Basel

BASEL II and BASEL III Implementation by JANATA BANK LIMITED following the statutory requirements of BANGLADESH BANK
IMPLEMENTATION OF BASEL II AND BASEL III ON JANATA BANK LIMITED

FOLLOWING THE STATUTORY REQUIREMENT OF BANGLADESH BANK
By
Ajmir Hossain
ID- 130203073
An Internship Report Presented in Partial Fulfillment

Of the Requirements for the Degree
Masters of Business Administration (MBA)
JAGANNATH UNIVERSITY
September, 2015
IMPLEMENTATION OF BASEL II AND BASEL III ON JANATA BANK LIMITED

FOLLOWING THE STATUTORY REQUIREMENT OF BANGLADESH BANK
By
Ajmir Hossain
ID- 130203073
Has Been Approved

September, 2015
Farhan Shazia
Lecturer
Department of Finance
Jagannath University
Letter of Transmittal
September 5, 2015
Farhan Shazia
Lecturer
Department of Finance
Jagannath University
Subject: Submission of internship report
Dear Sir,
It is a great pleasure for me to submit the report on Implementation of BASEL II and BASEL III on
Janata Bank Limited following the Statutory Requirement of Bangladesh Bank. I am submitting this
report as part of my internship in Janata Bank Limited. As my faculty supervisor, I have tried to prepare
the report following your instructions.
The purpose of the report is based on my working experience in Janata Bank Limited and how the
bank has implemented the Basel Accords following the guidelines of Bangladesh Bank.
I will be glad if you kindly accept this report.
Thanking you.
Sincerely,
___________________
Ajmir Hossain
ID: 130203073
ACKNOWLEDGEMENT
At first, I would like to express my gratitude to almighty Allah for enabling me the strength and
opportunity to complete the report in the schedule time successfully. I am taking this privilege to
deliver my gratefulness to each and every people who are involved with me in every phase of
our lives.
It is really mind blowing to be in touch with one of the oldest public banks like Janata Bank
Limited. A good number of personnel of JBL and outside JBL helped me in various ways by
providing their valuable information and thoughts.
I obviously express my deepest thanks and appreciation to my teacher Farhan Shazia, lecturer of
Department of Finance, Jagannath University, for giving her valuable time, guideline and advice
in preparation of my internship report.
I express my sincere gratitude to Mr. Biswas Ataur Rahman (DGM & Manager, Mohammadpur
Corporate Branch) to give me the opportunity to proceed on my internship in Janata Bank
Limited. I also express my heartiest gratitude to Dipti Kaur ( General banking manager,
Mohammadpur corporate branch,JBL) for her cordial attitude & extending help whish make me
able to prepare my internship report properly.
I am also grateful to the Human Resource Department of Janata Bank Limited for giving me the
opportunity to make my internship program in this organization. Their consideration favoured
me to perform the internship and prepare this report. Otherwise, it would not possible for me to
complete the internship.
Finally, I would like to extend my deepest thanks to my parents and other family members.
Without their co-operation I would not able to complete my MBA program.
TABLE OF CONTENTS:
CONTENTS
PAGE NO.
PART 1
1
Janata Bank Limited: An Overview
05
Trade Finance Division
06
Import Section
07
3.1. Letter of Credit (L/C)
07
3.2. L/C Cycle
07
3.3. Required Document for Opening a

Letter of Credit (L/C)
09
3.4. Typical Example of an Import L/C
10
Export Section
15
4.1. Typical Example of Export L/C
15
4.2. Back to Back L/C
17
4.3. Bill Purchase and Discounting
18
Recommendation
19
Conclusion
19
PART 2- RESEARCH
1
Introduction
21
1.1. Abstract
21
1.2. Problem Statement
22
1.3. Purpose of the study
22
1.4. Scope of the report
22
1.5. Methodology
22
1.6. Limitations of the report
23
2
.
Literature Review
24
3
.
Data Collection Procedures
30
3.1. Risk Based Capital Adequacy
30
3.2. Eligible Regulatory Capital
30
3.3. Conditions for maintain Regulatory
31
3.4. Risk Weighted Assets (RWA)
32
3.5. Capital Adequacy Ratio
32
Data Analysis
33
4.1. Capital Structure of Janata Bank

Limited
33
4.2. Capital Adequacy of Janata Bank

Limited
35
4.3. Credit Risk Management in Janata

Bank Limited
38
4.4. Market Risk Management in Janata

Bank Limited
39
4.5. Operational Risk Management in

Janata Bank Limited
40
4.6. BASEL III implementation
41
5
.
Findings and General Discussion
43
6
.
Recommendation
44
7
.
Conclusion
45
8
.
Reference List
46
4
.
LIST OF TABLES:
Table:
Page No:
1.
Constituents of Tier 1, Tier 2 and Tier 3 Capital
31
2.
Format for Risk Weighted Asset (RWA) Calculation
32
3.
Quantitative Disclosure of Janata Bank LTD
33
4.
Historical CAR ratio of Janata Bank LTD
35
5.
Capital Adequacy to guard against the three risks
36
6.
Regulatory Capital ratio for BASEL III
41
7.
Proposal for the CAR and timeline of BASEL III

internationally
41
LIST OF ILLUSTRATIONS:
Figure:
Page No
1.
BASEL II structure
25
2.
Risk based Capital Adequacy Ratio in Bangladesh
28
3.
Tier 1 Capital
34
4.
Tier 2 Capital
34
5.
Yearly change of CAR of JANATA BANK LIMITED
36
6.
Capital Requirement against Risk
37
7.
Total and Tier 1 Capital Adequacy Ratio
37
8.
Quantitative value of Capital Asset

