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Credit Risk Management & Private Commercial Banks Performance in Bangladesh
1
1.1 Background of the Study
Banks are useful to economic development through the financial services they provide. Their
intermediation role can be said to be a method for economic growth. The efficient and effective
performance of the banking industry over time is an index of financial stability in any nation.
The extent to which a bank extends credit to the public for productive activities accelerates
the pace of a nation’s economic growth and its long term sustainability. There are four (4)
State owned Commercial Banks, thirty nine (39) Private commercial Banks, ten (10) foreign
banks and nine (9) specialized development banks in Bangladesh.
The researcher has taken 3 Private commercial Banks as a sample to measure the Private
Commercial Banks Performance in Bangladesh. The researcher has measured the Performances
through different types of methods that represent all the Private Commercial Banks Performance
in Bangladesh. Because every Banks target is to collect the idle money from the people and
invest where deficit and also this process make profit. The Researcher 3 banks are United
Commercial Bank Ltd. (UCBL), Southeast Bank Ltd. (SEBL) and Standard Bank Ltd. (SBL)
whose are Bangladesh based financial institution and provides banking services. The services
include personal & business banking, loans, credit cards, online banking and money transfer
services. The entire bank operates in Bangladesh & headquarter is in Dhaka. Being committed to
the economic development of the country, the entire Private Commercial Bank has already made
a distinct mark in the area of private Sector Banking through personalized service, innovative
practices dynamic approach & efficient Management .The entire bank aiming is to play a leading
role in the economic activities of the country & is firmly engaged in the development of trade,
commerce & industry through a creative credit policy.
United Commercial Bank (UCB) started its journey in mid 1983 and has since been able to
establish itself as one of the largest first generation banks in the country. Its Authorized Capital
is 15,000.00 million Tk. & Paid up Capital is 8,366.00 million Tk. With a vast network of 148
branches, this Bank has already made a distinct mark in the area of Private Sector Banking
through personalized service, innovative practices, dynamic approach and efficient Management.
The Bank has expanded its arena in different and diverse segments of banking like Retail
Banking, SME Banking, Corporate Banking, Off-shore Banking & Remittance etc. Besides
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
2
various deposit and loan products of Retail Banking, the Bank caters export and import loan to
deserving candidates which in turn helps the overall economy of the country through increased
earning foreign exchange.
Standard Bank Limited (SBL) was incorporated as a Public Limited Company on May 11, 1999
under the Companies Act, 1994 and the Bank achieved satisfactory progress from its commercial
operations on June 03, 1999. Its Authorized Capital is 15000.00 million Tk. & Paid up Capital is
5702.00 millions Tk. SBL has introduced several new products on credit and deposit schemes. It
also goes for Corporate and Retail Banking etc. The Bank also participated in fund Syndication
with other Banks. With 96 branches it has made personalized service, innovative practices,
dynamic approach and efficient Management.
Southeast Bank Limited is a private commercial bank in Bangladesh. The Bank’s journey began
when it was incorporated as a public limited Company on March 12, 1995. Its Authorized
Capital is 10000.00 million Tk. & Paid up Capital is 6390.00 million Tk. In the Registrar of Joint
Stock Companies and Firms issued the Certificate of Commencement of Business of Business of
the Bank on the same date. The Southeast Bank received its Banking License from the
Bangladesh Bank on March 23, 1995.With its 111 branches have expanded its arena in different
and diverse segments of banking like Retail Banking, SME Banking, Corporate Banking, Off-
shore Banking & Remittance etc.
Banks are in the Business of managing risk, not avoiding it. A bank’s success lies in its ability to
assume and aggregate risk within tolerable and manageable limits. Risk is the fundamental
element that drives financial behavior. Without risk, the financial system would be vastly
simplified. Financial institution should manage the uncertainty to survive in this highly uncertain
world. Only those banks have efficient risk management system, they can survive in the market
in the long run.
The credit function of banks enhances the ability of investors to exploit desired
profitable ventures. Credit creation is the main income generating activity of banks (Kargi,
2011). However, it exposes the banks to credit risk. The higher the exposure of a bank to
credit risk, the higher the tendency of the banks to experience financial crisis and vice-
versa. Interest rate risk is directly linked to credit risk implying that high or increment in interest
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
3
rate increases the chances of loan default. Credit risk and interest rate risk are intrinsically
related to each other and not separable (Drehman, Sorensen, and Stringa, 2008).
Financial ratios as measures of bank performance has been collected from the annual reports and
accounts of Private Commercial Banks in Bangladesh and analyzed using descriptive, correlation
and regression techniques from the help of SPSS 16.00. The findings revealed that credit risk
management has a significant impact on the profitability of Bangladesh Private Commercial
Banks. Banks’ profitability depends on ROA, Total Investment to Total Assets, Profit Margin
Ratio and it is inversely related with Credit Risk.
All the banks vision are to be the bank of first choice in all terms, sustainable inclusive
business growth by ensuring efficiency, regulatory compliance, good asset quality, combination
of experience and professional talents, consistent profitability and of course good governance.
Pooling of deposits that are able to advance loans from which income is derived for their
survival. Bank offers all kinds of Commercial Corporate & Personal Banking services covering
all segments of society within the framework of Banking Company Act and rules and regulations
laid down by the Central Bank of Bangladesh.
1.2 Origin Of the Report
This report has been prepared to fulfill the partial requirement of Internship of BBA Program of
Business Administration Discipline, Khulna University supervised by Associate Professor Tania
Afroze, Business Administration Discipline, Khulna University, Khulna. The researcher has
attached with Credit Risk Management and Private Commercial Banks Performance in
Bangladesh & the researcher has prepared this report with the guidance of her supervisor and
after getting the approval from the supervisor work on this topic.
1.3 Objective of the study
Investigate the Credit Risk Management of Private Commercial Banks in Bangladesh.
Evaluate credit risk management practices and techniques in dealing with different types
of risk.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
4
Identify the factors that influence effectiveness of Banks Performance used by Private
commercial banks in Bangladesh.
1.4. Operational definition & Measurements
Now primary variables have been given but other variables may use for the Researcher report in
future. This report researcher has used five independent variables & one dependent variable.
Variable Operational Definition Measurement items Bank Performance screen banks on the basis of their
solvency, liquidity and overall performance
timing of supervisory detect possible
problems provide information to
the investors gives clear idea of
liquidity
Asset Quality is an indicator for the liquidation of banks
management of operations
level of liquidated banks
affects profitability
GNPAs/GA measure of quality of assets in loss of Non-Performing Assets situation
gross advances reduces value of Bank destabilizes credit
system TI/TA helpful to benefit from the possible
economies of scale make profit measures liquid Assets enrich economy
ROA to utilize the Assets employed in the company efficiently and effectively to earn a good return
generating profit indicate efficiency giving clear idea of an
financial institution. PMR determines its ability to withstand
competition and adverse conditions determines ability ensures efficiency contribute to the
economy
Table 1: Operational definitions & Measurement
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
5
1.5. Methodology
This report has conducted data from 3 commercial banks in Bangladesh those are United
Commercial Bank Limited (UCB), Southeast Bank Limited (SEBL) & Standard Bank Limited
(SBL). The main sources have been collected from published Annual Report 2013. Causal
research design & descriptive research design have used for establishing the relationship between
the variables with Bank Performances. Descriptive Research Design has been conducted for
measuring Profitability ratio of Private Commercial Bank. Here Bank Performances is dependent
variable for measurement of profitability relatively to their assets and how the measurement is
efficient in utilizing the company assets to generate profit. The independent variables are Asset
Quality, Gross Non-Performing Assets to Gross Advances, Total Investments to Total Assets,
and Return on Assets & Profit Margin Ratio.
The Researcher population is all the Commercial Banks in Bangladesh. The Researcher has
taken Stratified Sampling that is probability methods of sampling for the 3 banks and the banks
are United Commercial Bank Limited, Standard Bank Limited and Southeast Bank Limited.
Here manipulation of dependent variable is Banks Performance with the control of independent
variables is Asset Quality, Gross Non Performing Assets to Gross Advances, Net advances, Total
Investments, Total assets. The Researcher has measured these factors by semi structured close
ended questions. Five point Likert Scale (SD= Strongly Disagree, MD= Moderately Disagree,
Ag= Agree, MA= Moderately Agree, SA= Strongly Agree) is used to identify correlation. For
the Researcher Report has to use various types of calculation. Those are given below:
1.5.1 Current Ratio
Current ratio is used primarily to ascertain a company’s ability to pay back its short-term
liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher
the current ratio, the better the company’s ability is to pay its obligations. The current ratio can
give a sense of the efficiency of a company’s operating cycle or its ability to turn its product into
cash.
Current Ratio =�������������
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Credit Risk Management & Private Commercial Banks Performance in Bangladesh
6
1.5.2 Return on Assets
The Return on Assets of a company determines its ability to utilize the Assets employed in the
company efficiently and effectively to earn a good return. This ratio measures the
percentage of profits earned per Tk. of Assets and thus is a measure of efficiency of the company
in generating profits on its Assets. Higher ratio indicates efficiency of management in employing
its funds efficiently and economically.
ROA = Net Profit / Total Assets
1.5.3 Return on Equity
This ratio indicates how profitable a company is by comparing its net income to its average
shareholders’ equity. The return on equity ratio measures how much the shareholders earned for
their investment in the company. The higher the ratio percentage, the more efficient management
is in utilizing its equity base and better return to investors
ROE= Net Income/Average Shareholders’ Equity
1.5.4 Capital Adequacy Ratio
Capital Adequacy Ratio is the ratio of qualifying capital to adjusted (or weighted) assets. The
minimum capital adequacy ratio is at 10% for all banks that is prescribed by Bangladesh Bank. A
ratio below the minimum indicates that the bank is not adequately capitalized to expand its
operations. The ratio ensures that the bank do not expand their business without having adequate
capital.
CAR = Tier I capital + Tier II capital/ Risk weighted assets
It would be difficult for an investor to calculate this ratio as banks do not disclose the details
required for calculating the denominator (risk weighted average) of this ratio in detail. As such
banks provide their CAR time to time.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
7
1.5.5 Credits to Deposit Ratio
CD ratio that means how much of the advances lent by banks are done through deposits. It is the
proportion of loan-assets created by banks from the deposits received. It is the ratio, the higher
the loan-assets created from deposits. Deposits would be in the form of current and saving
account as well as term deposits. The outcome of this ratio reflects the ability of the bank to
make optimal use of the available resources
CD Ratio= Total Advance/Total Deposit
1.5.6 Gross NPAs to Gross Advances Ratio
The Gross NPAs to Gross Advances ratio is a measure of the quality of assets in a situation,
where the management has not provided for loss on NPAs (Non-Performing Assets). Here
Gross NPAs are measured as a percentage of Gross Advances. Lower ratio indicates better
quality of advances.
Gross NPAs to Gross Advances Ratio = Gross NPAs / Gross Advances
1.5.7 Net NPAs to Net Advances Ratio
This ratio is the most standard measure of Assets Quality. This ratio measures Net NPAs as a
percentage of Net Advances. Net NPAs are Gross NPAs net of provisions on NPAs and
interest in suspense account.
