documentation and approvals are in place prior to disburse of loan facilities. For this reason, it is essential that the functions of Credit Administration be strictly segregated from relationship Management/ Marketing in order to avoid the possibility of controls being compromised or issues not being highlighted at the appropriate level.
3.8 Disbursement
Security documents are prepared in accordance with approval terms and are legally enforceable. Banks standard loan facility documentations that have been reviewed by legal counsel should be used in all cases. Exception should be referred to legal counsel for advice based on authorization from an appropriate executive in CRM. Disbursements under loan facilities are only be made when all security documentation is in place. CIB report should reflect/ include the name of all the lenders with facility, limit & outstanding. All formalities regarding large loans & loans to Directors should be guided by Bangladesh bank circulars & related section of Banking Companies Act. All credit Approval terms have been met. Before disbursement of loan facilities, the Relationship and credit Administration at Branch shall jointly sign documentation check list. Credit Administration department under Credit Risk Management division at Head Office shall issue Activation/Disbursement authority on being satisfied about security compliance certificate issued by the Branch.
3.9 Custodial duties

a. Storage of security documents shall be maintained at the branch jointly by two authorized officer i.e. one from Marketing and one from credit Administration Department. b. Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets as per sanctioned terms.
c. Security documentation is held under strict control, preferably in locked fireproof storage. d. Credit Administration Department of the Branch shall independently control and match the value of Cash Collateral which is lined to the Bank. e. Business units and Head Office Credit Division shall kept credit files under proper control and use shall be restricted to authorized individuals.
3.10 Compliance Requirement

All required Bangladesh Bank returns are submitted in the correct format in a timely manner. Bangladesh Bank circulars/ regulations are maintained centrally and advised to all relevant departments/ branches to ensure compliance. Department/Branches shall also maintain the circulars/regulations and advise down the line to ensure compliance.
3.11 Credit Monitoring

To minimize credit losses, monitoring procedures and systems shall be in place that provides an early indication of the deteriorating financial health of a borrower. At a minimum, systems shall be in place to report the following exceptions to relevant executives in CRM and RM teams: Past due principal or interest payments, past due trade bills, account excesses and breach of loan covenants. Loan terms and conditions are monitored, financial statements are received on a regular basis and any covenant breaches or exceptions are referred to CRM and the RM team for timely follow-up. Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit. All borrower relationships/loan facilities are reviewed and approved through the submission of a credit proposal at least annually.
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Computer system must be able to produce the above information for central/ head office as well as local review. Where automated systems are not available, a manual system should have the capacity to produce accurate exception reports. Exception report should be submitted to Head Office at least on half-yearly basis. Credit Administration Department will regularly keep follow-up of the accounts and corrective action should be taken in a timely manner before the account deteriorates further.
3.12 Credit Recovery

The recovery division at Head Office would directly manage accounts with sustained deterioration (a risk rating of substandard (6) or worse). Accounts graded 4-5 shall be transferred to the Recovery division for efficient exit based on recommendation of CRM and Corporate Banking. Whenever an account is handed over from Relationship management to Recovery Division, a handed over/Downgraded Checklist shall be completed. The Recovery Divisions primary functions are: Determine Account Action Plan/ Recovery strategy. Pursue all options to maximize recovery, including placing customers into relationship or liquidation as appropriate. Ensure adequate and timely loan loss provisions are made based on actual and expected losses. Regular review of grade 6 or worse accounts. The management of problem loans shall be a dynamic process and the associated strategy together with the adequacy of provisions must be regularly reviewed. A process shall be established to share the lessons learned from the experience of credit losses in order to update the lending guidelines.
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Chapter 4
Empirical Analysis
Page 37
4.1 Sector Financed