Requirement against market Risk
39
9.
Capital Requirement for Market Risk
39
1
0.
Surplus Capital for BASEL II
42
EXECUTIVE SUMMARY
Importance of banking system in a country is increasing day by day. It is quite impossible for
any country to develop in industrial and commercial sector without sound banking system in
modern economic era.
The working report stands for BASEL II and BASEL III Implementation in Janata Bank
Limited. Foreign trade operation is one of the significant functions of the bank. It plays a vital
role in overall economy of the country. Foreign trade contains Import and Export section and
foreign remittance department contains inward and outwards remittance.
From the beginning of the report, the entire foreign trading activities relating to Export and
Import has been described. All the clauses and steps are clearly mentioned in this report. The
details about Letter of credit i.e. classification of L/C, L/C opening procedure, types of L/C,
L/C payments moods, required documents, documents checking, transmitting L/C, about preshipment inspection when it is needed.
The procedure begins from getting the ERC (Export registration certificate) by chief controller
of import & export office. After that, receiving the letter of credit and advising L/C, necessary
document collection and negotiation. How the bank assist to exporter through financing. Last but
not the list the foreign trade remittance process.
Chapter: One
Introduction
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Any academic course of the study has a great value when it has practical application in the real
life. So we need proper application of our knowledge to get some benefit from our theoretical
knowledge. Only then we come to know about the benefit of the theoretical knowledge. Such an
application is made possible through internship. Internship implies the full application of the
methods and procedures through rich acquired knowledge of subject matter can be fruitfully
applied in our daily life. Such a procedure of practical application is known as internship. The
study is titled . As a student of BBA this study will be more significant in my practical life. I
have worked for 3 months at Mohammadpur Branch of Janata Bank Limited to complete the
internship program as an academic requirement.
1.2 Origin of the Report
In todays world only academic education does not make a student perfect to become
Competitive with the outside world. Internship is highly needed to gain idea, knowledge and
Experience. From this internship program students get the opportunity to learn facing the real
Business world.This report is an internship report prepared as a requirement for the completion
of MBA Program of Jagannath University. The primary goal of internship is to provide the job
exposure to the student and an opportunity to implement theoretical knowledge in real life
situation. The program covers a period of 3 months of organizational attachment. Janata Bank
Limited is a place where I could learn the business dealings. This organization has created a
positive image to the customers mind by providing better service. As an intern, I have got the
opportunity to work with this organization from March, 2014 to May, 2014 and acquire idea
about foreign exchange division.
1.3 Scope of the report
To fulfill the requirement of our MBA Program.
To evaluate the performance of Janata Bank Limited
To evaluate the implementation of BASEL ACCORD by Janata Bank
1.4 Objectives of the Report
The writing of this report contains two objectives: General objective and Specific objective.
Primary Objective: The primary objective of this report is to complete the internship program.
Secondary Objective: the secondary objective of this report is analyse of the Implementation Of
Basel II And Basel III On Janata Bank Limited Following The Statutory Requirement Of
Bangladesh Bank
1.5 Methodology Of the study
To perform the study the data sources are to be identified and collected, they are to be classified,
analysed, interpreted and presented in a systematic manner and key points are to be found out.
The overall process of methodology is given below:
A. Identifying data sources:
Essential data sources both primary and secondary are identified which will be needed to
complete and work out the study. To meet up the need of data primary data are used and study
also requires interviewing the official and staffs were necessary. The report also required
secondary data.
This report is mainly prepared by the secondary sources of information and some few primary
sources of information like
Primary data:
Secondary data:
Discussion with officials of The Janata Bank Limited

Experts opinions and comments
Direct involvement in the foreign exchange activities in JBL
Direct Observation
Questioning the concerned persons.
Relevant books Newspaper, Journals etc.

Annual reports of JBL (2012,2011,2010,2009,2008)
Credit rating report of JBL by CRISL (Credit Rating Information
and Services Limited)
Periodicals published by Bangladesh Bank.
Monthly reports and published documents
Office circular and other published papers, documents and reports
B. Collection of data:
Primary data has been collected by observing and discussing with the Bank official.
C. Classification, Analysis, Interpretations and Presentation of data:
Some graphical tools are used in this report for analysing the collected data and to
Classify those to interpret them clearly.
D. Findings of the study:
The collected data were scrutinized very well and pointed out and shown as findings.
Recommendations are also made for the improvement of the current situation.
E. Final report preparation:
On the basis of the suggestions of my honorable supervisor, some corrections were made to
present the report in this form.
1.6 Limitation of the report

The report is written mainly on the basis of face to face conversation with the officials and little
practical experience in the bank. So, no perfect study is conducted to measure the viability of the
report. The following are some other limitations
Due to time constraints, many aspects could not by discuss in the

present study.
Confidentiality of data was another important barrier that was

faced during the conduct of this study. Every organization has their own secrecy that
cannot be revealed in publics.
Rush hours and business was another reason that acts as an

obstacle while gathering data.
As, I had more dependence on the primary sources, so there might

be some level of inaccuracy with those collected information.
Insufficient books, publications, Facts and figures narrowed the

scope of accurate analysis.
JBL does not have rich and wealthy collection of various types of
Banking related
Books and Journals.
Chapter: Two
Organization
Overview
CHAPTER: TWO
ORGANIZATION OVERVIEW
2.1 Overview of Janata Bank Limited
Janata Bank Limited is one of the largest and oldest private-sector commercial banks in
Bangladesh, with years of experience. Janata Bank Limited was established in 1965 under the name
Eastern Banking Corporation Limited with the specific objective of accelerating trade and
investment in the economically depressed eastern wing of the than Pakistan. After liberation of
Bangladesh, the Bank underwent a major change namely, it was nationalized in March, 1972 and
given the name Janata Bank.
The Bank again in 1983 was denationalized and made a commercial bank in the private Sector under
the name Janata Bank Limited. The Bank was incorporated as a banking company on June 29,
1983 and obtained business commencement certificate on August 21, 1983. The Bank floated shares
in the year 1984. At present, it operates through 211 fully computerized branches ensuring best
possible and fastest services to its valued clients.
2.2 Mission of JBL
Maintaining the maximum ethical standards community accountability praiseworthy of
A leading corporate citizen.
Continuously improving profitability, productivity and thereby enhancing shareholder value.
Creating and maintaining a set of hard working and efficient employees.
To extend financial assistance to poorer section of the people.
To achieve balance growth & equitable development.
2.3 Vision of JBL
To be leading commercial bank in the country and contribute maximum of the welfare for
the people of the country.
Prime objective is to deliver a quality that demonstrates a true reflection of its vision.
Excellence in banking.
To provide quality service to the customer.
To set high standard of integrity.
Bring total satisfaction to its clients, sponsors and employees.
2.4 Objectives of JBL

JBL has following objectives, which are as:
To ensure growth and development of the bank.

To use resources of the bank efficiently.
To participate in development of the country.