Net NPAs to Net Advances = Net NPAs / Net Advances
1.5.8 Total Investments to Total Assets Ratio
This ratio indicates the aggressiveness of banks in investing rather than lending. It is the ratio of
Total Investments to Total Assets. Higher ratio means lack of credit take-off in economy and
much proportion of total assets is utilized in investments that should not be the case with
banks because the primary business of the banks is to lend. This ratio indicates how much
proportion or percentage of total assets is in the form of investments.
Total Inv. to Total Assets Ratio = Total Investments/Total Assets
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
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1.5.9 Net NPAs to Total Assets Ratio
This ratio indicates the efficiency of the bank in assessing credit risk and to an extent recovering
the debts. This ratio is arrived at by dividing the Net NPAs by Total Assets. Net NPAs are
calculated by adjusting provisions against Gross NPAs. Lower ratio indicates the better
performance of banks.
Net NPA to Total Assets Ratio = Adjusting Provision/ Gross NPAs
1.5.10 Earnings per Share
This ratio measures the profitability of the firm on per Equity Share basis. This ratio measures
the earnings available to an equity shareholder on a per share basis.
Earnings per Share = Net Income – Dividend on Preferred Shares/Weighted Average
Number of Common Share Outstanding
1.5.11 Interest Income to Total Income Ratio
Interest Income is a basic source of revenue for banks. The Interest Income to Total Income
Ratio indicates the ability of the bank in generating income from its lending activities. In other
words, this ratio measures the income from lending operations as a percentage of the total
income generated by bank in a year. Interest Income includes Interest on Advances,
Discount on Bills, Income from Investments, Interest on Deposits with Bangladesh Bank
and Other Inter-Bank Funds.
Interest Income to Total Income Ratio = Interest Income/Total Income
1.5.12 Profit Margin Ratio
The profit margin of a company determines its ability to withstand competition and adverse
conditions like rising costs, falling prices or declining sales in future. This ratio measures
the percentage of net profit to total income and thus is a measure of efficiency of the company.
PMR = Net Profit / Total Income
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
9
1.5.13 Non- Performing Assets Ratio
NPAs ratios indicate that is used as a measure of the overall quality of the bank’s loan book.
NPAs are those assets for which interest is overdue for more than 90 days (or 3months).
Net NPAs are calculated by reducing cumulative balance of provisions outstanding at a period
end from gross NPAs. Higher ratio reflects rising bad quality of loans.
NPAs ratio = Net non-performing assets/Loans given
1.6 Sample of Data Collection
In this Report the Researcher has used for Research design is both Causal research design and
descriptive research design. The Researcher has taken Stratified Sampling that is probability
methods of sampling for UCBL, SEBL & SBL. Here Bank Performances is dependent variable
for measurement of profitability relatively to their assets and how the measurement is efficient in
utilizing the company assets to generate profit. The independent variable is Asset Quality, Gross
Non-Performing Assets to Gross Advances, Total Investments to Total Assets, Return on Assets
& Profit Margin Ratio.
The Researcher has collected her essential information for this report from Annual Report of
United Commercial Bank Limited, Standard Bank Limited and Southeast Bank Limited in
Bangladesh. The Researcher has used Primary Data and Secondary data for my report.
Primary Data has been collected from the Head of Credit Division Employee of those
Commercial banks.
Secondary data have collected from the website & financial statement of those banks. A semi
structured questionnaire designed for this report with five point Likert Scale.
As The Researcher has been completed her Internship under the United Commercial bank
limited (UCBL), so its credit policy so far as same all two banks. Because all the commercial
banks follow the rules & regulation of Bangladesh Bank but their interest rate differs and their
loan collection techniques also differ and problem mitigation techniques are different.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
10
1.7. Hypotheses
Researcher has selected five independent variables that are Asset Quality, Gross NPAs to Gross
Advances Ratio, Total Investment to Total Asset, Total investment to Total Income, Return on
Assets & Profit Margin Ratio. Only dependent Variable is Bank Performances. In this report the
researcher has tried to find out that Independent Variables are they related with Bank
Performances or not and if they linked how much they related strongly with bank performances .
H1 There is a significant relationship between Bank Performances & Asset Quality.
H2 There is a significant relationship between Gross NPA to Gross Advances Ratio and Bank Performances.
H3 There is a significant relationship between Total Investment to Total Asset & Bank Performances.
H4 There is a significant relationship between Return on Asset and Bank Performances.
H5 There is a significant relationship between Profit Margin Ratio and Bank Performances.
Table-2: Hypotheses
1.8. Reliability
Reliability is the consistency of result when the research object has been repeatedly measured.
The Researcher has been measured reliability by using Cronbach’s alpha methodology based on
internal consistence. The reliability analysis of each factor has performed after eliminating
measurement items that lower the overall reliability, produced the following results: Asset
Quality .723, Gross NPAs to Gross Advances .460, Total Investment to Total Asset .725,Return
on Assets.720 & Profit margin Ratio 0.608. Cronbach Alpha value for all factors is (∝>.613),
indicating satisfactory reliability level of internal consistency is (∝>.60).
BP(Y) = α +X1AQ+X2GNPAs/GA+X3TI/TA+X4ROA+X5PMR
Bank Performance Factors Number of Items Cronbach’s Alpha Value
Asset Quality 5 0.723
Gross NPAs to Gross Advances 6 0.460
Total Investment to Total Asset 6 0.725
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
11
Return on Asset 6 0.720
Profit Margin Ratio 6 0.608
Table-3 Reliability tests
1.9. Hypotheses Test
1.9.1 Independent T-test:
The Levene’s test reveals that F statistics is significant (p<0.05). The bottom row (Equal
Variances not assumed) is appropriate for explaining whether difference in opinions lies between
on Banks Performance and Asset Quality. Bottom row shows that null hypothesis (H01) is
significant (p <0.05). It signifies that the hypothesis is true, thus accepted and null hypothesis
rejected. (Figure 1)
The Levene’s test reveals that F statistics is not significant (p>0.05). The upper row (Equal
Variances Assumed) is appropriate for explaining whether difference in opinions lies between
Banks Performance and Gross NPAs to Gross Advances. Bottom row shows that hypothesis
(H02) is not significant (p >0.05). It signifies that the hypothesis is true, thus accepted. (Figure 2)
The Levene’s test reveals that F statistics is significant (p<0.05). The Bottom row (Equal
Variances Assumed) is appropriate for explaining whether difference in opinions lies between
Banks Performance and Total Investment to Total Asset .Bottom row shows that null hypothesis
(H03) is significant (p <0.05). It signifies that the hypothesis is true, thus accepted. (Figure 3)
The Levene’s test reveals that F statistics is significant (p<0.05). The Bottom row (Equal
Variances Assumed) is appropriate for explaining whether difference in opinions lies between on
Banks performance and Return on Asset. Bottom row shows that null hypothesis (H04) is
significant (p <0.05). It signifies that the hypothesis is true, thus accepted. (Figure 4)
The Levene’s test reveals that F statistics is not significant (p>0.05). The upper row (Equal
Variances Assumed) is appropriate for explaining whether difference in opinions lies between on
Banks Performance and Profit margin Ratio. Upper row shows that null hypothesis (H05) is not
significant (p >0.05). It signifies that the hypothesis is true, thus accepted. (Figure 5)
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
12
a. Predictors:AQ,GNPAs/GA, TI/TA ,ROA,PMR
Coefficientsa
Model
Unstandardized Coefficients
Standardized
Coefficients
t Sig. B Std. Error Beta
1 (Constant) 1.594 .516 3.088 .003
AQ .475 .067 .594 7.130 .000
GNPAs/GA -.087 .103 -.075 -.848 .399
TI/TA .335 .096 .289 3.503 .001
ROA .407 .134 -.148 -1.551 .001
PMR .168 .113 .131 1.477 .143
a. Dependent Variable: Bank
Performance
Table – 4: Coefficients
This study has been combined five banks performance variables into one regression, to see the
overall effect on Banks Performance. The result in the table shows that of the five hypothesized
relationships, three are significant (p<0.05) and two are non-significant (p>0.05).
This model explains 53.1% (R2 =.531) variation of Banks Performance. Still 46.9% variation is
not measured. So, Asset Quality, Gross NPAs to Gross Advances, Total Investment to Total
Asset, Return on Asset, Profit Margin Ratio (Independent Variables) are not capable enough to
measure Banks Performance.
This table also indicates that Asset quality, Total investment to Total Assets & Return on Asset
are statistically significant (p<0.05) in determining the performances of Private Commercial
Banks in Bangladesh. So, null hypothesis is rejected and there is significant relationship among
Banks Performance & Asset Quality and Total Investment to Total Assets & Return on Asset.
Model Summary
Model R R Square
Adjusted R
Square
Std. Error of the
Estimate
1 .729a .531 .501 .47386
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
13
This table also indicates that Gross NPAs to Gross Advances, Profit Margin Ratio are not
statistically significant (p>0.05).So, null hypothesis is accepted and there are no relationship
among Banks Performance. Regression results showed that Asset Quality, Total Investment to
Total Asset & Return on Asset have positive impact on the Banks Performance. Gross Non-
Performing Assets to Gross Advances & Profit Margin Ratio have negative impact with Banks
Performance.
1.11. Limitations
The tenure is for twelve weeks only that is not sufficient time for reaching all the Private
Commercial Bank’s in Bangladesh.
The entire employee may not provide all the information that is necessary for me. The
entire employee may not give valid information so it is a risk for me.
Employees are not aware of the terms of Banks Performance & they are not comfortable
with it.
As Audited report is not Published yet so the researcher have faced many problems to
collect the Data of 2014.
1.12. Conclusion
The main objective of this report is to investigate Credit Risk Management and Private
Commercial Bank performance in Bangladesh. The Other objectives are to evaluate credit risk
management practices and techniques in dealing with different types of risk, to identify the
factors that influence effectiveness of Banks Performance by Commercial Banks in Bangladesh.
Bank survival and performance is the key to the stability of the financial system and the overall
growth of the economy. United Commercial Bank, Southeast Bank Limited & Standard Bank
Limited and all other Private Commercial bank in Bangladesh have already made a distinct mark
in the area of Private Sector Banking through personalized service, innovative practices, dynamic
approach and efficient Management. The Bank has expanded its arena in different and diverse
segments of banking like Retail Banking, SME Banking, Corporate Banking, Off-shore Banking
& Remittance etc. Besides various deposit and loan products of Retail Banking, the Bank caters
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
14
export and import loan to deserving candidates which in turn helps the overall economy of the
country through increased earning foreign exchange.
It is only when banks are in health state that they can be able to perform financial intermediation
roles. Therefore, bank supervisors in collaboration with bank owners should put in place
measures that promote bank performance and survival. The remedies for bank survival vary from
those implemented by external parties with interests in the banking sector and those implemented
within individual commercial banks.
Researcher has selected five independent variables that are Asset Quality, Gross NPAs to Gross
Advances Ratio, Total Investment to Total Asset, Return on Assets & Profit Margin Ratio. Only
dependent Variable is Banks Performance. In this report the researcher has tried to find out that
Independent Variables are they related with Banks Performance or not and if they linked how
much they related strongly with bank performances. After gathering information Asset Quality,
Total Investment to Total Asset and Return on Asset are related with Banks Performance.