Loans and Advances The bank has continued its lending operations in productive and priority sectors covering agriculture, industry, SME, trade and commerce. Total loans and advances of the bank stood at TK. 28609.81 Crore as on December 31, 2010. The bank has extended credit to Govt. public and private sectors tom the tune of TK. 381.53 Crore, 5472.99 Crore, and TK. 22755.29 Crore respectively. The percentage of total loans and advances against total deposit (AD ratio) is 59.84%. Necessary steps have been taken to increase the advance-deposit ratio gradually at a satisfactory level. New Loan and Advance / Investment Products To accelerate the rate of credit growth, some new loan / investment products namely a. Small and Medium Enterprise Loan (SME) b. Special Small Loan c. Rural Small Financing Loan d. Rural Small Business Loan e. Poverty Alleviation Assistance Program f. Probashi Karmasangsthan Rin Prokalpo g. Education Loan h. Jago Nari Grmeen Rin i. Household Durable Scheme under Bai-Muazzal Mode etc. have introduced.
The break-up of Banks outstanding loans and advances as on December 31, 2010 is shown in the following tables: Tables: 4.1 No. 1.
Nature of Loans and Advances Agricultural/Rural Credit As on As on Change 31.12.2010 31.12.2009 % of Change % of Total Advances
2521.76
2298.06
223.7
9.73
8.81 Page 38
2. 3. 4. 5. 6.
Micro Credit Industrial Credit Agro-based Industrial Credit General Advances Industrial Trade
865.06 6372.34 2891.53 6725.02 9234.1 28609.81
826.18 5718.71 2701.24 5505.84 8352.22 25402.25
38.88 653.63 190.29 1219.18 881.88 3207.56
4.71 11.43 7.04 22.14 10.56 12.63
3.02 22.27 10.11 23.51 32.28 100
Total
30000 20000 As on 31.12.2010 10000 0 As on 31.12.2009 Change % of Change % of Total Advances
Figure: 4.1 General Credit Sonali Bank Limited plays a vital role in the national economy by extending various credit facilities to both public and private sector organizations and entities. In the year 2010, the bank disbursed loans amounting to TK. 2153.36 Crore under General Advances out of which TK. 364.00 Crore was in the public sector and TK. 1789.36 Crore in the private sector. On the other hand, the bank has also recovered classified loans amounting to TK. 200.75 Crore, during the period from January 01, 2010 to December 31, 2010. Agricultural/ Rural Credit With a view to augmenting agricultural output, create employment opportunities and generate income of the rural people, Sonali Bank Limited intensified its efforts to extend
credit facilities to all sections of rural population under various rural credit schemes, programs and projects pertaining to agricultural and off-farming activities. During FY2009-2010 TK. 443.94 Crore of new Agricultural Loan has been disbursed. Total outstanding of loan is TK. 2521.76 Crore as on December 31, 2010. Micro Credit Micro Credit has now been accepted and recognized worldwide as an effective tool for poverty alleviation, self-employment generation and rural economic development. As such, the bank has been striving its best to provide funding support to the sector. At present, 32 projects / programs are being run by the bank for poverty alleviation. Among all other programs Bank-NGO Linkage wholesale credit program, Fruit, Harbal, Medicinal and Nursery development credit scheme, Loan program for disabled persons, Swanirvor Bangladesh, different types of credit through BRDB-UCCA(Crop, Irrigation and Poverty Alleviation), ADB financed Rural Livelihood Project (RLP) in 152 upazilas, Daridro Bimochone Shahayata Rin Karmasuchi, Rural Small Business and Small Farming Loan Scheme, BARD (Comilla)- Soanali Bank and RDA (Bogra) Sonali Bank Functional Research Project etc. were introduced by the bank to channelize the financial resources for poverty alleviation and socio-economic development of the country. It may be mentioned here that Credit for Urban Women Micro Enterprise Development (CUMED) project without collateral upto TK. 5.00 lacs are operating in 92 branches of the country including all principal branches of the division and district headquarters, 26 selected are in Dhaka city, 2 branches in Chittagong city, 3 branches in Moulvibazar. Besides this, Micro Entrepreneur Development credit Program Unmesh is also operating in Moulvibazar district. Now this credit program has been extended all over the country. Moreover, to make the rural women self-relient the bank has introduced a new Loan program in the Year 2010 named Jago Nari Grameen Rin through 250 rural branches all over the country with a provision of collateral free loan upto TK. 25 thousand.