Paying special attention to the areas, which are under developed.
To develop SMES, foreign remittance, foreign trade.
To increase industrialization in the country.
To provide employment opportunities.
For smooth functioning of foreign trade, establish large foreign network.
To maintain a good position in the competitive banking sectors in Bangladesh.
2.5 Goal of Janata Bank Limited

Short term Goal: Increase financial services day by day. Earn satisfactory profit by
giving services to the customer.
Long term Goal: Maximize the wealth of shareholders and want to be a leading bank in
the Banking sector of Bangladesh.
2.6 Financial Highlights of Janata Bank Limited
(Figure in Million-where
Applicable)
SL
.
N
O.
PARTICULARS
2012
2011
2010
2009
2008
INCOME STATEMENT
1.
Gross Income
13,674.
3
10,668.
2
8,768.2
7,654.4
6,313.5
2.
Gross Expenditure
10,412.
9
7.,517.
9
5,701.3
5,140.5
4,007.9
3.
Gross profit
3,261.4
3,150.3
3,066.9
2,513.9
2,305.6
4.
Pre-tax profit
2,536.4
3,000.3
2,801.9
2,188.9
2,098.1
5.
Post Tax profit
1,236.4
1,650.3
1,551.9
1,105.2
1,138.5
BALANCE SHEET
6.
Authorized capital
6,000.0
5,000.0
5,000.0
3,200.0
1,600.0
7.
Paid-up-capital
3,306.4
2,875.2
2,396.0
1,597.3
798.6
8.
Statutory other Reserves
6,490.5
6,758.8
6,214.8
4,609.6
2,890.2
9.
Shareholders Equity
9,796.9
9,634.0
8,610.8
6,206.9
3,688.8
10
.
Deposit
93,658.
6
72,152.
4
65,868.
0
59,387.
3
50,817.
0
11
.
Advances(Gross)
61,328.
6
54,010.
3
48,672.
7
39,451.
4
37,146.
9
12
.
Investment
41,998.
2
22,894.
7
18,591.
1
22,502.
5
11,188.
3
13
.
Guarantee Business
1,878.6
1,806.6
1,759.1
1,633.5
1,826.9
14
.
Export Business
14,192.
9
15,588.
5
12,986.
7
15,096.
9
15,039.
9
15
.
Import Business
35,418.
6
33,037.
6
29,614.
5
29,129.
3
31,146.
9
16
.
Foreign Remittance
43,585.
6
37,848.
7
43,200.
7
44,635.
3
36,073.
2
17
.
Fixed Assets
2,843.4
2,762.2
2,798.1
1,088.4
1,065.7
18
.
Total Assets
123,790
.6
97,417.
9
81,451.
8
71,946.
0
58,444.
3
19
.
Classified loans And

Advances
5,161.9
2,821.9
2,678.7
2,842.0
2,633.8
20
.
Total Off Balance Sheet

exposures
12,005.
3
9,860.0
9,377.6
8,560.5
8,806.9
BIS CAPITAL
21
.
Required Capital
7,518.7
6,865.6
6,287.4
3,688.2
3,420.5
22
.
Actual Capital
9,300.6
9,117.4
7,912.7
5,829.0
4,048.4
CREDIT QUALITY
23
.
Required Provision against

loans & advances
1,740.9
1,062.4
923.9
889.7
684.8
24
.
Provision Maintained
1,803.5
1,092.0
952.0
910.1
792.8
25
.
Required provision against

off
120.0
98.6
93.8
85.6
88.1
26
.
Balance sheet exposures
120.1
111.6
101.7
101.7
101.7
3.74
5.74
5.40
69.19
142.56
SHARE INFORMATION
27
.
Earnings per share
28
.
Market value per share
38.10
77.80
166.08
145.03
339.38
29
.
Price earnings ratio(time)
10.19
13.55
30.76
2.10
2.38
30
.
Book value per share(NAV)
29.63
33.51
29.95
25.91
23.09
OPERATING PERFORMANCE
31
.
Advance-deposit ratio
0.65:1
0.75:1
0.74:1
0.66:1
0.73:1
32
.
Total advance/classified
advance %
8.42%
5.22%
5.50%
7.20%
7.09%
33
.
Total advance/classified
advance(Net) %
4.32%
3.20%
3.54%
4.90%
4.96%
34
.
Income from equity (%)
12.62%
17.13%
18.02%
17.80%
30.86%
35
.
Income from assets (%)
1.00%
1.69%
1.91%
1.54%
1.95%
74,336
74,936
65,037
42,570
27,228
215
211
211
211
207
3,560
3,780
3,262
3,291
3,476
855
1,748
1,590
1,239
1,062
OTHER INFORMATION
36
.
Number of Shareholders
37
.
Number of Branches
38
.
Number of employees
39
.
Human Resource
Development
Chapter: Three
An analysis on c
1. INTRODUCTION
1.1 Abstract:
Bangladesh Bank (BB) is the central bank of Bangladesh and governs all the active performing
commercial banks in the country. Considering the persistent complexity and diversity in the banking
industry and to make the banks capital more risk sensitive and shock absorbent, Bangladesh Bank has
introduced Risk Based Capital Adequacy guideline relating to the Basel 2 Accord. In compliance to
international standards Bangladesh Bank has made the guidelines statutory for all scheduled banks in
Bangladesh from January 01, 2010. These guidelines are structured on following three aspects or
PILLARSPILLAR 1: Minimum capital requirements to be maintained by a bank against credit, market, and
operational risks.
PILLAR 2: Process for assessing the overall capital adequacy aligned with risk profile of a bank
as well as capital growth plan.
PILLAR 3: Framework of public disclosure on the position of a bank's risk profiles,
capital adequacy, and risk management system.
There are three main risks that a commercial bank faces1. Credit risk
2. Market risk3. Operational risk
According to the Annual report of 2011, the Capital Adequacy Ratio (CAR) of Janata Bank reached14.2% on actual capital which is greater than the ratio of 8.11% of the year ended 2010. The required
Capital Adequacy Ratio required to maintain is above 10%, and therefore Janata Bank LTD has
successfully fulfilled the criteria.
Risk Weighted Assets (RWA) of Janata Bank Ltd at the year ended 2011 was registered to TK 88,429.00
million which was TK 100,545.90 million in the same period of 2010. The total capital of Janata Bank
stood at TK 12,574.37 million against Minimum Capital Requirement (MCR) of TK 8,849.20 million i.e.
TK 3,725.17 million capital is surplus to meet Stress Test and ICAAP requirement .
1.2 Problem Statement:

From January 10, 2010, Bangladesh Bank has made the guidelines to follow the BASEL II accord a
statutory requirement for all scheduled banks in Bangladesh. It was instructed by the central bank to
maintain a capital of 10% against its risk weighted assets to quard itself against the risk of credit, market
and operations. This research is done to figure out how BASEL II is implemented by JANATA BANK
LIMITED following the guidelines provided by Bangladesh Bank , and its current position to the
introduction of BASEL III in the nearest future.
1.3 Purpose of the report:
The primary objectives of the report are to fulfill the academic requirement of a research paper during
my internship which is required for the completion of BBA degree under Independent University
Bangladesh, and to enhance my knowledge base by probing into the details of Basel II accord and how
Janata Bank Ltd sails through the required criterias, and how the central bank of Bangladesh regulates
the industry through Basel II. The report goes into explaining the ways Janata Bank Ltd allocates its
credit capital, disclosure of market information and the coordination of Risk.
1.4 Scope of the report:

As a MBA student with Finance major it was utmost necessary to familiarize myself with the Banking
processes. I have worked in Janata Bank Ltd Mohammad branch, which helped me a lot to engage in
different banking activities and experience the working conditions and environment for the first time in
the banking industry.
By observing the environmental behavior, facts, record and present condition of the industry.
By working in Customer Service and communicating with the clients of the bank from various
industries.
Secondary data: I have collected the secondary data through annual reports of Janata Bank Ltd,
market disclosure reports of Janata Bank ltd, online newspaper articles from The Daily Star and The
Financial Express, various informative websites etc
Statistical methods: Descriptive and graphical methods of calculations have been made for the
mathematical representations to prepare this report
1.6 Limitations of the Study:

I have dedicated my entire efforts to enrich and complete this report although there are some
limitations which are as follows:
Basel II is a comparatively newer regulation posed on banks compared to the others regulations from
Bangladesh Bank; therefore few employees have sufficient information about it.
Basel III has not been yet proposed for implementation by Bangladesh Bank.
Bank employees are extremely busy with transactions and other purposed therefore the time
that could be managed from was not enough.
Unfortunately due to the Banks limitations (business secrecy and confidentiality), I was unable
to acquire sufficient information.
Personal barriers such as inability to understand some official terms, office decorum created a
few problems for me.
Time was also a limitation. Gathering such an amount of information by only working for three
months was an extremely difficult job.
LITERATURE REVIEW:
Basel II
It is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are
recommendations on banking laws and regulations issued by the Basel Committee on Banking
Supervision (Wikipedia, 2012).Basel II, initially published in June 2004, was intended to create an
international standard for banking regulators to control how much capital banks need to put aside to
guard against the types of financial and operational risks banks (and the whole economy) face. One
focus was to maintain sufficient consistency of regulations so that this does not become a source of
competitive inequality amongst internationally active banks (Wikipedia, 2012). In theory, Basel II
attempted to accomplish this by setting up risk and capital management requirements designed to
ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending and
investment practices (Wikipedia, 2012). Generally speaking, these rules mean that the greater risk to
which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its
solvency and overall economic stability (Wikipedia, 2012).
The BASEL II aims at:
Ensuring that capital allocation is more risk sensitive;

Enhance disclosure requirements which will allow market participants to assess the
capital adequacy of an institution;
Ensuring that credit risk, operational risk and market risk are quantified based on data
and formal techniques;
Attempting to align economic and regulatory capital more closely to reduce the scope for
regulatory arbitrage.( Wikipedia, 2012)
30
BASEL III
Basel II accord is introduced in 2010 due to the shortcoming of Basel I and II. The new Accord expands
the treatment of capital qualification and higher capital requirement. Besides the stronger constrains on
the former Basel II capital requirements, it also introduced the short term Liquidity Coverage Ratio
(LCR) and the long term Net Stable Funding Ratio (NSFR) to maintain the banks stability
The Structure of BASEL II:

Before we move on to the more detailed aspects of Basel ii, it is mandatory to have a better knowledge
of the Basel II structure and its individual components and at the later stages the relationship of the
components and how the banking industry and Janata Bank Ltd implements the accord. The structure is
provided belowFigure 1: Basel Structure
Bangladesh Bank (BB) is the central bank of Bangladesh and governs all the active performing
commercial banks in the country. Considering the persistent complexity and diversity in the banking
industry and to make the banks capital more risk sensitive and shock absorbent, Bangladesh Bank has
introduced Risk Based Capital Adequacy guideline relating to the Basel 2 Accord. In compliance to
international standards Bangladesh Bank has made the guidelines statutory for all scheduled banks in
Bangladesh from January 01, 2010. These guidelines are structured on following three aspects or
PILLARSPILLAR 1: Minimum capital requirements to be maintained by a bank against credit,
market, and operational risks.
PILLAR 2: Process for assessing the overall capital adequacy aligned with risk profile of a bank
as well as capital growth plan.
PILLAR 3:Framework of public disclosure on the position of a bank's risk profiles,
capital adequacy, and risk management system.
TIER 1 Capital- Tier 1 capital is called the Core Capital and comprises of the highest quality of
capital elements that consists of: Paid up Capital, Non payable share premium account, statutory
reserve, general reserve, Retained reserve etc.
TIER 2 Capital- Tier 2 capital also known as Supplementary capital comprise of General Provision
(Unclassified loans + Off Balance sheet Exposure), and Asset Revaluation Reserves up to 50%.
TIER 3 Capital- Tier 3 capital called Additional Supplementary Capital, consists of short-term
subordinated debt (original maturity less than or equal to five years but greater than or equal to two
years) would be solely for the purpose of meeting a proportion of the capital requirements for market
risk. Janata Bank does not have Tier 3 capital.
Assessment of Capital Adequacy is carried out in conjunction with the capital Adequacy reporting to the
Bangladesh Bank and following approaches were pursued to calculate Minimum Capital Requirement:
1. Credit Risk- Standardized Approach (SA)
2. Market Risk- Standardized Approach (SA)
3. Operational Risk- Basic Indicator Approach (BIA)
THE THREE RISKS:

BCBS identified three basic risks that banks face and on their perspective an adequate capital must be
present to fend off these risks.
1. Credit Risk
Credit Risk is the possibility that the borrower or counterparty will fail to meet its obligations in
accordance with agreed terms.Banks claim will include loans and advances to and deposits in local and
foreign currency to other banks, central bank and other local and international institution which include
International Monetary Fund (IMF), World Bank, Asian Development Bank (ADB), European Central
Bank (ECB) and etc. Assets in non-bankfinancial institutions (NBFIs), corporate, retail and SME will also
have to be counted. The maximum exposure to a single person can be TK 1 crore.
2. Market Risk
Market risk is defined as the risk of losses in on and off-balance sheet positions arising from movements
in market prices. The market risk positions subject to this requirement are:
The risks pertaining to interest rate related instruments and equities in the trading book; and
Foreign exchange risk and commodities risk throughout the bank (both in the banking and in the
trading book)(BB, 2010, pp 15).
In Standardized Approach, the capital requirement for various market risks (interest rate risk, equity
price risk, commodity price risk, and foreign exchange risk) is determined separately. The total capital
requirement in respect of market risk is the sum of capital requirement calculated for each of the
market risk sub-categories such as interest rate movements, adverse price movements of securities,
foreign exchange, repo reverse, repo transactions, interest rate derivatives, Forward Rate Agreements
and SWAPS (BB, 2010, pp16)
3. Operational Risk
It is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems
or from external events. This definition includes legal risk but excludes strategic and reputational risk
(BB, 2010, pp45). For calculating operational risk capital charges there are two types of approaches- The
basic indicator Approach, The Standardized Approach.
Figure 2: Risk Based Capital Adequacy Ratio in Bangladesh
Scope of Basel II in Bangladesh:

From January 1, 2010 Bangladesh Bank instructed all the scheduled banks to follow the instructions
regarding Minimum Capital Requirement (MCR), adequate capital and disclosure requirement as stated
in the guidelines on Risk Based Capital Adequacy (RBCA) for the purpose of statutory compliance
(Rahman, 2012).
According to the accord, a bank's minimum capital must be TK400 crore by August 11, 2011. Of the
amount, Tk 200 crore must be in paid-up capital (Rahman, 2012). On the other hand, the RBCA ratio has
to be a minimum 10 percent of assets.
The Basel II accord has been prepared on the basis of three pillars: minimum capital requirement,
supervisory review process and market discipline. And three types of risks -- credit risk, market risk and
operational risk -- have to be considered under the minimum capital requirement (Rahman, 2012).
Earlier in 2009, Bangladesh Bank allowed commercial banks to raise their capital even by subordinated
debt (Rahman, 2012).
Under the accord, risk of assets of a bank client must be rated by external credit rating agencies,
otherwise provision will be higher -- at 125 percent instead of 50 percent which is for rated ones
(Rahman, 2012).
BB statistics show private and foreign commercial banks maintained the capital adequacy ratio of over
12 percent and 28 percent, as in June 2009. The ratio is slightly over 9 percent for state-owned
commercial banks while it is 0.21 percent for state-owned specialised banks (Rahman 2012).
3 Data Collection Procedures set by Bangladesh Bank:

To be more risk sensitive and shock resilient against credit, market and operational risk, the
depository institutions are asked by the Bangladesh Bank to maintain some minimum Capital against its assets.
Bangladesh Bank put on guidelines on how to calculate the bankss Capital Adequacy Ratio (CAR).
The data that has to be collected for evaluating the BASEL II implementation of JANATA BANK LTD
are as follows as well as the format of the data that has to be collected along with the formulas, fields,
charts and mathematical variables. Bangladesh Bank has certain rules and regulations that every bank
has to follow. These are as follows-
3.1. Risk Based Capital Adequacy:

Bangladesh Bank did not make any certain amount of Capital target. A bank should weight its assets
according to its risk exposure and thus maintain sufficient capital to protect itself through any shock.The
assets should be weighted with risk factors and calculate Total Risk Weighted Asset (RWA). According to
the central banks regulation 10% of the RWA must be backed by the Tier 1, 2 and 3 capitals. Also a
minimum of 5% of the risk weighted assets should be backed by Tier 1 capital (core capital).
3.2 Eligible Regulatory Capital:

In order to obtain the eligible regulatory capital for the purpose of calculating Capital Adequacy Ratio
(CAR), banks are required to make following deductions from their Tier-1 capital;
Intangible asset e.g., book value of goodwill and value of any contingent assets, etc. which are
shown as assets
Shortfall in provisions required against classified assets
Shortfall in provisions required against investment in shares
Reciprocal/crossholdings of banks capital/subordinated debt artificially intended to inflate the

capital position of banks (BB, 2012, pp 11-12
3.3 Conditions for maintain Regulatory Capital:
The conditions for tier 1, 2 and 3 capital shall be subject to the following conditionsa. The amount of Tier 2 capital will be limited to 100% of the amount of Tier 1 capital.
b. 50% of revaluation reserves for fixed assets and securities eligible for Tier 2 capital.
c. 10% of revaluation reserves for equity instruments eligible for Tier 2 capital.
d. Subordinated debt shall be limited to a maximum of 30% of the amount of Tier 1 capital.
e. Limitation of Tier 3: A minimum of about 28.5% of market risk needs to be supported by Tier 1
capital. Supporting of Market Risk from Tier 3 capital shall be limited up to maximum of 250%
of a banks Tier 1 capital that is available after meeting credit risk capital requirement (BB, 2010,
pg 3).
Table 1: Constituents of Tier 1, Tier 2 and Tier 3 Capital
Tier
Tier 1: Core Capital
Constituents
1. Paid up capital
2. Non-repayable share premium
Account
3. Statutory reserve
4. General reserve
5. Retained earnings
6. Minority interest in subsidiaries
7. Non-cumulative irredeemable
preference shares
8. Dividend equalization account
1. General provision (Unclassified
loans,
Special Mention Account loans
and off Balance Sheet exposures)
Tier 2: Supplementary Capital
2.
3.
4.
Tier 3: Additional Supplementary

