Risk management

RISK MANAGEMENT FRAMEWORK Risk is defined as potential losses or foregone profits that can be triggered by internal and external factors. Therefore, the objectives of risk management are identification of potential risks in our operations and transactions, in our assets, liabilities, income, cost and offbalance sheet exposures and independent measurement and assessment of such risks and taking timely and adequate measures to manage and mitigate such risks within a risk-return framework. In DBBL, only calculated risks are taken while conducting banking business to strike a balance between risk and return. Risk is clearly identified, mitigated or minimized and if possible eliminated to protect capital and to maximize value for shareholders. It is also ensured that on balance sheet and off-balance sheet risks taken by the Bank are consistent with risk appetite and strategic objectives of the Bank. A wide range of tools and techniques are used to address & mitigate all kinds of inherent and potential risks in banking operations. The Bank attaches highest priority to establish, maintain and upgrade risk management infrastructure, systems and procedures. In this regard, sufficient resources are allocated to improve skills and expertise of relevant banking professionals to manage the risk effectively. The policies and procedures are approved by the Board and assessed on a regular basis to bring these to the level of satisfaction required to manage & mitigate the risks adequately and consistently. Ultimate responsibility for effective risk management lies with the Board of Directors of DBBL. The Board and its committees like Audit Committee and Executive Committee, set principles and limits, review and monitor various risks to assess adequacy of system and to ensure that the Bank is operating within approved systems & procedures. Management committees, like ALCO and Credit Committee, also oversee and ensure that sufficient risk management systems are in place and these are consistently applied to protect the interest of the Bank.

RISK MANAGEMENT PROCEDURE

Approved predetermined policies & guidelines To ensure that risks are properly addressed and protected for sustainable development of the Bank, there are approved policies and procedures covering all the risk areas i.e. credit risks, operational risks and market risks. These are formulated taking into account Bangladesh Banks Guidelines for Managing Core Risks on Credit Risk Management, Internal Control & Compliance, Asset and Liability Management, Foreign Exchange Risk Management and Money Laundering Risk Management as well as the business environment in which the Bank operates, specific needs for particular type of operations or transactions and international best practice. These policies are regularly reviewed and updated to keep pace with the changing operating environment, technology and regulatory requirement. Meticulous compliance with the established procedures are ensured to satisfy that the Bank is operating within approved procedures and limits and that risks are within tolerable limits to effectively ensure long term solvency and sustainable growth of the Bank.

Risk management infrastructure

Risk management procedures are approved, monitored, and mitigated at various stages of the Bank with a combination of Board, its committees, management committees, management units and Internal Control & Compliance Division as detailed below:

Board of Directors
Board oversees and approves all major risk management policies and parameters taking into account market condition, regulatory requirement and lessons learned in the past. While setting policies and parameters for credit, operational and market risks, a balance is maintained for ensuring smooth banking operations while protecting against down-side risk from potential loss or foregone income and to protect interest of shareholders and depositors.

Executive Committee (EC) of the Board

Executive Committee is responsible to oversee that the management and its committees are operating within approved limits and authorities and that all major risks are managed & mitigated effectively and potential and actual losses arising from risks are within accepted limits. The Committee also approves credit proposals, administrative proposals and major purchases as recommended by the Management Credit Committee, Management Committee and Management Purchase Committee.

Audit Committee of the Board

Audit Committee independently monitors all activities of banking operations involving credit risks, operational risks and market risks through Internal Control & Compliance Division of the Bank. Risk based audit plan for IC &CD is approved by the Committee and its implementation is monitored on a regular basis to ensure that all risk factors are adequately addressed and any deviation is quickly corrected to ensure sustainable operation of banking activities.

Management Committees
Management Committees like Credit Committee, Asset-Liability Management Committee and Purchase Committee ensure compliance with all relevant risk management policies.

Management units
Management units like Credit Risk Management Division, Treasury Division, Credit Administration Division, Credit Monitoring & Recovery Division etc. ensure and monitor risk management system and compliance with all approved limits and procedures at operational level on a daily basis.

Internal Control & Compliance Division

Internal Control & Compliance Division on a regular basis independently verifies compliance with all approved risk management and internal control policies. Deviations are identified, reported and corrected to mitigate risk on a continuous basis and to ensure that the Bank is operating in compliance with all approved and established policies. Internal Control & Compliance Division directly reports to the Audit Committee of the Board.