The risk associated with the business of banking can be defined credit risk, market risk, foreign
exchange risk, liquidity risk and interest rate risk, operational risk, legal risk & strategic risk.
Every Financial institution face risk and they take various steps to mitigate these risks. By the
help of Bangladesh bank they take proper techniques from that risk. Every function of the
banking business has an element of risk and success of this business lies in prudent
identification, calculation & management of these risks. The future of banking is undoubtedly
rest on risk management dynamics. The effective management of credit risk is a crucial
component of comprehensive risk management essential for long term success of a banking
institution. In the line with this reality, the entire bank concentrates the credit risk management
as the topmost priority.
For measuring financial ratios of all Banks UCBL position is the 1st and then other banks.
Though it established earlier & has created faith to the mind of customers. 2nd generation bank
like SEBL & SBL they are competing with 1st generation bank and making profit and contribute
to enrich our economy. Our Government is giving permission to establish new private banks and
encourage the investors to invest these sectors and it also a good indicator to create employment.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
15
2.0 Literature Review
The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lenders trust in
a person’s/firm’s/or company’s ability or potential ability and intention to repay. In other words,
credit is the ability to command goods or services of another in return for promise to pay such
goods or services at some specified time in the future. For a bank, it is the main source of profit
and on the other hand, the wrong use of would bring disaster not only for the bank but also for
the economy as a whole. A bank can lend to the customers 80% of its Total Asset by the rule of
Bangladesh Bank.
The risk associated with the business of banking can be defined credit risk, market risk, foreign
exchange risk, liquidity risk and interest rate risk, operational risk which sometimes includes
legal risk and most recently strategic risk (Asare-Bekoe, 2010; Yussif, 2003, Cooperman et al.,
2000). Risk management is an orderly process for the identification and assessment of pure loss
exposure faced by an entity (Redja, 2008). It is also defined as coherent activities which are
undertaken to minimize the negative impact of uncertainty regarding possible losses. It is
the life blood of every organization and corporate officers deal with it decisively wherever it
appears (Abor, 2005 & Shimpi, 2001). It is intended to help an organization meet its objectives
such as the minimization of foreign exchange losses, reduction the volatilities of cash flow
protection of earnings against fluctuations and to promote the survival of the firm through
growth and profitability (Fatemi & Glaum,2000).
Bank capital can be defined as a cushion that protects bank customers and shareholders from
unexpected losses that may arise as the bank assumes risks in its day to day trading and dealing
(BCBS, 2008a). Capital reduces the possibility of bank distress (Diamond, 2000). Capital gives
guarantee that the bank will be liquid in the long-run because deposits are withdrawn on demand
and are prone to bank-runs (Dang, 2011).
Bank’s assets comprise of loan advances, fixed assets, investments in the capital market and
money market (Aydogan, 1990). Every bank derives most of their income in form of interest
earned from loans, which they advance to various sectors of the economy. Therefore, the quality
of the loan book is responsible for bank performance ( Sangmi and Nazir, 2010). The greatest
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
16
risk facing a bank is the probability that loans will turn to be bad, that is borrowers will not honor
their promise to repay (Guy, 2011). All banks to keep the level of their non-performing loans as
low as possible. For this reason, most banks have adopted several techniques to lessen the
possibility of credit risk. Most banks have credit policy manuals, which governs how credit is
originated, sanctioned, and reviewed in order to minimize loan losses (Kroszner, 2002 ).
The need of commercial banks to encourage deposits in order to survive during difficult times
(Mangudya, 2009). As deposit taking financial intermediaries, banks should aim at encouraging
the mobilization of deposits because it is only through pooling of deposits that they are able to
advance loans from which income is derived for their survival (Fatemi & Glaum,2000).
The most important reason of measuring bank performance is to distinguish banks that are
performing well from those which are doing badly (Berger & Humphery, 1997). Bank regulators
screen banks on the basis of their solvency, liquidity and overall performance (Casuet al., 2006).
Therefore, measuring bank performance is crucial in allowing regulators to estimate the timing
of supervisory intervention and to detect possible problems before hand. In addition, investors
are also concerned about bank performance. Their decision on whether to invest in a particular
bank is an issue of performance.Net Interest Margin (NIM), Return on Assets (ROA), and Return
on Equity (ROE) are widely employed to measure performance Profit before Tax (PBT), Profit
after Tax (PAT), ROE, Rate of Return on Capital (ROC) and ROA in measuring Bank
Performance (Ahmed, 2003).
Capital adequacy reflects the scale of ability of a financial institution to withstand shocks in its
balance sheets (IMF, 2011). Therefore, capital adequacy helps banks to guarantee more business,
thus profitability. The capital adequacy for a bank is measured by the capital adequacy ratio
(Dang, 2011) .The CAR is the ratio of total equity to assets (risk-weighted) and it measures the
internal strength of the bank to withstand adverse shocks arising in the course of business
(Hassan and Bashir 2003). There is a positive relationship between performance and capital
adequacy because well-capitalized banks face less bankruptcy costs which reduces their cost of
funding, therefore profitability (Schmist and Roth, 1990). Capital adequacy also enables banks to
take full advantage of their profitable growth prospects (Akintoye and Somoye, 2008).
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
17
ROA is a ratio of Income to its total asset (Khrawish, 2011). It measures the efficiency of
management in utilizing company assets in generating income (Wen, 2010). Higher ROA shows
the effectiveness of the firm in making use of its resource endowments. Therefore, a lower ROA
shows inefficient use of assets implying that either some asset are lying idle or are outdated and
need renovation. In the banking sector a lower ROA may imply branch setups which are
operating below capacity. Banks with a lower leverage ratio (higher equity) usually report a
higher ROA but a lower ROE (Dietrich and Wanzenried, 2011).
Net Interest Margin measures the difference between the amounts paid by the bank to its lenders
(creditors/ depositors) and amount received by the bank from its borrowers (debtors) in relation
to the amount of their assets that are capable of generating income (Athanasoglou et al., 2005). It
is the gap that exists between net interest income and interest expense as fraction of interest
earning assets. NIM is frequently expressed as a percentage of what the bank is earning on its
loans in a specific period less what the bank has paid to its creditors divided by the average
amount of assets from which the interest income has been derived during that period (Tsai, Y.
C., 2005). Higher NIM is a reflection of greater performance in interest earning assets, according
to a higher net interest margin could reflect riskier lending practices associated with substantial
loan loss provisions (Khrawish, 2011).
Non Performing loans, an indicator of credit risk can reduce the value of a bank and destabilizes
the credit system. Loan default reduces the resource base of a bank for further lending, weakens
staff morale and affects the borrower’s confidence (Padmanabham & Agu,1998). There is an
indirect relationship; between non-performing loans & profitability (Kithinji,2010). Return on
equity (ROE) and Return on assets (ROA) both measuring profitability were inversely related
to the ratio of non-performing loan to total loan of financial institutions thereby leading to
a decline in profitability (Felix and Claudine, 2008). An increase in loan loss provision is also
considered to be a significant determinant of potential credit risk.
Management efficiency is regarded as a major variable in explaining firm profitability because of
the influence that it has in determining the level of operating expenses (Athanasoglou et al.
2005). Managers are the main employees in firms and have the responsibility to influence the
performance of their subordinates (Aburime, 2005). The success of an organization therefore
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
18
depends on the efficiency of management in deploying the firms’ resources for income
generation and reducing expenditure (Haron and Wan, 2004). The capability of management to
utilize the firm’s resources can be measured by financial ratios. One of the ratios used to measure
management efficiency is the operating profit to income (Sangmi and Nazir, 2010). It follows
that, the higher the operating profit to income ratio, the more efficient the management is in
terms of operational efficiency and income generation.
Bank liquidity is another factor that can significantly influence financial performance. Liquidity
can be defined as the ability of a bank to meet its obligation as and when they fall (BCBS,2000).
Liquidity is the ability of a bank to fund the increase in assets and to meet its short term
obligations and when they become due (Samad, 2004). Adequate liquidity level is positively
related to profitability (Dang,2011). The more liquid a firm’s asset, the less likely the firm is to
experience problems in meeting short term obligation (Cecchetti, 2005). However, high liquidity
positions are opportunity cost positions as implied by who defined liquidity as the easy with
which assets can be turn into money or cash. Therefore, there is a trade-off between liquidity and
profitability.
A liquid bank is less likely to be insolvent but tend to lose out revenue in form of interest on
investments. The liquidity of the bank can be measured by the loan to deposit ratio and the liquid
asset ratio. The higher the loan to deposit ratio or the lower the liquid asset ratio, the lower the
probability of a bank to be able to meet demand in loans (Hassan & Basir,2003). The liquid asset
ratio is silent regarding to the flow of funds from increase in loans, decrease, or increase in
liability and repayments of loans (Moore,2010).
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
19
3.1 Understanding the Risks and their Management
Every function of the banking business has an element of risk and success of this business lies in
prudent identification, calculation & management of these risks. Although Banks have been
doing these (prudently or imprudently) for ages, several tools and techniques have been
developed recently by different regulators and supervising bodies to bring uniformity in the
approach. As for UCBL, SEBL & SBL are focusing on the risks on the risks from two broad
perspectives, as prescribed by Bangladesh Bank; those are Core Risk management and Basel
Framework. Therefore, the risks can be described from both these perspectives.
3.2 Core Risk Management
The Core Risks, as identified by Bangladesh Bank, are as under:
Credit Risk
Foreign Exchange Risk
Asset Liability Management Risk
Internal Control and Compliance Risk
Money Laundering Risk &
Information Technology Risk
Every Bank has taken a number of initiatives to identify measure and manage these risks
effectively and efficiently.
3.2.1 Credit Risk
The world over, credit risk has proved to be the most critical of all risks faced by a banking
institution .Credit Risk arises as a result of customers or counter-parties not being able to or
willing to fulfill their financial & contractual obligations as and when they fall due. These
obligations arise from lending, trade financing and other activities undertaken by the Bank. So,
credit risk is the potential loss of revenue as a result of the failure of the borrower or the counter
parties to meet their obligations in accordance with agreed terms. Every Bank has placed strong
emphasis in creating credit risk awareness among all lending employees within the Bank. Credit
Risk awareness programs are conducted regularly to create risk awareness culture and empower
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
20
staff with the capability to identify and manage credit risks more effectively. Selection and
training of lending personnel is considered a key process in the management of credit risk.
The Possibility of incurring loss due to inability of a borrower or counterparty to honor its
obligations or fulfilling their commitment in accordance with the agreed terms and conditions is
termed as credit risk. In other words, it is the loss associated with degradation in the credit
quality of borrowers or counterparties. In a bank’s portfolio, losses stem from outright default
due to the inability or unwillingness of the customer or counterparty to meet commitments in
relation to lending, trading, settlement and other financial transaction. Alternatively, losses result
from reduction in portfolio value arising from actual or perceived deterioration in credit quality.
Credit risk emanates from a bank’s on and off balance sheet dealings with an individual, firm,
company, corporate entity, bank, financial institution or a sovereign.