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Agro-based Industrial Finance Economic Development of Bangladesh mainly depends on agriculture. A large number of people of the country are directly involved in agriculture. As the largest commercial bank of the country, Sonali Bank Limited is playing an important role in industrial development of the country through establishment of Agro-based industries by extending credit facilities under Agro-based Industries Credit Scheme. Objectives of the Scheme Setting up of Agro-based industries Creation of employment opportunity Earn and retain foreign exchange for the country by establishing export-oriented and import-substitute industries The Main Sectors Under the Agro-based Project Financing Scheme Are Mentioned Below Jute mills and jute goods Frozen fish and shrimp processing industries Particle board mills Mixed / balanced fertilizer industries Poultry, cattle and fish feed industries Rice, suji and flour mills Specialized cold storage Salt processing industries Milk processing industrial items and Other 27 agro-based industrial items Activities and Successes For improvement of socio-economic condition, project loan is extended on simple terms and conditions through 107 designated branches. Working Capital Loans in these sectors are disbursed by all the branches throughout the country.
Page 41
It may be mentioned here that a large amount of loan has been disbursed to 8 (eight) Govt. Jute Mills under BJMC, 9 (nine) Non-Govt. Jute Mills and 26 (twenty six) Jute spinning Mills. An amount of TK. 1449.25 Crore is lying outstanding as on December 31, 2010 against the above mills. In addition, a large amount has been disbursed to the Frozen Fish and Shrimp Processing industries, which are the most significant ones since they earn huge amount of foreign currency. The current outstanding loan in this sector is TK. 416.20 Crore. Besides this, food and allied industries like Atta, Maida, Suji, Rice Mills are also most important significant areas in the agro-based project. In these sectors TK. 252.97 Crore is outstanding as on december31, 2010. During 2010 TK. 310.14 Crore of new loan has been disbursed in different sectors under agro-based industries and the total outstanding of loan stood at TK. 2891.53 Crore. Foreign Trade Financing The total foreign trade of the bank for the year 2010 stood at TK. 35429.07 Crore. Import and Export The total import and export of the bank for the year 2010 stood at TK. 16404.29 Crore and TK. 7414.29 Crore as against TK. 9686.42 Crore and TK. 6444.20 Crore in 2009. The Comparative Position of Foreign Exchange Business for the Year 2009 and 2010 Tables: 4.2 Sl. No. 01. 02. 03. 04. Particulars Total Import Total Export Inward Remittance (including WES) Outward Remittance (including WES) Total 2010 16404.29 7414.29 10437.82 1172.67 35429.07 (TK. in Crore) 2009 9686.42 6444.20 10260.86 927.05 27318.53
Page 42
Total Import Total Export Inward Remittance (including WES) Outward Remittance (including WES)
Figure: 4.2
Industrial Finance Sonali Bank Limited has been playing a significant role in implementing the Govt. policy of rapid industrialization. In this respect Sonali Bank Limited has sanctioned a total tern loan and working capital loan of TK. 1417.79 Crore to establish new industries in the year 2010 through its 120 designated branches. Sanction and disbursement of loan to industrial sector under industrial credit scheme and lease financing scheme are also continuing. Under consortium financing, Sonali Bank Limited so far sanctioned term loan of TK. 433.08 Crore to 20 industrial units as lead arranger and on the other side sanctioned TK. 962.06 Crore to 27 units as a participant under consortium arrangement lead by other banks and financial institutions. Bank has thus created opportunities for employment of 20500 persons in 2010 by sanctioning loans and thus substantially contributing to the growth of GDP. Overall Industrial Credit Position of the Bank as on December 31, 2010 Tables: 4.3 Sl. No. 01. Nature Loan Large of No. Units & 741 of Amount Sanctioned 4729.06 Amount Recovered 1650.78 (TK. in Crore) Outstanding 3040.48
Page 43
02. 03.
Medium Small & 21170 Cottage W.C to 1386 industries Total 23297
1005.91 2587.85 8322.82
727.22 1581.39 3959.39
172.82 3159.04 6372.34
25000 20000 15000 10000 5000 0 Total W.C to industries Small & Cottage Large & Medium Large & Medium Small & Cottage W.C to industries Total
Figure: 4.3
4.2 Recovery of Loan