CREDIT RISK
Credit risk is the most significant and inherent risk in banking business. Every loan exposure or transaction with counterparty involves the Bank to some degree of credit risks. Credit Risk Management is at the heart of the overall risk management system of the Bank. It is designed and continuously updated to identify, measure, manage and mitigate credit risk to maintain and improve quality of loan portfolio and reduce actual loan losses and to ensure that approved processes are followed and appropriate due diligence are made in approving new credit facilities and renewals.

Early warning system

Operation and performance of loans are regularly monitored to trigger early warning system to address the loans whose performance show any deteriorating trend enabling the Bank to grow its credit portfolio in a sustainable way to ensure higher quality and lower risk with the ultimate objective to protect the interest of depositors and shareholders.

Credit policy approved by the Board

The Board approves the major policy guidelines, growth strategy, exposure limits for particular sector, product, individual company and group, keeping in view regulatory compliance, risk management strategy and industry best practice.

Credit approval is delegated properly

Credit approval authorities are carefully delegated to the Executive Committee of the Board and appropriate level of management to strike a balance between adequate control and flexibility in credit operations to ensure full transparency and accountability at all levels.

Independent Credit Risk Management Division

There is an independent risk management division to assess credit risks and suggest mitigations before recommendation of every credit proposal.

Separate Credit Administration Division for documentation

A separate Credit Administration Division confirms that perfected security documents are in place before disbursement. DBBL is continuing a unique process of rechecking security documentation by a second legal adviser other than the lawyer who vetted it originally.

Independent Credit Monitoring & Recovery Division and Management Recovery Committee
An independent and fully dedicated credit monitoring and recovery division monitors the performance and recovery of loans, identify early signs of delinquencies in portfolio and take corrective measures to mitigate risks, improve loan quality and to ensure recovery of loans on time including legal actions. This department also monitors risk status of loan portfolio and ensures adequate loan loss provision. There is a dedicated and high-level management recovery committee to deal with the problem loans for early and most appropriate settlements.

Adequate provision & suspension of interest

Interest accrued on classified loan is suspended and adequate provision is maintained there-against as per Bangladesh Banks Guidelines.

Credit operations are subject to independent Internal Audit

Internal Control & Compliance Division independently verifies and ensures, at least once in a year, compliance with approved lending guidelines, Bangladesh Bank guidelines, operational procedures, adequacy of internal control and documentation. Internal Control & Compliance Division directly reports to the Audit Committee of the Board.

Reporting to Board /Executive Committee

Overall quality, performance, recovery status, risks status, adequacy of provision of loan portfolio is regularly reported to the Board of Directors/EC for information and guidance.

MARKET RISK
Market risk is the risk of losses in on and off-balance sheet positions arising from movements in market price such as changes in interest rate and price of equity, foreign exchange and commodity.

Liquidity, interest rate and foreign exchange risks

The Treasury Division manages the liquidity, interest rate and foreign exchange risks with oversight from AssetLiability Management Committee (ALCO) which is chaired by the Managing Director including top management and senior executives of the Bank. The Committee meets at least once a month. The Board approves all risk management policies, sets limits and reviews compliance on a regular basis. The overall objective is to provide cost effective funding to finance the asset growth and trade related transactions, optimize the funding cost, increase spread with the lowest possible liquidity, maturity, foreign exchange and interest rate risks.

Liquidity risk
Liquidity risk is the risk that we may not meet our financial obligation as they become due. Liquidity risks also include our inability to liquidate any asset at reasonable price in a timely manner. It is the policy of the Bank to maintain adequate liquidity at all times and in both local and foreign currencies. Liquidity risks are managed on a short, medium and long-term basis. There are approved limits for credit-deposit ratio, liquid assets to total assets ratio, maturity mismatch, commitments for both in on-balance sheet and off-balance sheet items and borrowing from money market to ensure that loans & investments are funded by stable sources, maturity mismatches are within limits and that cash inflow from maturities of assets, customer deposits in a given period exceeds cash outflow by a comfortable margin even under a stressed liquidity scenario.

Interest rate risk

Interest rate risk is potential reduction in net interest income caused by changes in the level of interest rates. In DBBL, it is ensured that the Bank is not subjected to undue interest rate risks due to interest rate mismatch and maturity mismatch. Fixed rate assets are not financed by floating rates liabilities or vice versa.