3.2.1.1 Credit Risk (Criteria):
Credit Risk
Financial
Risk Business/
Industry
Risk
Management Risk Security Risk Relationship
Risk
Leverage
Liquidity
Profitability
Coverage
Size of Business
Age of Business
Business Outlook
Raw Material
Availability
Industry growth
Market Competition
Entry/Exit Barrier
Experience
Track Record
Second
Line/Succession
Team Work
Security
Coverage
(Primary)
Collateral
Coverage
Support
Guarantee
Account
Contact
Utilization
of Limit
Complianc
e of
Covenants
Personal
Deposit
Diagram -1: Credit Risk
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
21
The key methods used to identify, assess, control and monitor the Credit Risk of the bank are as
follows:
3. Risk Control
Credit Policy which documents the
credit risk rating, collateral policy and
policies on rehabilitation and
restructuring of problematic and
delinquent loans.
Efficient credit personnel to deal with
the credit approval, processing and
review.
Segregation of duties between credit
approvals functions and credit
obligations.
Independent credit control and
monitoring
4. Risk Monitoring
Past due principal or interest
payments, past due trade bills,
account excesses and breach of loan
agreements.
Loan terms and conditions are
monitored, financial statements are
received on e regular basis and any
agreement breaches or exception
are to be referred to the proper
authority for timely follow-up.
Timely corrective action is to be
taken to address findings of any
internal, external inspection/audit.
Credit Risk Management
1. Risk Identification
Critical analysis & review of criminal
accounts to identify weakness in
credit.
Benchmark of asset quality against
industry peers.
Apart from this, Credit risk for the counter
party arises from an aggregation of the
following:
Financial Risk
Business/Industry Risk
Management Risk
Security Risk
Relationship Risk
Natural Calamities and Political unrest
2. Risk Assessment and Measurement
Use of Credit Risk Rating system to
grade the quality of borrowers.
Collect the Credit Information
Bureau (CIB) report of the potential
borrower from The Central Bank.
Stress testing of loan portfolios
under various scenarios.
Diagram -2: Credit Risk Management
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
22
3.2.2 Foreign Exchange Risk (FX)
FX Risk refers to the potential change in earnings resulted from exchange rate fluctuations,
adverse exchange positioning or change in the market prices. FX Risk of the Bank is minimal, as
all the transactions are carried out on behalf of the customers against underlying L/C
commitments and other remittance requirements. This risk usually affects import-export
business, but it can also affect investors making international investments. If money is converted
to another currency to make an investment, then any changes in the currency exchange rate will
cause that investments value to either decrease or increase when the investment is sold and
converted back into the original currency. FX Risk may arise from:
Exchange rate Fluctuations
Adverse Foreign Exchange position of the bank
Changes in market price of Foreign Exchange
FX Risk management is one of the important responsibilities of the Treasury and International
Divisions of the Bank. Regular FX operations are done confirming the Central Bank’s
guidelines. Treasury Division conducts the FX transactions and the Back Office of the Treasury
Division is responsible for verification of the deals and passing of their entries in the books of
account.
3.2.3 Money Laundering Risk
Money Laundering Risk can be defined as the loss of reputation and expenses incurred as
penalty for being negligent in prevention of money laundering. Every Bank has a designated
Chief Compliance Officer at Head Office and Compliance Officers at Branches, who
independently review the transactions of the accounts to verify suspicious transactions.
The convenience of several remarkable changes in the world markets propelled Money
Laundering to become a worldwide problem. The entire Bank considers Money Laundering and
Terrorist Financing Risk not only a compliance a requirement of the regulatory bodies but also as
one of its core business values. The Board of Directors and the Management are firmly
committed to combat Money Laundering activities.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
23
3.2.4 Internal Control and Compliance Risk
Internal control can be defined as a system in place, on a permanent basis to control the activities
in an organization to accomplishing specific goals or objectives. It is the process by which an
organization’s resources are directed, monitored and measured. It plays an important role in
preventing and detecting fraud and protecting the organization’s resources. At the organizational
level, internal control objectives refer to the actions taken to achieve a specific objective. Internal
Control can provide reasonable, not absolute, assurance that the objectives of an organization
meet. Effective internal control implies the organization generates reliable financial reporting
and substantially complies with the laws and regulations that apply to it.
3.2.5 Asset Liability Management Risk
Asset and Liability Management (ALM) is the practice of managing risks that arise due to
mismatches between the assets and liabilities .Asset Liability management (ALM) is a strategic
management tool to manage Interest Rate Risk, Liquidity Risk and Foreign Exchange Risk faced
by banks and other financial institutions. Banks manage the risks of asset liability of Asset
liability mismatch by matching the assets and liabilities according to the maturity pattern or by
the matching the duration. The key to successful Asset & Liability management is to understand
the uncertainties in return on investments (Assets) and the uncertainties in the amount and the
duration of payouts (Liability). ALM /Balance Sheet Risk can be classified into three types such
as;
Diagram-3: Asset Liability Management Risk
Asset Liability Management Risk/Balance
Sheet Risk
Liquidity Risk Interest Rate Risk Foreign Exchange
Risk
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
24
3.2.5.1 Liquidity Risk
When bank may not be able to meet its financial obligations/commitment at that time liquidity
risk arises. Liquidity Risk also includes the inability of the bank to liquidate any assets at
reasonable price in a timely manner. An investment may sometimes need to be sold quickly. An
insufficient secondary market may limit this quick liquidation of assets. Some assets are highly
liquid and have low liquidity risk, while other assets are highly illiquid and have high liquidity
risk (Building).
3.2.5.2 Interest Rate Risk
It is the possible loss from adverse movements in market interest rates. Changes in interest rates
affect a bank’s earnings by changing its net interest income and the level of other interest
sensitive income and operating expenses. An investment’s value will change due to change the
absolute level of interest rates. Such changes usually affect securities inversely and can be
reduced by diversifying or hedging.
3.2.5.3 FX Risk
It is also involved with Balance Sheet. Foreign Exchange risk is potential loss arising from
movements in foreign currency exchange rate. Foreign Exchange Risk and its management by
the Bank have already been discussed.
3.2.6. ALM Risk Management
Every Bank is in right place to handle the ALM Risk. For managing the ALM Risk with utmost
care, Every Bank form Asset liability Committee (ALCO).
3.2.7 Information Technology Risk
In a very short space of time, banks and other financial institutions have become more dependent
on internet, computer and other electronic media and operating systems to run their daily
operations. Risk Surrounding IT such as network failure, lack of skills, hacking, viruses & poor
system integration have the potential to have a negative impact on an organization. Moreover,
information and communication technology is rapidly changing which warrants continuous
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
25
vigilance. The Bank has taken initiatives to serve its customer through its customers through the
modern technology and the bank has undertaken implementation of core banking solution (CBS).
3.3 Basel Regulatory Framework Management
Bangladesh Bank, being the supervisory authority has implemented Basel II framework in the
banking sector from January, 2009.This requires addressing market Risk and Operational Risk
along with Credit Risk and ends up with keeping minimum Capital to safeguard the bank on
susceptibility to these risks. Basel II Framework is acting as a major catalyst for function of Risk
Management practices within the Bank, embedding the risk culture and risk methodologies in the
Bank’s operation. In this regard the Bank has already taken initiatives by introducing new Risk
management Process. Basel II framework emphasizes on the following risk:
3.2.1 Operational Risk
Operational Risk is the risk of loss resulting from inadequate or failed internal process, people
and systems or from external events. It includes risks of physical and logical security, transaction
processing, operations control, technology and systems, as well as unique risk that arise due to
outsourcing.
Operational Risk is monitored and controlled through an operational risk management
framework designed to provide a sound and well –controlled operational environment within the
bank. Daily functional checks and balances method is used to manage the Operational Risk in the
bank. The bank has developed internal procedures and monitoring mechanism Effective internal
control has been ensured that operational policies and procedures are being adhered at different
levels throughout the Bank. In response to the threat of external fraud, losses arising from fraud
or control lapses are analyzed with emphasis on identifying the causes of such losses.
3.2.2 Governance and Broad Oversight
Strong risk governance is essential as the foundation for successful Risk management. In the line
with the Bank’s guideline on corporate governance, the Board of Directors has overall risk
oversight responsibility. The board utilizes its Audit Committee to discharge that responsibility.
Audit committee assists the Board in this regard by ensuring that an effective internal control
framework exists within the bank.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
26
The Risk management structure of the bank includes the following divisions /Departments
/Units/Cells/Committees:
Risk Management Unit
Credit Risk Management Division
Credit Administration Department
Special Asset Management Division
Treasury Division
Information Technology Division
General Banking & Development Division
Internal Control and Compliance Division
Board Audit Cell
All Risk Committee
Credit Risk Review Committee
Asset Liability Management Committee
Risk based regulatory capital adequacy in line with Basel II framework has fully come into force
from January 01, 2010 as stipulated by Bangladesh Bank. As per the framework, Minimum
Capital Requirement, Supervisory Review Process and Market Disclosure requirements must be
followed by all the scheduled banks of Bangladesh as for regulatory compliance, which
constitutes of three-mutually reinforcing pillars:
Pillar 3
Market Discipline
Communicating with the Market Participants
about the Bank’s Risk Profile and ensuring
Transaction
Pillar I Minimum Capital
Requirement Credit Risk Market Risk Operational Risk
Pillar II Minimum Capital Requirement Internal Assessment of Risk
Profile of Banks (ICAAP) Evaluation of Risk Profile
Assessment of Banks by the Supervisors
Taking supervisory measures
Diagram-4: Basel II Pillars of Bank
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
27
Credit Risk, Market risk & Operational Risk constitutes the basic risks that require the Bank to
maintain the minimum level of capital. In case of identifying both credit and market risk, the
Bank resorts to the Standardized Approach. For measuring the operational risk, Basic Indicator
Approach is followed.
Apart from the above mentioned risks, all other risks are assessed through the evaluation of
Supervisory Review Process. Under Internal Capital Adequacy Assessment Process, the
Additional Capital Requirement of a Bank is estimated. The supervisor will evaluate the risk
assessment process of the Bank and give directions to the acceptability of the process.
Under Pillar 3 of the framework, Market discipline comprises a set of disclosures on the capital
adequacy and risk management framework of the Bank. These disclosures are intended for
market participants to assess key information about the Bank’s exposure to various risks and to
provide a consistent and understandable disclosure framework for easy comparison among banks
operating in the market.
3.4. Capital Structure
3.4.1Tier I capital
The highest quality capital components comprise the Tier I Capital. This is also as core Capital.
3.4.2 Tier II Capital
The components of Tier II capital lacks some quality of Tier I capital, but strengthen the capital
base of the Bank. The Components of Tier I and tier II capitals are depicted below:
Digram-5: Tier I Capital
Tier I
Capital
Paid- Up Capital
Statutory
reserve Non-
repayable
share
General
Reserve
Non-cumulative
irredeemable
preference Minority
Interest in
subsidiaries
Retained
Earnings
Dividend
equalization
account
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
28
Diagram-6: Tier II Capital
3.5 Approaches followed for Specific & General Allowances and
Statistical Methods
As per the guideline of Bangladesh Bank regarding the provisioning of loans & advances, the
bank has followed the following approaches in calculating the Specific & General Allowances:
Types of Loans & Advances Rate of Provision Requirement
UC SMA SS DF BL
Consumer House building &
Professionals
2% 5% 20% 50% 100
%
Other than Housing Finance
&
Professionals to set up
Business
5%
5%
20%
50%
100
%
Tier II
Capital
General
Provision
Subordinated
debt with
remaining
maturity of more
All other
preference
shares Asset
Revaluation
Reserve Exchange
Equalization
account
Revaluation
reserve for
securities
Revaluation
reserves for
equity
Instruments
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
29
Brokerage House, Merchant banks, Stock
dealers, etc.