Classified Loan Recovery The amount of classified loan as on December 31, 2010 stood at TK. 6831.49 Crore, which represents 23.88% of the banks total loan. This was TK. 6983.35 Crore or 27.49% of the banks total loan as on December 31, 3009. The amount of classified and write off loan recovered in 2010 are TK. 1348.20 and 128.85 Crore respectively. In 2010 the bank was able to make a breakthrough in recovering non-performing assets (NPA) by strengthening recovery measures, outside court settlement, interest exemption facilities and rescheduling in the light of Bangladesh Bank policies and Ministry of Finance guidelines.
Page 44
Litigation Status The Comparative Position of Litigation status of 2010 and 2009 is shown below Table: 4.4 Name of Court Upto 2010 Upto 2009 (TK. in Crore)
Disposal/Recovery in 2010 Number Amount Number Amount Number Amount Artharin Adalat 4670 3660.12 5165 3615.37 839 514.56 Certificate Adalat 23758 57.47 24063 61.75 3444 21.34 Dewlia Adalat 09 203.43 09 203.44 Other Adlat 171 15.18 121 11.05 36 0.49 Total 28308 3936.20 29358 38358 4319 536.39 Disposal of suit cases and recovery their against increased in the year 2010 by 442 and TK. 363.20 Crore respectively as compared to there in 2009.
40000 30000 20000 10000 0
Upto 2009 Number Upto 2009 Amount
Figure: 4.4
30000 20000 10000 0
Upto 2010 Number
Upto 2010 Number Upto 2010 Amount
Figure: 4.5
4.3 Ratio Analysis 4.3.1. Profitability Ratios:

Profitability is the ultimate test of the effectiveness of management. Profitability ratios are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to previous period is indicative that the company is doing well. Profitability can be measured in terms of return on asset, return on equity, net profit margin, EPS etc.
(a) Return on Asset