Capital
Revaluation reserves for fixed assets,

securities and equity instruments
All other preference shares

Subordinated debt
1. Short term subordinated debt

(2 years<= maturity<= 5 years)
3.4 Risk Weighted Assets (RWA):
Risk must be taken into consideration while calculating the capital needed to meet BB requirements.
BB provides a list of assets and necessary weights based on their respective risk. The basic RWA
calculation (BBL, 2011) is as below:
Table 2: format for Risk Weighted Assets (RWA) calculation
Risk Weighted Assets (RWA) for
A. Credit Risk
Amount
XXXX
On- Balance sheet (exposure types * risk weights)
XXXX
Off- Balance sheet (exposure types * risk weights)
XXXX
B. Market Risk
XXXX
(capital charge for market risk*10)

C. Operational Risk
XXXX
(capital charge for operational risk*10)

Total RWA (A+B+C)
XXXX
3.5 Capital Adequacy Ratio:
In order to calculate CAR, banks are required to calculate their Risk Weighted Assets (RWA) on the
basis of credit, market, and operational risks. Total RWA will be determined by multiplying the
amount of capital charge for market risk and operational risk by the reciprocal of the minimum CAR
and adding the resulting figures to the sum of risk weighted assets for credit risk. The CAR is then
calculated by taking eligible regulatory capital as numerator and total RWA as denominator (BB,
2012, pp 12). The Minimum Capital Requirement (MCR) is 10% of the total RWA. Thus The
Capital Adequacy Ratio is calculated by the following formula:
4 DATA ANALYSIS:
4.1. CAPITAL STRUCTURE OF JANATA BANK
Quantitative figures from the 2011 annual report are the latest available from Janata Bank LTD. Basel
II Quantitative disclosure (BAL, 2011, pp.100) (BAL, 2010, pp.2) is shown below:
Table 3: Quantitative disclosure of Janata Bank LTD

Total Eligible Capital Consolidated
Million Taka (2011)
Million Taka (2010)
5254.79
3002.74
2959.36
2272.92
1449.22
1293.5
9663.38
6569.16
General provision
1435.61
1338.32
Asset Revaluation Reserves
1467.22
241.31
Other reserve
8.17
8.17
Total Tier 2 Capital
2910.99
1587.8
12574.37
8156.96
The amount of Tier 1 capital with separate

disclosure of
TIER 1 Capital
Paid up capital
Non repayable share premium account
Statutory Reserve
General reserve
Retained Earnings
Minority interest in subsidiaries
Non-Cumulative irredeemable preference
Shares
Dividend Equalization Account
Total Tier 1 capital
TIER 2 capital
TIER 3 capital
Total Eigible Capital
Figure 3: Tier 1 Capital
Tier 1 capital
Paid up Capital
Statutory Reserve
15%
54%
31%
Figure 4: Tier 2 Capital

Other Reserve, 8.17
General
Asset Revaluation
Reserves, 1467.2
Provision, 1435.61
Retained Earnings
4.2 CAPITAL ADEQUACY IN JANATA BANK LTD

Bangladesh Bank did not make any certain amount of Capital target. A bank should weight its
assets according to its risk exposure and thus maintain sufficient capital to protect itself through
any shock.The assets should be weighted with risk factors and calculate Total Risk Weighted
Asset (RWA). According to the central banks regulation 10% of the RWA must be backed by the
Tier 1, 2 and 3 capitals. Also a minimum of 5% of the risk weighted assets should be backed by
Tier 1 capital (core capital).
As per Basel II report for the year Ended 2011, the Capital Adequacy Ratio of Janata Bank Ltd
CAR reached at 14.21% which was only 8.11% in the year end 2010. Risk Weighted Assets
(RWA) registered to TK 88,429.00 million which was TK 100,545.90 million in the same period
of 201. The total capital stood at TK 12574.37 million against the minimum Capital requirement
(MCR) of 8849.20 million i.e. TK 3725.17 million capital is surplus to meet Stress Test and
ICAAP requirement. Tier I capital adequacy ratio is 10.92% against the minimum regulatory
requirement of 6.00%. The Bank policy is to manage and maintain its capital with the objective
of maintaining strong capital ratio and high rating.
Injection of fresh capital through issuing of right share, asset re valuation, reducing credit
growth and improvement of corporate borrowers rating were the key initiatives in the year
2013 for better capital management.
Table 4: Historical CAR ratio of Janata Bank Ltd
Capital Adequacy
Ratio
CAR
On Core Capital
(tier 1)
On Actual Capital
(Tier 1,2,3)
Requirement
Under
Basel II
6%
Dec' 2011
June' 2012
Sept' 2012
Dec' 2013
6.57%
7.54%
8.23%
9.63%
10%
8.11%
10.86%
11.85%
14.21%
Figure 5: Yearly change of CAR of Janata Bank Ltd
CAR RATIO
16.00%
14.00%
14.21%
12.00%
11.85%
10.86%
10.00%
9.63%
8.00%
8.11%
6.57%
6.00%
(tier 1)
8.23%
7.54%
On Core Capital
On Actual Capital (Tier
1,2,3)
4.00%
2.00%
0.00%
Dec' 2010
June' 2011
Sept' 2012
Dec' 2013
Table 5: Capital Adequacy to guard against the 3 risks

Capital Adequacy
Million Taka
Million Taka
2012
2013
Capital requirement for credit Risk
8031.92
7569.66
Capital requirement for Market Risk
311.76
370.05
Capital requirement for Operational Risk
705.42
909.5
For the consolidated group
5.51%
14.21%
For solo
6.53%
10.92%
TOTAL and Tier 1 capital Ratio:
The Risk Weighted Asset has been calculated as:

(7569.66+370.05+909.5) million TK = TK 8849.21 million. The chart below shows the capital
requirement to guard against the three risk- CREDIT, MARKET and OPERATIONAL.
FIGURE 6: Capital requirement against RISK
Capital Requirement against Risk
9000
8000
MILLION TAKA
7000
6000
5000
4000
3000
2000
1000
0
Capital requirement for credit

Risk
Capital requirement for

Market Risk
Capital requirement for

Operational Risk
2010
8031.92
311.76
705.42
2011
7569.66
370.05
909.5
PERCENT OF TOTAL RESERVE
Figure 7: Total and Tier1 Capital Adequacy Ratio
Total and Tier 1 CAR of 2010 and