2% 5% 20% 50% 100
%
Short term Agriculture, Credit and micro Credit 5% 5% 5% 5% 100
%
Small & Medium Enterprise Finance 0.25% 5% 20% 50% 100
%
Others 1% 5% 20% 50% 100
%
Table -5: General allowances & Statistical Methods
3.6 Methods used to measure Credit Risk
As per Central Bank’s Guidelines, the Bank Standardized Approach for measurement of Credit
Risk adopting the credit rating agencies as External Credit Assessment Institutions (ECA) for
claims on Bank & Non-Banking Financial Institutions (BNFIs), Corporate Customers and Credit
Risk Mitigates (CRM) against the financial securities & guarantees of loan exposure.
3.7 Credit Risk Management
The global economic crisis has radically changed the credit risk environment not only of the
developed countries but also of the emerging and developing countries. The economy has
slumped with defaults soaring around the world. The Board of Directors and the Management
play their due role to manage the credit risk efficiently in the middle of this credit crunch. The
entire Banks manage their credit risk in the following manner:
3.7.1 Credit Risk Management Policy
Given the fast changing dynamic global economy and the increasing pressure of globalization,
consolidation and disintermediation, The entire Bank have a robust credit risk management
policy and procedures that are sensitive and responsive to these changes. A clearly defined, well-
planned, comprehensive and appropriate Credit Risk Management Policy of the Bank provides a
board guideline for the Credit Operation towards efficient management of its Credit portfolio.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
30
3.7.2 Delegation of Credit Approval
Major credit exposures to individual borrowers, groups of connected counterparties and
portfolios of retail exposures are reviewed by the Head Office Credit Committee (HOCC) and
HOCC recommends the loan to the approval authority. All credit approval authorities are
delegated by the Board of Directors to the executives based on their capability, experience &
business acumen. Credit origination and approval roles are segregated in all cases. Credit
approval authorities are carefully segregated between CRM & the business units with appropriate
level of management for check and balance between control and business consideration. Proper
delegation of credit approval ensures full transparency and accountability at all levels.
3.7.3 Credit Quality and Portfolio Diversification
The well practiced 5Cs principles of Credit i.e. Character, Capacity, Capital, Conditions and
Collateral are followed professionally in the credit evaluation stage. Evaluation of repayment
ability, character of financial discipline and its key personnel, financial health of the borrower
and other qualitative and quantitative information are gathered so that credit facilities are
allowed in a manner so that Bank’s optimum asset quality is ensured. Concentration of credit is
carefully avoided to minimize risk. Credit lines have been segregated focusing on regulatory
requirements and with respect to sector, industry, geographical region, maturity, size, economic
purpose etc.
3.8. Large loan limit and credit facility on business consideration
The Bank watchfully avoids name lending. Credit facility shall be allowed absolutely on
business consideration after conducting due diligence. No credit facility is allowed simply
considering the name and reputation of the key person of the borrowing company. In all cases,
viability of business, credit requirements, and security offered, cash flow and risks level are
meticulously and professionally analyzed.
3.8.1 Credit Monitoring and Early Warning system
The Bank regularly monitors the performance of loan portfolio and external events both at
branch level as well as on head office level. The HOCC & PAMC meet regularly to assess the
impact of external events and trends on the credit risk portfolio and to define and implement total
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
31
response in terms of appropriate changes. Action trigger point has been set to identify accounts
according to early Warning system to address the loans whose performances show any
deteriorating trend. Recovery division has been given the responsibility to handle these delicate
issues with caution. It enables 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.
3.8.2 Provision
For Classified loans & Advances, Banks maintain enough provision. Thus, the bank has adequate
shock absorbing capacity in case of loss of impaired assets.
3.8.3 Independent internal audit and Board Audit cell
Internal Control and Compliance Division (ICCD) 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. Board Audit Division
directly reports to the Board/Audit Committee the overall quality, performance, recovery status,
risks status, adequacy of provision of loan portfolio for information and guidance.
3.9. Creating Credit Risk awareness Culture
Strong emphasis has been placed to create credit risk awareness among all lending employees
within the bank. Awareness programs have been conducting regularly to create a risk-conscious
culture and empower them with the capability to identify, control and manage Credit Risks more
efficiently.
3.10. Interest Rate Risk in the Banking Book
Interest Rate Risk in the Banking Book reflects the shocks to the position of the Bank including
potential loss that the bank may face in the event of adverse change in market interest rate. This
has an impact on earning of the bank through Net Interest Earning as well as on Market Value of
Equity or net worth.
Thus this risk would have an impact on both earning potential and economic value of the Bank.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
32
The Bank uses following measures for deriving value of capital requirement for interest
rate risk.
Modified Duration gap
Simulation on Market Value of Equity
Impact of average interest rate fluctuation demonstrated in last 12 months from
the date of computation. In the event of lack of data for last twelve month the
bank considers data of maximum period available.
The bank ensures that interest rate risk is not included within the market risk. The Bank has
calculated the rate sensitive assets and liabilities with maturity up to 12 months bucket and
applied the sensitivity analysis to measure the level of interest rate shock on its capital adequacy.
3.11. Market Risk
Market Risk is a trading book concept. It may be 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 the risks pertaining to interest rate related instruments and equities in the trading book
and Foreign exchange risk and commodities risk throughout the Bank. This signifies the risk of
loss due to decrease in the market portfolio arising out of market risk factors. The Bank has
considered interest rate risk on banking book separately and the impact of interest rate risk on the
trading book will not be considered here.
The board approves all policies related to market risk, sets limits and reviews compliance on a
regular basis. The objective is to provide cost effective funding last year to finance growth and
trade related transaction.
3.11.1 Methods used to measure market Risk
Standardized (Rule Based) Approach is used to measure the Market Risk of the Bank whereas
for Interest Rate Risk and equity Risk both General and Specific risk factors are applied for
capital charge and for Foreign Exchange and Commodities only General risk factor is applied.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
33
3.11.2 Management system of Market Risk
The duties of managing the market risk including liquidity, interest rate and foreign exchange
risk lies with the Treasury Division under the supervision of ALCO committee. The ALCO
committee is comprised of senior executives of the Bank, who meets at least one time in a month
during the ALCO meeting. The committee evaluates the current position of the Bank and gives
directors to mitigate the market risk exposure to a minimum level.
3.12. Credit Process
Credit process starts with receiving prescribed completed credit application from the customer
and ends with issuance of a written “Sanction Advice” by the Bank. Credit process in the bank
shall be guided by some basic principles. These are as follows:
3.12.1 Credit Proposal Purpose
A Credit Proposal is prepared by the Relationship Management Team either at Branch or
Corporate Division based at Head Office to present a concise and objective assessment of the
risks associated with lending money to the prospective borrowers. Banks have to ensure before
sanction/disbursement that their portfolio is of high quality. A credit proposal may be defined as
here under;
Initial Credit Proposal – Initiate credit facilities for any new relationship for the bank.
Annual Credit Proposal – Renew existing facilities extended to a borrower or
amendments to existing facilities at the Annual Review Date.
Interim Credit Proposal – Propose amendments (for e.g., an increase in amount or tenor
or pricing, or a change in security structure), and/or new facilities for an existing
borrower at any time other that the Annual Review Date.
Identification Number: Each borrower would have a unique Loan Identification Number.
3.12.2 Time frame for decision
Any requirement for further information regarding a particular credit proposal shall have to be
communicated in writing to the customer within 5 days from the date of submission of the credit
application. Any decision of declining a credit application other than retail credit shall have to be
communicated to the customer by the Relationship Team within 15 days from the date of
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
34
receiving all information from the customer. On the other hand, Head Office Credit Risk
Management Division informs the primary status of the proposal after scrutiny of the proposal
within 3(three) days from the date of submission of the scrutinized credit proposal by the
Corporate Banking Division other than Industrial Credit.
3.12.3 Reporting Approvals
Credit Executives having credit approval authority at Branch level should report on monthly
basis a summarized position of all credit facilities sanctioned by him/her during the month in the
prescribed form. This is to be submitted to the Head of Credit and Head of Corporate within the
first week of the following month.
3.12.4 Review of Approval
The Head of Credit Risk Management Division review at least 10% of total approval of an
individual executive on monthly basis in respect of compliance with the Credit Risk
Management Policy, internal circulars, prevailing regulations etc. and report the findings to the
Managing Director.
3.12.5 Revision of Credit Decision
Any credit proposal declined by Credit Risk Management Division may be placed before next
higher authority for reassessment/review if Corporate Banking Division feels that the exceptions
are justifiable, or can be rectified over a reasonable period of time. But no appeal goes beyond
the Managing Director.
3.12.6 Compliance to Regulation
Any credit approval/sanction shall be subject to the compliance of Bank’s Credit Policy as well
as banking regulations in force or to be imposed by the regulatory body from time to time and to
the changes in the Bank’s policy. This is to be specifically mentioned in the Sanction Advice
issued to the customer.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
35
3.12.7 Credit Committee
Bank has a multi-tier Credit approving system to manage the credit risk efficiently. Credit
proposals after preliminary evaluation and making necessary adjustment are placed by Corporate
Banking Division before the Credit Committee for preliminary appraisal since recommendation
of the Credit Committee is pre-requisite before approving any loans by the appropriate approval
authority. Credit Risk Review Department of CRMD conduct their risk assessment on different
aspects of the proposal and may place their observation in the Credit Committee meeting.
Additional Managing Director/Deputy Managing Director is the Chairman of the committee and
the committee is to be constituted by the Managing Director.
3.13. Steps in Credit Approval Process
Step-1: A potential borrower collects prescribed Credit Application Form from the
Relationship Officer of Branch/Corporate Division, Later; he/she submits the filled in
Credit Application Form along with required papers and documents.
Step-2: The Relationship Officer scrutinizes the Credit Application Form and other
documents submitted by the customer and make a preliminary assessment on
creditworthiness of the potential borrower on the basis of the information provided by the
borrower. Relationship Officer forwards the application with his comments to the
concerned Relationship Manager.
Step-3: The Relationship Manager, singly or jointly with Relationship Officer, visit the
customer’s business premise and try to acquire proper understanding about the business
position, business expertise and reputation of the borrower, purpose of credit, actual
credit requirement, sources of repayment, Apart from this, he/she assesses the value of
the security to be offered and prepares Valuation Report. Finally, the Relationship
Manager summarizes all these information in the Pre-sanction Inspection Report/Call
Report/Visit Report in the Bank’s prescribed format in which he/she recommends for
specific credit facility for the customer.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
36
Step-4: The Relationship Manager sends the Pre-sanction Inspection Report to the
Corporate Division, Head Office. The Head of Corporate Division or assigned Executive
assesses the credit proposal and may contact with the concerned Relationship Manager or
directly to the customer for any query. Finally, Corporate Division of Head Office
communicates their decision to the Relationship Manager.