Foreign exchange risk

Foreign exchange risk is potential loss arising from changes in foreign currency exchange rate in either direction. Assets and liabilities denominated in foreign currencies have foreign exchange risks. In order to further strengthening the foreign exchange risk management, DBBL has strengthened and restructured its dealing room with the help of advanced technological equipment and experienced personnel. The Bank operates its foreign exchange and money market activities under a centralized and single functional area. Bank's Exchange Rate Committee meets on a daily basis to review the prevailing market condition, exchange rate, exposure and transactions to mitigate foreign exchange risk.

OPERATIONAL RISK
Operational risk is the risk of loss resulting from inadequacy or failure of internal processes, systems and people or from external events.

Internal Control & Compliance risk The Board of Directors approved updated policy guidelines on Internal Control & Compliance Risk (ICC). Management thereby restructuring the organizational chart of the Bank in accordance with the instructions of Bangladesh Bank for managing core risks. In line with aforesaid policy guidelines, Bank's own working manual on ICC has been approved by the Board of Directors of DBBL and the manual is now in operation. Internal Control & Compliance Division of the Bank under direct supervision of Audit Committee of the Board has been implementing detail guidelines on ICC risk management to assess and mitigate risks and as part of it the IC&CD has been divided into three (3) independent units; namely:a) b) c) Audit & inspection unit Monitoring unit Compliance unit

The units have been functioning independently and separately with direct reporting lines to the Head of IC&CD. In addition, Departmental Control Function Check List has been introduced in the branches and divisions at Head Office under direct supervision of Monitoring Unit of IC&CD which ensures compliance with regulatory rules and regulations as well as general banking norms and procedures. Documental Check List has been brought in practice under supervision of dedicated units. Exceptions are addressed monitored and corrected on a regular basis. Policy guidelines on RISK BASED INTERNAL AUDIT (RBIA) system have been formulated and the branches have already been brought under RBIA networks. As per RBIA, marks have been allocated for rating of the branches in terms of business risk and control risk. The branches scoring higher are being subjected to more frequent audits. It is a Policy of the Bank to put all brances of the Bank under any form of audit once in a year and IC&CD has been working in that direction. All these activities of the Internal Control & Compliance Division are devoted to address and mitigate operational risks of the Bank in more effective way to ensure effciency and effectiveness of performance, ensure reliability and completeness of financial and management information and to ensure compliance with legal and regulatory requirements. Money Laundering risk As prevention of Money Laundering had become a burning issue in the beginning of this century, Money Laundering Prevention Act, 2002 was enacted in our country to give tight rein on money laundering process. Bangladesh Bank too undertook a project in the year 2003 to review the global best practices in the risk areas in view of globalization of business and identified 5 (five) core risks for implementation by the banks which included, among others, Money Laundering risk. In line with the money laundering law and relevant guideline of Bangladesh Bank on Money Laundering risk, our Bank has already formulated guidelines on policies & procedures on prevention of Money Laundering. The prime objective of the guidelines is to combat Money Laundering which became rampant in recent years.

As per the guidelines, Account Opening Form of our Bank has been redesigned with provision for obtaining particulars of Personal Identity of customer and Transaction Profile. The Bank has also undertaken enhanced due diligence in case of opening of accounts of Politically Exposed Persons( PEP) as per directive of Bangladesh Bank which is in line with recommendation of Financial Action Task Force of U.N. Anti Money Laundering units have

been set up in all the branches under a central unit at Head Office. Basic training has been imparted to all the officers of the Bank on compliance with rules and regulations of Money Laundering Act so as to prevent opening of suspicious accounts and identify suspicious transactions. Legal risks In DBBL legal risks are covered by recognizing potential losses from litigation or possible litigation at an early stage and by formulating solutions for reducing, restricting and avoiding such risks and creating adequate provision thereagainst.

OTHER RISKS
Business risk
Business risk covers the risk of losses arising from lower non-interest income and higher expenses from the budgeted amount. The business risk is resulted from the market condition, customer behavior or technological development that may change compared to the assumptions made at the time of planning. Business risk in DBBL is managed by setting clear targets for specific business units in term of business volume, income, cost, cost / income ratio, quality of assets etc. with an ongoing process of continuous improvement.