Return on asset is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. ROA is calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Table: 4.5 Year Net Income Total Asset ROA 2005 208038 2006 2007 2008 2311114 (Amount in Thousand) 2009 2737610 2010 3490198
(36275634) 973580
337687117 352893818 1.17% 0.85%
461964233 492946148 649267923 550857429 0.96% 0..33% 0.43% 0.32%
Page 46
ROA
1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% 2005 2006 2007 2008 2009 2010 Series1
Figure: 4.6 In 2009 and 2010 return on asset of the bank was well. Efficient management ability of the bank increases its ROA to 0.32% in 2010. Due to the economic recession especially in USA and Europe, the export business faces horrible threats which also influence banks income.
(b)Return on Equity
Return on equity means the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have
invested. ROE is expressed as a percentage and calculated as: Return on equity = Net income / Common shareholders equity
Page 47
Table: 4.6 Year Net Income 2005 208038 2006 (36275634) 2007 973580 2008 2311114
(Amount in Thousand) 2009 2737610 2010 3490198
Sharehold 6,306,200, (28,444,370, ers 000 219) Equity ROE

3% 128%
21,741,728 ,899
24,417,714 ,137
37,261,981 ,202
45,773,859 ,298
4%
12%
29%
29%
140% 120% 100% 80% 60% 40% 20% 0% 2005 2006 2007 2008 2009 2010 Series1
Figure: 4.7 The return on equity of Sonali Bank Ltd. has an increasing trend. In 2009 ROE was 30% which is the reason of large increase in net income and also shareholders equity. In 2010 ROE stands for 39 %which indicates well performance.
(c) Net Interest margin

Net interest margin is a ratio of profitability calculated as total interest income less total interest expense divided by total interest income. A higher net interest margin indicates a more profitable bank that has better control over its costs.
Table: 4.7 Year

Total Interest Income Total Interest Expens e
(Amount in Taka) 2008 2009 2010
2005
2006
2007
1196845563 5
1596287388 8
896208934 1
1310186177 4
1768310822 3
2284140872 9
1141307505 3
1503941098 4
662539079 9
1396592907 0
1580002693 9
1913179589 5
Net Interes t Margin

5% 6% 26% -7% 11% 16%
30% 25% 20% 15% 10% 5% 0% 2005 -5% -10% 2006 2007 2008 2009 2010 Series1
Figure: 4.8 Net profit margin of the bank in 2009 and 2010 was well because of higher interest income. In 2009 net profit margin was 145% due to the large increase in net income mainly in operating income and it followed an increase in the succeeding year with the rate 94% ( in 2010).
Page 49
4.3.2 Liquidity ratios

A liquidity ratio measures the banks ability to pay off its short-terms debts obligations. Generally, the higher the ratio, the more liquid the bank is considered to be.
a) Current Ratio
Current ratio is a liquidity ratio that measures the banks ability to pay short term obligation. Current ratio is calculated by dividing current asset by current liabilities. Generally, a current ratio 2.0 is occasionally cited as acceptable. Table: 4.8 Year Current Assets Current Liabilities Current Ratio
1.409437845 1.356736171 2.147599119 2.13343234 2.261750084 2.270410904 2.38934E+11 2.59377E+11 2.10526E+11 2.26408E+11 2.39111E+11 2.81303E+11
2005
2006
2007
2008
2009
2010
6.38674E+11
3.36762E+11 3.51907E+11 4.52125E+11 4.83025E+11 5.4081E+11
2.5 2 1.5 Series1 1 0.5 0 2005 2006 2007 2008 2009 2010 Series2
Figure: 4.9
Page 50
Over the period of time the bank has been holding enough Current Assets to meet up the Current Liabilities. With the passage of time it has reached to the benchmark. But in recent time it has exceeded the standard which may increase the opportunity cost. However it is good for the Bank.
Loans to deposit ratio

A loan to deposit is a commonly used statistic for assessing a bank's liquidity by dividing the banks total loans by its total deposits. This number, also known as the LTD ratio, is expressed as a percentage. If the ratio is too high, it means that banks might not have enough liquidity to cover any unforeseen fund requirements; if the ratio is too low, banks may not be earning as much as they could be. Table: 4.9
Year Loans & Advances Deposits Credit Deposit Ratio 277079060 81.93% 302303031 79.73% 328997209 62.72% 364385971 63.44% 406151569 62.54% 478134085 59.84%
(Amount in Thousand) 2008

231166579
2005
227009620
2006
241029268
2007
206347592
2009
254022505
2010
286098070
90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2005 2006 2007 2008 2009 2010 Series1
Figure: 4.10
Over the time this ratio is decreasing which indicates the bank is not making large portion of its loan from deposits. In the last two years it has been decreased very sharply because of the rapid increase in Deposits.
4.3.3 Leverage ratio