Step-5: Credit Administration Department on receipt of the request letter from the
Branch sends the “CIB Inquiry Form” to Bangladesh Bank. Credit Administration
Department will send the CIB report immediately by facsimile/e-mail/courier service to
the concerned Relationship Officer on receipt of the report.
Step-6: If, clean CIB Report is received, the Relationship Officer originates a formal
Credit Proposal in prescribed format that should carry the recommendations of the
Relationship Manager. After signing by him, it is to be sent to the Corporate Banking
Division, Head Office and a copy to the Credit Risk Review Department of Credit Risk
Management Division.
Step-7: Corporate Banking Division, Head Office after modifying the proposal as
required place the proposal along with Head of Corporate Banking Division’s
recommendation before the Credit Committee. Head of Credit Risk Review Department
of CRMD or his authorized representative may report his observation in writing/verbally
before the Credit Committee. Corporate Banking Division should inform the list of
proposals that are to be placed before the Credit Committee at least 15(fifteen) hours
before to the Credit Risk Review Department of CRMD for smooth functioning of the
committee except the exception cases be recommended by Credit Risk Management
Division for approval. The appropriate approving authorities may approve the proposal if
within their respective delegated approval authority or decline the proposal or may ask
for further review. If the proposal exceeds Managing Director’s delegated authority,
he/she recommends it to the Executive Committee of the Board of Directors or to the full
Board of Directors.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
37
Step-8: If the proposal is endorsed by the Credit Committee, Corporate Banking Division
prepares required Memo mitigating the weakness/risk factors and incorporating the
suggestion/observation of the Credit Risk Review Department as well as Credit
Committee for approval of the appropriate authority. The modified Memo should be
routed through Credit Risk Management Division for further scrutiny. On receipt of the
Memo, Head of Credit Risk Review Department distributes to the respective Credit
Officer to review, scrutinize and analyze in line with the business plan, risk acceptance
criteria of the bank and general credit norms. Credit Officer after evaluating the credit
information, facility structure and risk factors summarize his observations with reasons
and forward for concurrence of Head of Credit. At that time the final Memo is
acceptable, risk is within tolerance level and facility structure commensurate with the
total facility.
Step-9: If the facility is approved by the appropriate approval authority, Corporate
Banking Division sends the copy of approval Memo/Note sheet to Credit Risk
Management Division. On receipt of approval, Credit Risk Review Department of CRM
issues Sanction Advice to the originating Branch along with a Documentation Check
List.
Step-10: Sanction Letter to the customer following Credit Risk Review Department of
CRM sanction advice to be issued under dual signatures from the originating Branch.
Preferably, Relationship Manager and Credit Administration Officer of the Branch
should sign on the Sanction Letter.
3.14. Different modes of Advances /Credit
Commercial Banks make advances in different form. All types of credit facilities can be broadly
classified into two groups.
Funded Credit
Non-Funded Credit
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
38
3.14.1Funded Credit
Any type of credit facility which involves direct outflow of banks fund on account of borrower is
termed as funded facility. Funded credit facilities may be classified into four major types.
Loan
Cash credit
Overdraft
Bill Purchased and Discount
3.14.1.1 Loans
Demand loan: To meet short term working capital need that is usually for a period up to
01 year.
Term loan: To meet Fixed Capital expenditure, that is usually for the period 01 year to
05 years.
3.14.1.2 Cash Credit
CC (Pledge)
CC (Hypothecation)
Under this arrangement borrows can borrow any time within the agreed limits and can deposit
money to adjust whenever he has surplus cash in hand.
3.14.1.3 Overdraft (OD)
Basically this is an arrangement between a banker and his customer by which the later is allowed
to withdraw over and above his credit balance in his /their current account. This is a temporary
accommodation of fund to the client. Overdraft facility to the borrower may be allowed generally
in the following ways.
Overdraft-clean
Overdraft-against guarantee
Overdraft-against FDR in the name of borrower
Overdraft-against FDR in the name of the 3rd party.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
39
Overdraft against savings certificate
Overdraft against Wade Earners Development Bond
Overdraft against DPS
Overdraft against assignment of book debts/bills receivables/life insurance policy etc.
Bills discounted and purchased.
3.14.1.4 Discounting
Bank allows advances to the clients by discounting bills which matures after a fixed tenor. In this
method the bank calculates and realizes the interest at a prefixed rate and credits the amount after
deducting the interest amount after deducting the interest from the amount of instrument.
Discounting of bills, in fact is an extension of credit facilities for a specified period.
3.14.1.5 Purchase of Bill
Financing against Sight/Demand bills are treated as purchase of bills. In this the bank becomes
the purchaser owner of such bills which is treated as security for the advance.
Before purchasing and or extending discounting facilities to any customer banker has to give
consideration to the following aspects:
Bills to be purchased from the regular customers of the bank.
Integrity and credibility of the customer.
Documents of title of goods are clean and supported with all required documents.
The Branch manager is authorized to purchase bills.
Other important funded advances/facilities are:
Advance against hypothecation of vehicles (Transport Loan)
Consumer Loan
Agriculture loan
Micro Credit
Consortium Loan
Lease financing
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
40
Hire Purchase
Syndication loan
Import Finance
Export Financing(Pre-shipment and post-shipment credit)
3.14.2 Non-Funded Credit Facilities
Though these types of Credit facilities are primarily non-funded in nature but at times it may turn
into funded facilities. As such, liabilities these types of credit facilities are termed as contingent
liability.
The major facilities are:
Letter of credit(L/C)
Bid bond
Performance bond
Advance/payment guarantee
Besides the above, credit facilities given by the banks can be classified in the following ways
On the basis of security obtained
o Clean
o Secured
o Micro Credit
On the basis of term
1. Short Term
2. Medium term
3. Long Term
Sectoral Classification
1. Private
2. Public
3. Commercial & Industrial
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
41
4. Agricultural
5. Transport
6. House building etc.
3.15. Loans
Bank classifies loans and advances into performing and non-performing loans (NPL) in
accordance with the Bangladesh Bank guidelines in this respect. An NPA (impaired is defined as
a loan or an advance where interest and/or installment of principal remain overdue for more than
90 days in respect of a Continuous credit, Demand loan or a Term Loan etc.
Classified loan is categorized under following 03(three) categories:
1. Sub-standard
2. Doubtful
3. Bad & Loss
Any continuous loan is classified as:
Sub-standard if it is past due/overdue for 3months or beyond but less than 6 months.
‘Doubtful’ if it is past due/overdue for 6 months or beyond but less than 9 months.
Bad/Loss if it is past due /overdue for 6months or beyond but not over 9 months from
the date of claim by the bank or from the date creation of forced loan.
‘Bad/Loss if it remains past due/Overdue for 9 months or beyond from the date of
claim by the bank or from the date of creation of forced loan.
In case of any installments or part of installments of a fixed Term Loan is not repaid within the
due date ,the amount of unpaid installments will be termed as past due or overdue installment.
3.16. Loan Classification Aspects
First – where a bank does not really receive interest and is merely capitalizing it in the
borrower’s account. The bank in this situation loses the opportunity to redeploy the income
stream for a better purpose.
Second- There is an effect on profitability.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
42
Third- There is an effect on the balance sheet of bank since nonperforming assets need to be
provided for and eventually written-off against capital and reserves. If adequate provision is not
made against non-performing assets, it will eat-up the bank’s entire capital base with the passage
of time.
3.17. Classification Procedure of Loans
3.17.1 Categories of Loans – At first all loans and advances will be grouped into four categories
for the purpose of classification, such as – (a) Continuous Loans (b) Demand Loans (c) Fixed
Term Loans and (d) Short Term and Agriculture & Micro Credit.
3.17.1.1Continuous Loans: The loan A/c in which transaction may be made within a certain
limit and have an expiry date for full adjustment will be treated as continuous loan. Example:.
CC, OD etc.
3.17.1.2 Demand Loans: The loan that becomes repayable by the party on demand by the Bank
treated it as demand loans. If any contingent or any other liabilities are turned into forced loan
will also be treated as demand loan. Example: LIM, PAD, FBP, IBP etc.
3.17.1.3 Fixed Term Loans: The loan which is repayable within a specific time period under a
specific repayment schedule will be treated as Fixed Term Loans.
3.17.1.4 Short Term Agriculture & Micro Credit: Short Term Agricultural Credit will be as
per list issued by Agricultural Credit and Specialized Programs Department (ACSPD) of
Bangladesh Bank under the Agricultural Credit Program. Credit in the Agricultural sector
repayable within 1(one) year will also be included herein. Short Term Micro Credit will include
any micro credit not exceeding Tk.25, 000.00 and repayable within 12 months.
3.18. Basis for loan Classification
Past due / Overdue:
(i) Any Continuous loan if not repaid /renewed within the fixed expiry date for repayment is
treated as past due/overdue from the following day of the expiry date.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
43
(ii) Any Demand Loan if not repaid/rescheduled within the fixed expiry date is treated as past
due/overdue from the following day of the expiry date.
(iii) In case of any installment or part installment of a Fixed Term Loan (repayable within five
years) is not repaid within the fixed expiry date, the amount of unpaid installment is
treated as past due/overdue (defaulted installment) from the following day of the expiry
date of that particular installment.
(iv) In case of any installment or part installment of a Fixed Term Loan (repayable over five
years) is not repaid within the fixed expiry date, the amount of unpaid installment is
treated as past due/over due after 6 (six) months of the expiry date of that particular
installment.
(v) The Short Term Agriculture & Micro Credit if not repaid within the fixed expiry date for
repayment is considered as past due/overdue (defaulted installment) after 6 (six) months
of the expiry date.
3.19. In case of Fixed Term Loans (repayable within five years)
If the amount of defaulted installment is equal to or more than the amount of due for 6(six)
months, the entire loan is classified as ‘Sub-Standard’.
If the amount of defaulted installment is equal to or more than the amount of installment due
for 12(twelve) months, the entire loan is classified as ‘Doubtful’.
If the amount of defaulted installment is equal to or more than the amount of installment due
for 18(eighteen) months, the entire loan is classified as ‘Bad/Loss’.
3.20. In case of Fixed Term Loans (repayable in more than five years)
If the amount of defaulted installment is equal to or more than the amount of installment due
for 12(twelve) months, the entire loan is classified as ‘Sub-Standard’.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
44
If the amount of defaulted installment is equal to or more than the amount of installment due
for 18(eighteen) months, the entire loan is classified as ‘Doubtful’.
If the amount of defaulted installment is equal to or more than the amount of installment due
for 24(twenty four) months, the entire loan is classified as ‘Bad/Loss’ after 60 months from
the stipulated due date.
3.21. The Short Term Agriculture and Micro Credit
These loan is treated as irregular loan up to 12 months and is classified as Substandard after 12
months, as Doubtful after a period of 36 months and as Bad/Loss after 60 months from the
stipulated time.
3.22. Qualitative Judgment
If any uncertainty or doubt arises in respect of recovery of any continuous, Demand or Term
Loans, the same have to be classified as Sub-Standard or Doubtful or Bad/Loss. Considering the
merit of the A/c on the basis of qualitative judgment is to be it classified or not on the basis of
objective criteria.
The Bank classifies on the basis of qualitative judgment and can de-classify loans if qualitative
improvement does occur. But if a loan is classified by Bangladesh Bank Inspection Team, the
same can be de-classified with the approval of the Board of Directors of the Bank.