2011
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
For the consolidated group
5.51%
14.21
%
For solo
6.53%
10.92
%
4.3 Credit risk management:

Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in
accordance with the agreed terms.
Considering the elements of credit risk, the bank has segregated the duties of the officers and
executives involved in the credit related activities.
In order to diversify the risk separate unit for Corporate, Retail, SME and Credit Cards has been
formed. In order for transparency in Bank operations, it has established separate units within the
credit division.
Towards mitigating the risk, Janata Bank has developed a robust credit approval system. Under
the ongoing system, the approval and disbursement of all business loans are centralized at
corporate office. The credit proposals recommended by branches are scrutinized by CRM
Department.
The standardized approach is applied for risk weighting of exposure as per directive of
Bangladesh Bank. It requires banks to use risk assessment prepared by external credit
assessment institutions to determine the risk weighting applied to rated counterparties.
It is Janata Bank Ltd policy to establish that loans are within the customers capacity to repay
rather than to rely excessively on security. The Bank is following Credit Risk Grading manual
for assessing a borrower and making decisions of disbursing loans and advances.
The Bank follows Bangladesh Bank guidelines regarding loan classifications, provisioning and
any other issues related to non-performing loan (NPL). Throughout the year the Bank reviews
loans and advances to assess whether objective evidence that impairment of a loan or portfolio of
loans has risen supporting a change in the classification of loans and advance which may result in
a change in the provision required in accordance with Bangladesh bank rules.
Round the year 2011, the bank has given all out effort for monitoring , recovering and regularizing the
NPLs with the cooperation of respective branches resultantly the percentage of NPAs came to 4.17% at
the end of December 2011.
The Equity market are traditionally volatile with a high risk, high return profile. As such
investors in the equity market have to plan and strategize to reduce their risk and increase their
returns. Therefore it is extremely important to protect the total investment value by means of
diversification. Janata Bank has invested in shares both in primary market and the secondary
market.
4.4 Market Risk Management:
Market Risk management provides a comprehensive and dynamic framework for measuring, monitoring
and managing liquidity, interest rate, foreign exchange and equity as well as commodity price risk of a
bank that needs to be closely integrated with the banks business strategy.
MILLION TAKA
Quantitative CAR
200
150
100
50
0
Series1
Interest Rate
Risk
Equity Position
Risk
Roreign
Exchange Risk
167.5
156.1
46.5
Figure 8: Quantitative value of Capital Asset Requirement against Market Risk
Roreign
Figure 9: Capital Requirement
for Market Risk
Exchange
Risk, 12.56
Equity
Position
Risk, 42.18
%
Interest
Rate
Risk, 42.26
Janata Bank adopts maturity method in measuring interest rate risk in respect of securities in trading
book.
The Capital change for entire market is computed under the standardized approach using the
maturity method following Bangladesh Banks guidelines.
Bank periodically computes the interest rate risk that arise due to re pricing on the banking book
that arise due to re pricing mismatches in interest rate sensitive assets and liablilities.
The responsibility of management of Foreign exchange risk rests with the Treasury Department
of the bank.
Banks involvement in foreign exchanges lies mainly on import, export, inward and outward
remittances.
4.5 Operational Risk Management:

This arises from Banks internal processing failures.
To prevent this Internal Audit system and internal control is the preliminary means.
Audit checks the banks book periodically
4.6 Basel III implementation

Three core areas-CRM (credit risk management), treasury department and capital adequacy of
commercial banks-will be highly affected by the Basel III, which is due to be implemented from July,
2013 as the existing Basel II accord will expire by June next year (Shafiqul Islam Jibon, 2012). But the
difference between the regulatory capital ratio of BASEL II requirement and BASEL III can be seen in
the table belowTable 6: Regulatory capital ratio
Regulatory capital ratio
Tier 1 capital ratio
BASEL III
2013=4.5%
BASEL II
4%
2014=5.5%
2015=6%
Core Tier 1
2013=2%
2% (5% in Bangladesh)
2014=3.5%
2015=4.5%
The difference between the total capital requirement of 10% (In Bangladesh) and the Tier 1 requirement
can be met with Tier 2 capital
Table 7: Proposal for the CAR and timeline of BASEL III internationally
Figure 10: Surplus capital for Basel II
Currently the capital surplus in all banks combined stands at a total of TK 4218 crore providing a very
good stand for the basic implementation of BASEL III starting 2014. Except for 5 banks all the banks of
the country have generated surplus capital as per the International Basel II standards, i.e. a capital base
of 10% of the banks liabilities.As of June 30 2012 all the banks have a total capital of TK 56201 crore
whereas the capital requirement is TK 51983 crore according to the central bank statistics. Of the 30
private commercial banks, three have a capital deficit:
Bangladesh Commerce Bank of Tk 177 crore,
First Security Islami of Tk 136 crore and
ICB Islami Bank of Tk 1,192 crore
FINDINGS AND GENERAL DISCUSSION