Leverage ratio used to calculate the financial leverage of a bank to get an idea of the company's methods of financing or to measure its ability to meet financial obligations. Leverage ratio includes debt ratio, interest coverage ratio etc.
Debt Ratio
The debt ratio measures the proportion of total assets financed by the firms creditors. The higher this ratio, the greater the amount of other peoples money being used to generate profits. The ratio is calculated by dividing total liabilities by total asset. Table: 4.10
Year
(Amount in Thousand) 2008 2009 2010
2005
2006
2007
Total Liabilities Total Assets Debt Ratio
331380917 381338188 440222504 468528434 513595447 603494063
337687117 352893818 461964233 492946148 550857429 649267923
98%
108%
95%
95%
93%
93%
Page 52
110% 105% 100% 95% 90% 85% 2005 2006 2007 2008 2009 Series1
Figure: 4.11 Sonali Bank Ltd.s debt ratio was 108% in 2006 which means a large portion of banks total asset was financed by borrowings and deposits. Borrow from other banks, increase in deposit- increase the debt ratio and repayment of loans decrease the debt ratio from 2007 to 2010. Higher debt ratio indicates greater risk which associated with the banks operations.
a) Interest coverage ratio

Interest Coverage ratio is a tool for measuring a bank's ability to meet its debt obligations. When the interest coverage ratio is smaller than 1, the company is not generating enough cash from its operations EBIT to meet its interest obligations. The Company would then have to either use cash on hand to make up the difference or borrow funds. Typically, it is a warning sign when interest coverage falls below 2.5. Table: 4.11
Year EBIT
(Amount in Thousand) 2008 23111145 02

139659290 70
2005
2006
2007 97358012 0
9
2009 16203585 04
158000269 39
2010 22442672 15
191317958 95
208038723 (36275634 028)
Interest expense
1141307505 1503941098 662539079 3 4
Page 53
Interest coverag e Ratio 0.01822810 4 2.41203822 0.14694682 2 0.16548233 1 0.10255416 1 0.11730562 2
0.5 0 2005 -0.5 -1 Series1 -1.5 -2 -2.5 -3 2006 2007 2008 2009 2010
Figure: 4.12 Interest coverage ratio of Sonali Bank Ltd. remains below 2.5 which indicates that banks cash generation is not sufficient for debt obligation. Although in 2010 interest coverage ratio was 0.11, this indicates that banks management focuses on cash generating activities to meet up their obligations.
4.3.4 Loan Ratio

The loan ratio indicates the extent to which assets are devoted to loans as opposed to other assets including cash, securities and plant and equipment. Loan ratio is calculated by dividing net loans by total assets. Table: 4.12
Year
(Amount in Thousand) 2008

231166579
2005
227009620
2006
241029268
2007
206347592
2009
254022505
2010
286098070
Net Loan
Page 54
Total Assets Loan Ratio
337687117 352893818 461964233 492946148 550857429 649267923
67%
68%
45%
47%
46%
44%
80% 70% 60% 50% 40% 30% 20% 10% 0% 2005 2006 2007 2008 2009 2010 Series1
Figure: 4.13 Loan ratio of Sonali Bank Ltd.s is remaining 44% to 68% in last 6 years. Loan ratio decreases to 44% in 2010. Higher loan ratio indicates that large portion of the bank assets is devoted to loans.
4.3.5 Classified loans to total loans

Classified loans mean any bank loan that is in danger of default. Classified loans have unpaid interest and principal outstanding, and it is unclear whether the bank will be able to recoup the loan proceeds from the borrower. Lower classified loans to total loans are good for the bank.
Page 55
Table: 4.13
Year
2005
22.52%
2006
24.44%
2007
44.59%
2008
31.44%
2009
27.49%
2010
23.88%
Classified loans to total loans
50.00% 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2005 2006 2007 2008 2009 2010 Series1
Figure: 4.14 Classified loans of the Sonali Bank Ltd. reduced over the period starting from 2007. Decrease in default of interest and principal payment by borrowers indicate the banks efficient credit risk grading, credit administration, credit monitoring and credit recovery etc.
4.3.6 Provision for loss ratio

Loan loss provision is a non-cash expense for banks to account for future losses on loan defaults. Banks assume that a certain percentage of loans will default or become slow-paying. Banks enter a percentage as an expense when calculating their pre-tax incomes. This guarantees a bank's solvency and capitalization if and when the defaults occur.
Tables: 4.14
Year
2005 2778036
2006 30719558
2007 48031159
2008 44597434
2009 43380164
2010 45481659
Loan Loss Provision
Total Loan 227009620 & Advances Provision for Loss Ratio