3.23. Accounting of the Interest of Classified Loans
If any loan or advance is classified as Sub-Standard and Doubtful, the interest accrued on such
loan is to be credited to Interest Suspense A/c instead of crediting the same to Income A/c. As
soon as any loan or advance is classified as Bad/Loss charging of interest in the same A/c cease.
But on any special purpose interest is charged on that A/c such as at the time of filing suit should
be preserved in Interest Suspense A/c.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
45
3.23.1 Maintenance of Provision
Banks are required to maintain provisions for entire loans and advances i.e. Unclassified, SMA,
classified and also for classified other assets & investment as per Bangladesh Bank Guideline,
details of which are :-
General Provision in the following way:-
i. @1% against all unclassified loans (other than loans under small enterprise and
consumer financing and Special Mention Account).
ii. @2% on the unclassified amount for small enterprise financing.
iii. @5% on the unclassified amount for consumer financing where it has to be maintained
@2% on the unclassified amount for (1) Housing finance and (2) Loans for professionals
to set up business under consumer financing scheme.
iv. @5% on the outstanding amount of loans kept in Special Mention Account after netting
off the amount of Interest Suspense.
Provision in respect of classified continuous, demand and Term Loans:-
Provision is be maintained on the balance to be ascertained by deducting the amount of Interest
Suspense and value of eligible security from the outstanding amount of classified A/c:-
i. Sub-Standard 20%
ii. Doubtful 50%
iii. Bad/Loss 100%
Provision in respect of Short Term Agriculture and Micro Credit-
i. All credit except Bad/Loss- 5%
ii. Bad/Loss 100%
3.23.2. Eligible Security
As per Bangladesh Bank definition the eligible security in determining the base for provision is –
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
46
i. 100% of deposit under lien against the loan.
ii. 100% of the value of the Government bond/ Savings Certificate under lien.
iii. 100% of the value of the guarantee given by Govt. or Bangladesh Bank.
iv. 100% of the market value of the gold or gold ornaments pledged with the Bank.
v. 50% of the market value of the easily marketable commodities kept under control of the
Bank.
vi. Maximum 50% of the market value of the land and building mortgaged with the Bank.
vii. 50% of the average market value for last 6 months or 50% of the face value whichever is
less, of the shares traded in the stock exchange.
Bank will conduct classification activities on quarterly basis.
Head Office should prepare a consolidated position of classification, provisions and Interest
Suspense using form CL-1 and send the same to BRPD of Bangladesh Bank.
All the Banks Credit Risk Management system is same because every Private Commercial
controlled by the rules & regulation of Bangladesh Bank.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
47
4. Measurement & Analysis (‘000’)
4.1 Current Ratio
Measurement Item United Commercial
Bank Limited
Southeast Bank
Limited
Standard Bank
Limited
22633313/20582817 4297618/3404393 852852/802966
Current Ratio 1.09:1 .12:1 1.06:1
4.2 Return on Assets (ROA)
Measurement Item United Commercial
Bank Limited
Southeast Bank
Limited
Standard Bank
Limited
Return on Assets (ROA) 319129.71/226333.13 33132/220930 35801/239939
1.41% .15% .15%
Table 4.1 indicates the current ratio that is used primarily to ascertain a company’s ability to pay
back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory,
receivables). The higher the current ratio, the better the company’s ability is to pay its obligations.
The current ratio can give a sense of the efficiency of a company’s operating cycle or its ability to
turn its product into cash. Among these three banks in 2014, UCB is more efficient than other two
banks. So it is more efficient than other banks to pay off its obligations. In case of SEBL ratio is
under 1 that means this bank is not more efficient to pay its obligations. So UCB is better position
& SBL is also in better position.
Table 4.2 indicates Return on Assets how profitable a company is relative to its total assets. It
illustrates how well management is employing the company’s total assets to make profit. The
higher the return, the more efficient management is in utilizing its asset base. In 2014, UCB is
the most profitable position than SBL & SEBL relative to its total assets. After UCB, SEBL &
SBL is the same profitable position for utilizing its assets.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
48
4.3 Return on Equity (ROE)
Measurement Item United
Commercial
Bank Limited
Southeast Bank
Limited
Standard Bank
Limited
ROE 12205975/781647 8477831/570547 6041062/438422
15.62% 14.85% 13.77%
4.4 Capital Adequacy Ratio (2013)
Measurement Item United
Commercial
Bank Limited
Southeast Bank
Limited
Standard Bank
Limited
Capital Adequacy Ratio 11.53% 10.99% 10.68%
Table 4.3 this ratio indicates how profitable a company is by comparing its net income to its average
shareholders’ equity. The return on equity ratio measures how much the shareholders earned for
their investment in the company. The higher the ratio percentage, the more efficient management is
in utilizing its equity base and better return to investors. In 2014, UCBL shareholders have earned
more for their investment and SEBL & SBL are also profitable comparing to their net income to
shareholders’ equity.
Table 4.4 indicates Capital Adequacy Ratio is the ratio of qualifying capital to adjusted (or
weighted) assets. The minimum capital adequacy ratio is at 10% for all banks that is prescribed by
Bangladesh Bank. A ratio below the minimum indicates that the bank is not adequately capitalized
to expand its operations. The ratio ensures that the bank do not expand their business without
having adequate capital.
It would be difficult for an investor to calculate this ratio as banks do not disclose the details
required for calculating the denominator (risk weighted average) of this ratio in detail. As such
banks provide their CAR time to time. But I have taken the information from the website of
UCBL, SEBL & SBL 2013. As 2014, CAR is not disclosed yet & audited report is not published
also. Every bank wants to increase this ratio.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
49
4.5 Credit to deposit ratio (CD ratio)
Measurement Item United Commercial
Bank Limited
Southeast Bank
Limited
Standard Bank
Limited
148664.86/184896.85 134863/177519 217291/293249
CD Ratio 80.40% 75.97% 74%
4.6 Non-Performing Asset Ratio (NPA ratio)
Measurement Item United Commercial
Bank Limited
Southeast Bank
Limited
Standard Bank
Limited
NPA Ratio 59911592/14866486 615357/12918462 325297/3459177
4.03% 4.76 9.40
Table 4.5 indicates CD ratio that means how much of the advances lent by banks is done through
deposits. It is the proportion of loan-assets created by banks from the deposits received. It is the
ratio, the higher the loan-assets created from deposits. Deposits would be in the form of current and
saving account as well as term deposits. The outcome of this ratio reflects the ability of the bank to
make optimal use of the available resources.UCB has been created better its deposit to loan asset
then SEBL and SBL. It measures the Banks Performance.
Table 4.6 NPA ratios indicate that is used as a measure of the overall quality of the bank’s loan
book. An NPA are those assets for which interest is overdue for more than 90 days (or 3months).
Net NPAs are calculated by reducing cumulative balance of provisions outstanding at a period end
from gross NPAs. Higher ratio reflects rising bad quality of loans. All the banks fall this problem
every year because 100% successful is not possible for any financial institution. SBL is the worst
position comparing with UCB & SEBL. But every bank tried hard to overcome this type of
riskiness. So UCBL position is better than two. All the banks want to mitigate this ratio by taking
proper Risk Management techniques
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
50
4.7 Gross NPA to Gross Advances Ratio
Measurement Item United Commercial Bank
Limited
Southeast Bank
Limited
Standard Bank
Limited
Gross NPAs to Gross
Advances Ratio
14899612.49%/59911592 615357/12918462 325297/6914062
2.49% 4.70% 4.70%
4.8 Net NPAs to Net Advances Ratio
Measurement Item United Commercial
Bank Limited
Southeast Bank
Limited
Standard Bank
Limited
Net NPAs to Net
Advances Ratio
59911592/148866486 3867540/69422064 4445080/69106277
4.03% 5.57% 6.43%
Table 4.7 describes The Gross NPAs to Gross Advances ratio is a measure of the quality of
assets in a situation, where the management has not provided for loss on NPAs (Non-
Performing Assets). Here Gross NPAs are measured as a percentage of Gross Advances.
Lower ratio indicates better quality of advances. Here UCBs percentage is lower so it
indicates UCB is better quality of advances. SEBL & SBL is the same. So UCBL position is
better than two. All the banks want to mitigate this ratio by taking proper Risk Management
Table 4.8 describes Net NPAs to Net Advances. This ratio is the most standard measure of
Bank Performance. This ratio measures Net NPAs as a percentage of Net Advances. Net
NPAs are Gross NPAs net of provisions on NPAs and interest in suspense account.
UCBL, Net Non Performing Asset is low than SEBL & SBL. So UCBL position is better than
two. All the banks want to mitigate this ratio by taking proper Risk Management techniques
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
51
4.9 Total Investment to Total Assets Ratio
Measurement Item United Commercial
Bank Limited
Southeast Bank
Limited
Standard Bank
Limited
Total Investment to
Total Assets Ratio
13558725/22633313 9153993/2209308 11553643/2393969
59.90% 41.55% 48.15%
4.10 Net NPAs to Total Assets Ratio
Measurement Item United Commercial
Bank Limited
Southeast Bank
Limited
Standard Bank
Limited
Net NPAs to Total
Assets
59911592/226333133 3867540/69422064 4445080/69106277
.26 .55 .64
4.9 Table describes TI to TA Ratio. This ratio indicates the aggressiveness of banks in
investing rather than lending. It is the ratio of Total Investments to Total Assets. It highlights
alternative avenues for parking funds. Higher ratio means lack of credit take-off in
economy and much proportion of total assets is utilized in investments that should not be
the case with banks because the primary business of the banks is to lend. This ratio
indicates how much proportion or percentage of total assets is in the form of
investments. UCB is used its Total Asset into investment because it is the 1st generation bank
and established faith to the mind of customrs.SBL is also is the better position and after that
SEBL.SEBL investment is lower than other two banks because it is 2nd generation bank.
4.10 Table describes Net NPAs to Total Assets Ratio that indicates the efficiency of the bank in
assessing credit risk and to an extent recovering the debts. This ratio is arrived at by dividing the
Net NPAs by Total Assets. Net NPAs are calculated by adjusting provisions against Gross
NPAs. Lower ratio indicates the better performance of banks. So UCB is most efficient than
SEBL & SBL.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
52
4.11 Earnings per Share
Measurement Item United
Commercial
Bank Limited
Southeast Bank
Limited
Standard Bank
Limited
Earnings Per Share 3.66 3.87 7.85
4.12 Interest income to Total Income
Measurement Item United
Commercial
Bank Limited
Southeast Bank
Limited
Standard Bank
Limited
Interest Income to Total
Income
27802/41535 77095/229993 21651/49221
66.93% 33.52% 43.98%
1.12 Profit Margin Ratio
4.11 This ratio measures the profitability of the firm on per Equity Share basis. This ratio
measures the earnings available to an equity shareholder on a per share basis. UCBL EPS is
3.66, SEBL is 3.87 & SBL is 7.85. I have got the information from their Annual Report 2013,
because 2014 audited report yet not published.
4.12 Table shows Interest Income to Total Income Ratio. It is a basic source of revenue for
banks. The Interest Income to Total Income Ratio indicates the ability of the bank in
generating income from its lending activities. In other words, this ratio measures the income
from lending operations as a percentage of the total income generated by bank in a year.