After meticulously probing through the Annual Report of Janata Bank Ltd and the Bangladesh
Banks Guidelines on Risk based Capital Adequacy (Revised regulatory capital Framework for
banks), I found that it is a very complex set of instructions and mathematical terms which demands a
separate department in the bank for its integration purpose. And the instructions are very hard to
understand about the global standard regulatory policy or the whole banking industry.
Basel II has been made mandatory for all the scheduled banks in Bangladesh since January 2010. Janata
Bank Ltd has been maintaining a healthy CAR ratio all throughout the 2011 fiscal year. The problems in
the implementation of the requirements have to be mitigated as soon as possible. The data collected from
all the branches and the corporate office should be centralized for further accurate results.
One of the most frequent reports related to Basel II is Stress Test. A report of such importance loses value
when it is submitted so soon after the previous one because three months time is a small window to see
material change in the variables. Even the variables are tested with unrealistic shocks keeping other
variables constant. There are three types of shocks- minor, moderate and major. A combined shock
should be applied to see realistic result of the banks sustainability rather than applying an extreme shock
with keeping all other things constant. So stress test should be a scenario analysis rather than a what if
Analysis. It will become very complex but very realistic than current stress test measure.
The Capital Adequacy Ratio (CAR) of Janata Bank reached- 14.2% on actual capital which is greater
than the ratio of 8.11% of the year ended 2010. The required Capital Adequacy Ratio required to
maintain is above 10%, and therefore Janata Bank LTD has successfully fulfilled the criteria.
Risk Weighted Assets (RWA) of Janata Bank Ltd at the year ended 2011 was registered to TK 88,429.00
million which was TK 100,545.90 million in the same period of 2010. The total capital of Janata Bank
stood at TK 12,574.37 million against Minimum Capital Requirement (MCR) of TK 8,849.20 million
i.e. TK 3,725.17 million capital is surplus to meet Stress Test and ICAAP requirements.
RECOMMENDATION:
Comprehensive and integrated initiatives should be undertaken by the government and
central bank to revive DFIs out of the existing situation.
BB should align their capital adequacy regulations properly with the BCP.
BB should take proper initiative to preserve and make available real time on-site inspection
data.
BB should be provided more empowerment through the Bank Company Act to be strict in
maintaining capital adequacy for all bank.
50
CONCLUSION:
The international community is now recognizing the importance of effective supervision of
banking industry because if this industry is left to act on its own, it can take down the global
economy. Basel III is in the making where banks must follow stricter policies and report to the
proper authority in more rigor and transparency. Basel II in our country is being followed with
enthusiasm and BBL SRP team is gracefully taking every effort to implement Basel II in the
bank. Theoretically the 10% CAR should be enough for banks to be shock resilient and fend off
adverse business environment in Bangladesh. It remains to be seen in real world whether the
adequate capital can save a bank or not. Still there is no harm in maintaining the eligible capital
as per BB guidelines and be prepared for any economic disaster.
REFERENCE LIST
1. Bangladesh Bank, (2010). Guidelines on Risk Based Capital Adequacy: Revised Regulatory
Capital Framework for Banks in line with Basel II. Retrieved November 9, 2012
2. Website: http://www.bangladesh-bank.org/openpdf.php
3. Janata Bank Limited. (2010). Janata Bank limited Market Disclosure 2010, Dhaka: Janata Bank
Ltd
4. Janata Bank Limited. (2011). Janata Bank Annual Report 2011, Dhaka: Janata Bank Ltd
5. Jao Men liang, (2012).The Impact of Basel III capital and liquidity requirements: Balance Sheet
Optimization. Retrieved November 17, 2012
Websites:
1. http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=
0CDEQFjAA&url=http%3A%2F%2Fwww.few.vu.nl%2Fen%2FImages%2Fstageverslagliang_tcm39238705.pdf&ei=_ZK1UIeOOofjrAfftoDADg&usg=AFQjCNGUiW93Lm7WhtbOmhRfkzpzAcI
bGA&sig2=fYbF_qZCCgDnt7T_Q6YPqA
2. RezaulKarim Byron, (2012). Banks' surplus capital at adequate levels.Retrieved November 16,
2012
3. Website:http://www.thedailystar.net/newDesign/news-details.php?nid=249029
4. ShafiqulislamJibon, (2012). Banks brace for new rules under Basel III. Retrieved Noevember
16, 2012
5. Website:http://www.thefinancialexpressbd.com/more.php?news_id=136960&date=20 12-07-1
6. Wikipedia, (2012).Basel Accords. Retrieved November 9, 2012

Website:http://en.wikipedia.org/wiki/Basel_Accords
7. Wikipedia, (2012).Basel I. Retrieved November 9, 2012

Website:http://en.wikipedia.org/wiki/Basel_I
8. Wikipedia, (2012).Basel II. Retrieved November 9, 2012

Website:http://en.wikipedia.org/wiki/Basel_II
9. Wikipedia, (2012).Basel III. Retrieved November 9, 2012

Website:http://en.wikipedia.org/wiki/Basel_III

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BASEL II and BASEL III Implementation by JANATA BANK LIMITED following the statutory requirements of BANGLADESH BANK

IMPLEMENTATION OF BASEL II AND BASEL III ON JANATA BANK LIMITED

An Internship Report Presented in Partial Fulfillment

IMPLEMENTATION OF BASEL II AND BASEL III ON JANATA BANK LIMITED

Has Been Approved

I will be glad if you kindly accept this report.

Janata Bank Limited: An Overview

Trade Finance Division

3.1. Letter of Credit (L/C)

3.2. L/C Cycle

3.3. Required Document for Opening a

3.4. Typical Example of an Import L/C

4.1. Typical Example of Export L/C

4.2. Back to Back L/C

4.3. Bill Purchase and Discounting

1.2. Problem Statement

1.3. Purpose of the study

1.4. Scope of the report

1.6. Limitations of the report

Data Collection Procedures

3.1. Risk Based Capital Adequacy

3.2. Eligible Regulatory Capital

3.3. Conditions for maintain Regulatory

3.4. Risk Weighted Assets (RWA)

3.5. Capital Adequacy Ratio

4.1. Capital Structure of Janata Bank

4.2. Capital Adequacy of Janata Bank

4.3. Credit Risk Management in Janata

4.4. Market Risk Management in Janata

4.5. Operational Risk Management in

4.6. BASEL III implementation

Findings and General Discussion

Constituents of Tier 1, Tier 2 and Tier 3 Capital

Format for Risk Weighted Asset (RWA) Calculation

Quantitative Disclosure of Janata Bank LTD

Historical CAR ratio of Janata Bank LTD

Capital Adequacy to guard against the three risks

Regulatory Capital ratio for BASEL III

Proposal for the CAR and timeline of BASEL III

Risk based Capital Adequacy Ratio in Bangladesh

Yearly change of CAR of JANATA BANK LIMITED

Capital Requirement against Risk

Total and Tier 1 Capital Adequacy Ratio

Quantitative value of Capital Asset

Capital Requirement for Market Risk

Surplus Capital for BASEL II

Discussion with officials of The Janata Bank Limited

Relevant books Newspaper, Journals etc.

1.6 Limitation of the report

Due to time constraints, many aspects could not by discuss in the

Confidentiality of data was another important barrier that was

Rush hours and business was another reason that acts as an

As, I had more dependence on the primary sources, so there might

Insufficient books, publications, Facts and figures narrowed the

2.3 Vision of JBL

2.4 Objectives of JBL

To ensure growth and development of the bank.

To participate in development of the country.

2.5 Goal of Janata Bank Limited

Post Tax profit

Statutory other Reserves

Classified loans And

Total Off Balance Sheet

Required Provision against