1%
241029268
206347592
231166579
254022505
286098070
13%
23%
19%
17%
16%
25%
20%
15% Series1 10%
5%
0% 2005 2006 2007 2008 2009 2010
Figure: 4.15
Provision for loss ratio in 2010 decreased compared to from 2007 to 2009 although it has increased in last few years compared to 2005 and 2006. This indicates that bank has made some risky loans for which they are increasing the provision. Large concentration on industrial loans might be the reason for that.
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4.3.6 Trend Analysis

Trend Analysis is the practice of collecting information and attempting to spot a pattern, or trend, in the information. In some fields of study, the term "trend analysis" has more formally-defined meanings. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. Trend analysis is helpful because moving with trends, and not against them, will lead to profit for an investor. Here for trend analysis the following variables have been considered: a) Loan & Advances b) Unclassified Loan i) Standard loan ii) Special Mention Account (SMA) c) Classified Loan i) Substandard ii) Doubtful iii) Bad/Loss Trend Analysis with Loan & Advances
Table: 4.15
Year 2005 2006 2007 2008 2009 2010
(Amount in Thousand) Loan & Advances
227009620 241029268 206347592 231166579 254022505 286098070
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Trend Analysis
350000000 300000000 Loan & Advances 250000000 200000000 150000000 100000000 50000000 0 2004 2005 2006 2007 Year 2008 2009 2010 2011 y = 1E+07x - 2E+10 R = 0.4987 Series1 Series2 Linear (Series1) Linear (Series2)
Figure: 4.16
From the above analysis it can be conferred that time can explain 49% in the change of Loan & Advances. With the passage of time Loan & Advances goes up by the amount of BDT 1E+7.
Trend Analysis with Substandard Loan Tables: 4.16 Year 2005 2006 2007 2008 2009 2010 (Amount in Thousand) Substandard Loan 2660352 5298737 3988971 4430443 4246674 4587987
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Trend Analysis
6000000 Sub-standard Loan 5000000 4000000 3000000 2000000 1000000 0 2004 2006 2008 Year 2010 2012 y = 197813x - 4E+08 R = 0.1789 Series1 Series2 Linear (Series1) Linear (Series2)
Figure: 4.17
From the equation drawn above it can be concluded that time variable can explain the change in Sub-standard Loan amount only 17.89%. With the proceed of financial year the Substandard Loan will go up by the amount of BDT 197813. Trend Analysis with Doubtful Loan Table: 4.17 Year 2005 2006 2007 2008 2009 2010 (Amount in Thousand) Doubtful Loan 2203957 3069235 24849905 7092070 5111092 2004464
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Trend Analysis
30000000 25000000 Doubtful Loan 20000000 15000000 10000000 5000000 0 2004 2005 2006 2007 2008 2009 2010 2011 Year y = -360849x + 7E+08 R = 0.0059 Series1 Series2 Linear (Series1) Linear (Series2)
Figure: 4.18 From the above equation, R square 0.0059 states that the time variable can explain the Doubtful Loan amount change over time by 0.59%, which indicates time variable cant cause any remarkable impact in the change of Doubtful Loan amount disbursement. Again While there is 1 unit in time proceed (financial year) in time can cause Doubtful Loan disbursement to change by the amount -360849. If there is no change in time variable this type of loan amount disbursement will be with the constant amount BDT 7E+08. Trend Analysis with Bad/Loss Table: 4.18 Year 2005 2006 2007 2008 2009 2010 (Amount in Thousand) Bad/Loss 46261203 50532902 63174653 61154243 60475711 61722404
Page 61
Trend Analysis
70000000 60000000 50000000 Bad Loss 40000000 30000000 20000000 10000000 0 2004 2006 2008 Year 2010 2012 y = 3E+06x - 6E+09 R = 0.64 Series1 Series2 Linear (Series1) Linear (Series2)
Figure: 4.19 The above trend shows that time can be held responsible for explaining the change in Bad/Loss amount by 64%. When there is 1 unit change in time variable (proceed in fiscal year) the Bad/Loss also increases by the amount of 3E+06. So there is a positive relation between time and Bad/Loss variables. Both of them go in a same direction. Trend Analysis with Standard Loan Table: 4.19 Year 2005 2006 2007 2008 2009 2010 (Amount in Thousand) Standard Loan 172637590 176313403 105032076 153048511 180050682 213021149
Page 62
Trend Analysis
250000000 200000000 Standard 150000000 100000000 50000000 0 2004 y = 7E+06x - 1E+10 R = 0.1513 Series1 Series2 Linear (Series1) Linear (Series2)
2005
2006
2007
2008
2009
2010
2011
Year
Figure: 4.20 The R square value shows that time variable can explain the change in Standard Loan amount disbursement by 15.13%. When time proceeds, say 1 unit (one year ahead in financial year) there will be a positive change in the Standard Loan amount disbursement by the amount of 7E+06. Trend Analysis with SMA Table: 4.20 Year 2005 2006 2007 2008 2009 2010 (Amount in Thousand) SMA 3169190 5746891 9194129 5371685 4044888 4651158
Page 63
Trend Analysis
10000000 8000000 SMA 6000000 4000000 2000000 0 2004 2005 2006 2007 2008 2009 2010 2011 y = -43389x + 9E+07 R = 0.0015 Series1 Series2 Linear (Series1) Linear (Series2)
Year
Figure: 4.21 From the linear equation drawn above it can easily inferred by making attention in the value of R square that the time variable can be held responsible for explaining the SMA loan amount disbursement by 0.15%. That is there is very little impact of time variable in capturing the change of SMA loan amount disbursement. When there is 1% change in time variable there is -43389 amount of SMA Loan change can be noticed. This shows, over time the amount of SMA Loan is decreasing. While there is no change in the time variable the SMA loan amount disbursement will be held constant with the amount 9E+07.
Page 64
Chapter 5
Summary and Conclusion
Page 65
Loans and advances are the primary source of bank earnings and the major source of risk. Sonali Bank Ltd. gives large portion of their total loans to industrial sector especially in Large & Medium industrial Sector. In 2010 the bank provides 54% loan to the industrial clients and 74% loans in Dhaka Division. This large concentration in one single sector and in single place makes the banks lending risky. Any accident in industrial sector or disaster in Dhaka can cause the bank huge losses. So the bank should focus on different sectors such as agricultural, consumer and women entrepreneurships loans etc. and provide loans to other divisions to ensure growth of those divisions and minimize banks risk. Sonali Bank Ltd.s profitability is increasing in recent year. Although in 2008 and 2009 bank faces lower profit due to some economic problems. So the profitability of bank has a volatile trend. Sonali Bank Ltd.s Loans to deposit ratio is decreasing which indicates a good sign for the bank but still it somewhat high for the bank which is not at all a good indication. Again in the case of Current ratio it shows a satisfactory result a it is standard enough but still there is a problem. High Current Ratio indicates a large proportion of idle money which increases the opportunity cost. The banks interest coverage ability is not enough. It is very much disappointing. It is noticed that it is decreasing day by day. The recent data shows the evidence. So the banks ability to meet financial obligation is low although the bank has got a large proportion of assets. Sonali Bank Ltd.s probability of default loan and provision for loan loss reduces in the last few years which indicate efficient credit assessment, credit risk grading, credit administration, credit monitoring and credit recovery etc. This is a very good sign for the bank as it is a mainly government owned bank. It is very appreciating. What is the trend of Classified and Unclassified Loan amount over time has also been identified. Almost all types of Loan amount are increasing over time. They are following a upward sloping direction. Again Bad/Loss loan amount is following a downward sloping direction. In the very recent years it is decreasing. Again most disappointing to say the Doubtful is following a positive upward sloping direction which refers that day by day Doubtful Loan amount is increasing. It is very alarming for the Bank.
Although Sonali Bank Ltd.s credit performance is better in 2010 than previous years the bank should reduce some of its formalities to give loan, provide more power to branch manager to sanction credit and credit assessment and monitoring should be strictly followed by the bank to reduce risk.
Page 67
Reference 1. Commercial Banking by Benton E. Gup & James W. Kolari (3rd Edition) 2. Sonali Bank Credit Risk Management Policy Guideline 3. Annual Report of Sonali Bank Limited from 2005 to 2010
Page 68
Appendix
Current Assets (Amount in thousand)