Reputational risk
Reputational risk is defined as the risk of losses, falling business volume or income as well as reduced value of the company arising from business events that may reduce the confidence of the customers & clients, shareholders, investors, counterparties, business partners, credit rating agencies, regulators and general public in DBBL. The branches and operational divisions are directly responsible for reputational risks arising from their business operations. Reputational risks may also arise from other risks and even increase those risks. The management ensures that DBBL is aware of any changes in market perceptions as soon as possible. Accordingly, all business policies and transactions are subjected to careful consideration. DBBL takes necessary precautions to avoid business policies and transactions, that may result in significant tax, legal or environmental risks. Reputation risk is also factored into major credit decisions that may lead to credit proposal being declined.

Compliance risk
The success of DBBL is largely dependent on the trust and confidence of our existing and potential customers, our shareholders, our staff, our regulators and the general public in our integrity and ethical standard. This confidence largely depends on meticulous compliance with applicable legal and regulatory requirements and internal policies of DBBL. The confidence also depends on conformity with generaly accepted market norms and standards in our business operations. The Board of Directors is primarily responsible for compliance with all applicable norms and regulations. The Board discharges its responsibilities itself and through delegation of authorities to Executive Committee and Audit Committee of the Board. The objective is to identify any compliance risks at an early stage that may undermine the integrity and the success of DBBL and to mitigate the risks in most appropriate way.

CAPITAL PLAN AND MANAGEMENT

The Bank is committed to maintain a strong capital base to support business growth, comply with all regulatory requirements, obtain good credit rating and CAMELS rating and to have a cushion to absorb any unforeseen shock arising from credit, operational and market risks.

The capital maintenance and dividend policies are pursued taking into consideration the following factors
Increased capital requirement for sustainable business growth. Keeping sufficient cushion to absorb unforeseen shock or stress. Cost effective options for raising Tier 1 and Tier 2 capital. Improving credit rating and CAMELS rating of the Bank. Meeting regulatory requirements. Meeting covenants of lenders.

The Board is responsible to ensure capital management within a broad framework of risk management. The Bank has been pursuing a dividend policy that must ensure satisfactory return for shareholders as well as sustainable growth of the Bank with strong capital adequacy ratio to protect greater interest of depositors and shareholders. As per BRPD Circular Letter No. 11 dated August 14, 2008, the total capital of the Bank should be raised to Taka 4,000 million latest by August 11, 2011 within which total paid up capital would be Taka 2,000 million. The Bank is well positioned to meet that requirement much earlier before the deadline. The Banks Tier 2 capital is strengthened by subordinated debt obtained from FMO, revaluation of fixed assets and revaluation of held to maturity securities. Other alternative options to raise Tier 2 capital would be explored as and when necessary.

PREPARATION FOR BASEL II ACCORD STRENGTHENING RISK MANAGEMENT SYSTEM AND CAPITAL BASE OF THE BANK
In order to make the banks in Bangladesh more shock absorbent as well as to cope with international best practice for risk management and, a sound and robust banking industry, Bangladesh Bank has taken measures to implement BASEL II from January 2009. BASEL Committee on Banking Supervision published a more comprehensive new package on capital adequacy requirement known as BASEL II for strengthening the capital adequacy, improving supervisory system to assess the adequacy of capital based on a thorough review of risks, reinforce risk management system and market discipline with the ultimate objective of having strong capital base that are commensurate with risk profile of the Bank comprising credit risk, market risk and operational risk that can ensure long term stability and solvency of banking company and banking sector as a whole.

A National Steering Committee comprising senior officials from banking industry, Bangladesh Bank and Chartered Accountant Firms has been constituted. Furthermore, a Coordination Committee and a Basel II implementation Cell have been established. In the meantime, Bangladesh Bank has done two studies one is self-audit on Basel core principles for effective Bank supervision and the second one is quantitative impact study in order to assess readiness of the banks for implementation of Basel II.

Under standardized approach, Basel II requires the recognition of External Credit Assessment Institutions for this a guideline has been prepared by BB and recognition process of credit rating agencies is under process. Bangladesh Bank has already issued Guidelines on Risk based capital adequacy for banks (revised regulatory capital framework in line with BASEL II) vide BRPD Circular No. 09 dated December 31, 2008.

In line with Bangladesh Bank requirement, the Bank has already formed a Basel II Implementation Unit to ensure smooth and timely implementation of Basel II Accord. Capacity building measures are underway so that the Bank is fully prepared to adopt the Accord in 2009.