Particulars Cash Balance with Other Banks & Fin'l institutions Money at call on Short Notice Investment s (short Term) Loans & Advances (Short Term) Others Assets Total
2005
1739114748 0
2006
1951413847 4
2007
2340781502 8
2008
2064159219 8
2009
2841595354 2
2010
3323063457 1
9523162413
1109359534 0
7316574707
9979717359
1061472609 2
4009934527 7
202041000 4363639648 1
234491500 3997773436 6
1517463000 8889089935 1
250857360 9509324119 9
3079323200
5547312900
1.1348E+11
1.11745E+11
2.2701E+11 3899978751 0 3.36762E+11
2.41029E+11 4005749112 7 3.51907E+11
2.06348E+11 1.24645E+11 4.52125E+11
2.31167E+11 1.25893E+11 4.83025E+11
2.54023E+11 1.31198E+11 5.4081E+11
2.86098E+11 1.61953E+11 6.38674E+11
Page 69
Current Liabilities (Amount in thousand) Particular s

Borrowings from other Banks, Fin'l Ints. Agents Current Deposits & Others A/c Bill Payable Savings Deposits Total
2005
2006
2007
2008
2009
2010
1306103440 7 7389567135 1.42068E+1 1.29627E+11 1 4203981763 5737213264 9204213053 1.04183E+1 4 1 2.59377E+1 2.38934E+11 1
6990041413 8705202318 2 5602281333 1.10881E+11 2.10526E+11
545955691
60124599
26385637
9879552338 1.01643E+1 1.18948E+1 9 1 1 6642924279 7073473848 8643731434 1.30335E+1 1.53685E+1 1.20423E+11 1 1 2.39111E+1 2.81303E+1 2.26408E+11 1 1
Shareholders equity (Amount in thousand) Particula 2005 rs

Paid-up capital
2006
2007
2008
2009
2010
3,272,200,0 00
5,000,000,00 0
9,000,000,00 0
9,000,000,00 0
9,000,000, 000
9,000,000,00 0
Statutory reserve
2,800,000,0 00
2,800,000,00 0
2,994,716,02 4
3,116,476,53 3
3,956,476,53 3
Other reserves
234,000,000
31,263,809
8,968,148,77 9
9,353,019,51 5
13,169,218,1 88
Surplus in Profit & Loss A/C
(36,275,634, 028) 778,864,096 2,948,218,08 9 19,648,164,5 77 Page 70
Total Sharehold ers equity Total Capital
6,306,200,0 00
(28,444,370, 219)
21,741,728,8 99
24,417,714,1 37
45,773,859,2 98
57,512,625, 540
21,870,796,2 72
147,203,240, 629
162,942,075, 968
242,631,139, 343
Page 71

Performance Evaluation

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Chapter 1 Introduction

An Overview of Credit Administration of by Sonali Bank Ltd.

An Overview of Credit Administration of by Sonali Bank Ltd.

An Overview of Credit Administration of by Sonali Bank Ltd.

An Overview of Credit Administration of by Sonali Bank Ltd.

2.1. Evaluating Bank Performance

Bank shareholders Bank management Regulators Depositors Business community

2. Evaluating Body 3. 4. Figure: 2.2

2.1.1 A Framework for Evaluating Bank Performance

Economic Condition Market demand

Political Setting Legal Setting

2.1.1.1 Internal Performance

2.1.1.2. External Performance

2.1.1 3 PRESENTATION OF BANK FINANCIAL STATEMENTS:

An Overview of Credit Administration of by Sonali Bank Ltd.

Loans and Lease

Different types of depository accounts

An Overview of Credit Administration of by Sonali Bank Ltd.

2.2 Credit Evaluation process

An Overview of Credit Administration of by Sonali Bank Ltd.

2.2.4 Ratio Analysis

An Overview of Credit Administration of by Sonali Bank Ltd.

2.2.4.2 Measuring Efficiency

2.2.4.3 Financial Leverage

2.3 COMMERCIAL AND INDUSTRIAL LENDING

An Overview of Credit Administration of by Sonali Bank Ltd.

An Overview of Credit Administration of by Sonali Bank Ltd.

An Overview of Credit Administration of by Sonali Bank Ltd.

Administration of Credit by Sonali Bank Limited

An Overview of Credit Administration of by Sonali Bank Ltd.

3.1 Single borrower/ Group limits/ large loan/ Syndication

An Overview of Credit Administration of by Sonali Bank Ltd.

3.2 Events of Default

3.3 Credit Assessment

An Overview of Credit Administration of by Sonali Bank Ltd.

Loan structure (Tenor, Covenants, Repayment schedule, Interest) Security arrangements.

An Overview of Credit Administration of by Sonali Bank Ltd.

3.4 Credit risk Grading

85+ 75-84 65-74 55-64 45-54 35-44 <35

An Overview of Credit Administration of by Sonali Bank Ltd.

3.5 Approval Authorities

3.6 Approval process

II. III. IV. V. VI. VII. VIII.

(approval/decline) to RM (Branch Manager) and HOCB.

An Overview of Credit Administration of by Sonali Bank Ltd.

Figure: 3.1 Approval Process

Head of Corporate (Marketing)

Head of Credit/CRM Team Approved/Declined as per delegation

Beyond capacity recommended to

Deputy Managing Director Approved/Declined as per delegation

Beyond capacity recommended to

Managing Director Approved/Declined as per delegation

Beyond capacity recommended to

Board of Directors Approved/Declined

An Overview of Credit Administration of by Sonali Bank Ltd.

3.7 Credit Administration

3.9 Custodial duties

3.10 Compliance Requirement

3.11 Credit Monitoring

An Overview of Credit Administration of by Sonali Bank Ltd.

3.12 Credit Recovery

An Overview of Credit Administration of by Sonali Bank Ltd.

An Overview of Credit Administration of by Sonali Bank Ltd.