Interest Income includes Interest on Advances, Discount on Bills, Income from
Investments, Interest on Deposits with Bangladesh Bank and Other Inter-Bank Funds. UCB
revenue is more than two Banks.SBL is the 2nd position & then SEBL.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
53
4.13 Profit Margin Ratio
Measurement
Item
United Commercial Bank
Limited
Southeast Bank Limited Standard Bank Limited
Profit Margin
Ratio
2181635425/3835360138 932897890/2617086773 764745570/2008527966
56.88% 35.65% 38.07%
4.13 Table shows that Profit Margin Ratio. The profit margin of a company determines its
ability to withstand competition and adverse conditions like rising costs, falling prices or
declining sales in future. This ratio measures the percentage of net profit to total income and
thus is a measure of efficiency of the company. UCB is more efficient than other two banks.
Because UCBs position is the 1st Private commercial bank in Bangladesh in 2013.But all the
Banks are in good position in this report.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
54
4.14 Banks Performance Ratio- Descriptive Statistics
Ratios Banks Mean
Ratio
Std.Dev F-
Value
Significance
Asset Quality UCBL 2.564 0.27655 34.69 0.000
Southeast 1.9432 0.6522
Southeast 3.522 0.89368
Gross NPA to Gross Advances UCBL 0.123 0.45362 2.17 0.000
Southeast 1.5 0.3178
Standard 1.557 0.9873
Total Investment to Total Assets UCBL 1.146 0.15978 39.35 0.000
Southeast 1.72 0.42697
Standard 0.186 0.13831
ROA UCBL 34.77 4.47377 47.74 0.078
Southeast 29.194 3.22174
Standard 31.458 2.94808
Profit Margin Ratio UCBL 0.682 0.0545 38.41 0.000
Southeast 0.956 0.26121
Standard 0.268 0.0545
Source: Results generated with the help of SPSS
The period for evaluating impact of Banks Performance of these private banks in this study is for
the year of 2013. The data is collected from various sources such as annual reports of banks and
their websites. Internet has been an important source of secondary data. In order to have a
comprehensive view the movement of each ratio covered by Banks Performance Ratios are
calculated. Moreover multiple regressions have been employed to measure the degree of impact
of Banks Performance on profitability of banks under study. Mean of Private Commercial Bank
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
55
Performances ratios is taken as dependent variable and various variable ratios have been taken as
independent variable. Asset quality is important issue for a bank to prevent the bank from going
bankrupt. If the banks have more risky assets on their balance sheet, then the capital will
be lower implying greater credit risk exposure. The ability of management to identify,
measure, monitor and control credit risk is also reflected here. The ratio Total Investment to
Total Asset indicates banks aggressiveness in lending. Gross NPAs to Gross Advances indicates
credit risk of bank. The lower this ratio is the better it is. All the banks are showing first an
increasing trend and the main reason is the political violence. But at the same time every
Private Commercial Banks want to make profit and always try hard for doing well. The ratio of
Return on Asset and Profit margin Ratio are in a good position. It indicates the Profitability of
any Bank.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
56
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Credit Risk Management & Private Commercial Banks Performance in Bangladesh
60
Short Form Abbreviation
UCBL United Commercial Bank Limited
SEBL Southeast Bank Limited
BB Bangladesh Bank
NPL Non-Performing Loan
LA Loan & Advances
ROI Return on Investment
NPA Non Performing Assets
NPL Non Performing Loan
LLP Loan Loss Provision
CL Classified Loan
FX Foreign Exchange
L/C Letter of Credit
EPS Earnings Per Share
ROA Return on Assets
ROE Return on Equity
CAR Capital Adequacy ratio
6. Appendix
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
61
TD Total Deposit
CD Credit to deposit
OD Overdraft
ALCO Asset Liability Committee
ECA External Credit Association
ICCD Internal Credit & Control Division
HOCC Head of Credit Committee
PAMC Provisionary Advance Monitoring
Committee
TI Total Investment
ALM Asset Liability Management Risk
NIM Net Interest Margin
CRM Credit Risk Management
GNPA Gross Non Performing Assets
ICAAP Internal Assessment of Profile of Banks
CIB Credit Information Bureau
IT Information Technology
ECA External Credit Assessment Institutions
BNFIs Non-Banking Financial Institutions
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
62
Rules
Current Ratio =�������������
������������������
ROA = Net Profit / Total Assets
ROE= Net Income/Average Shareholders’ Equity
CAR = Tier I capital + Tier II capital/ Risk weighted assets
CD Ratio= Total Advance/Total Deposit
Gross NPAs to Gross Advances Ratio= Gross NPAs / Gross Advances
Net NPAs to Net Advances ratio = Net NPAs / Net Advances
Total Inv. to Total Assets Ratio = Total Investments/Total Assets
Net NPA to Total Assets ratio = Adjusting Provision/ Gross NPAs
Earnings per Share = Net Income – Dividend on Preferred Shares/Weighted
Average Number of Common Share Outstanding
Interest Income to Total Income ratio = Interest Income/Total Income
PMR = Net Profit / Total Income
NPA ratio = Net non-performing assets/Loans given
CCCRM Corporate Customers & Credit Risk
Mitigates
ICCD Internal Control & Compliance Division
CRMD Credit Risk Review Department
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
63
Independent Samples Test-1
Figure 1
AQ
Equal variances assumed
Equal variances not assumed
Levene’s Test for Equality
Variances
t-test for Equality of means
F
6.738
Sig.
.001
t
1.860
1.860
df
98
87.125
sig(2-tailed)
.066
.066
AQ
Equal variances assumed
Equal variances not assumed
t-test for Equality of means
Mean Difference std.Error
Difference
95%Confidence
Interval of the
Difference
Lower Upper
.30800
.30800
.16556
.16556
.02055
.02106
.63655
.63706
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
64
Independent Samples Test-2
Figure 2
GNPAs/GA
Equal variances assumed
Equal variances not assumed
Levenes Test for Equality
Variances
t-test for Equality of means
F
6.682
Sig.
.211
t
1.173
1.173
df
98
87.914
sig(2-tailed)
.244
.244
GNPAs/GA
Equal variances assumed
Equal variances not assumed
t-test for Equality of means
Mean Difference std.Error
Difference
95%Confidence
Interval of the
Difference
Lower Upper
.13600
.13600
.11596
.11596
.09412
.09445
.36612
.36645
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
65
Independent Samples Test-3
Figure 3
TI/TA
Equal variances assumed
Equal variances not assumed
Levene’s Test for Equality
Variances
t-test for Equality of means
F
6.511
Sig.
.041
t
.979
.979
df
98
96.979
sig(2-tailed)
.033
.033
TI/TA
Equal variances assumed
Equal variances not assumed
t-test for Equality of means
Mean Difference std.Error
Difference
95%Confidence
Interval of the
Difference
Lower Upper
.11333
.11333
.10008
.10008
.04309
.04312
.11642
.11645
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
66
Independent Sample Test-4
Figure 4
ROA
Equal variances assumed
Equal variances not assumed
Levene’s Test for Equality
Variances
t-test for Equality of means
F
5.808
Sig.
.0012
t
.537
.537
df
98
84.509
sig(2-tailed)
.022
.022
ROA
Equal variances assumed
Equal variances not assumed
t-test for Equality of means
Mean Difference std.Error
Difference
95%Confidence
Interval of the
Difference
Lower Upper
.10514
.10514
.09575
.09575
.04143
.04152
.13958
.13866
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
67
Independent Sample test-5
Figure 5
PMR
Equal variances assumed
Equal variances not assumed
Levene’s Test for Equality
Variances
t-test for Equality of means
F
.050
Sig.
.224
t
.792
.792
df
98
97.871
sig(2-tailed)
.430
.430
PMR
Equal variances assumed
Equal variances not assumed
t-test for Equality of means
Mean Difference std.Error
Difference
95%Confidence
Interval of the
Difference
Lower Upper
.05143
.05143
.09575
.09575
.24143
.24152
.13958
.13866
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
68
Bank Performances
Asset Quality
Gross NPAs to
Gross Advances
Total Investment to
Total Asset
Return on Asset
Profit Margin Ratio
Figure 6: A schematic Conceptual Framework of Banks Performances
Dependent Variable Independent Variables
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
69
7.Questionnaire
“Assessing the Credit Risk Management & Commercial Banks
Performance in Bangladesh’’
Dear Respondent,
The Researcher is a BBA student of Khulna University conducting an analysis on Credit Risk
Management & Commercial Banks Performance in Bangladesh.
These Questions pertains to your experience in your present job and organization. Your answer
will be kept strictly confidential and used for this research purpose only. Your name will not be
mentioned anywhere on the document. So, kindly provide an impartial opinion to make my
research successful. The Researcher have used Five Point Likert Scale that is (1.SD=Strongly
Disagree, 2. MD= Moderately Disagree, 3. Ag= Agree, 4. MA= Moderately Agree, 5. SA=
Strongly Agree).
1. Indicate the number of years you have served in Credit division?
2. What is your designation
3. Indicate the ownership of your institution?[Please put (√) tick mark]
Foreign Commercial Bank
Private Commercial Bank
State Owned Commercial Bank
1. Are you aware of the following performance measurement systems? [ Please Put (√)Mark]
Performance Measurement Systems To Large To some
extent
To little
extent
Not aware
ROI
CAMEL Framework
Productivity Measures
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
70
2. Asset Quality[Please Put (√)Mark]
No. Particulars SD MD Ag MA SA
I. We think that it is the most critical
area in determining the overall
condition of a Bank
II. Loans that we provide usually the
largest items of Asset & Largest items
of Risk Also.
III. It is the important parameter of
measuring the strength of the bank.
IV. We follow the CAMEL model for
measuring Asset Quality
V. Every employee of this Bank knows
the terms & condition of Asset Quality
3. Gross NPAs to Gross Advances [Please Put (√)Mark]
No. Particulars SD MD Ag MA SA
I. We think it is a Measuring percentage
of gross advances
II. We know that Higher Ratio is harmful
for Bank.
III. It indicates Profit when the percentage
of Net Performing Asset is low.
IV. We believe that Gross advances reduce
the financial risk of Bank and help to
grow sustainability.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
71
V. We know that When advances are
more than NPAs at that time the ratio
is lower and it is better for bank.
VI. It reduces the value of a bank &
destabilizes the credit system
4. Total Investment to Total Asset [Please Put (√)Mark]
No. Particulars SD MD Ag MA SA
I. We know every bank is aggressive to
invest its asset rather than lending.
II. It measures the Banks Performance
whether it better condition or lower
condition.
III. We think when we invest our money to
enrich our economy ultimately it will
enrich our institution.
IV. It measures how much Liquid asset is
available to Total asset to convert cash
easily.
V. We believe from our heart when our
institution use our asset properly at that
time quality will increase
simultaneously
VI. It protects our institution from uncertain
Risk
VII. We know that higher net interest
margin gives higher profit for
investment.
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
72
5. Return on Assets [Please Put (√)Mark]
No. Particulars SD MD Ag MA SA
I. It determines the company ability
to utilize its assets.
II. It measures the percentage of
profit and efficiency of
management.
III. It gives an indication of capital
intensity of any organization.
IV. We know it gives clear idea of
any financial institution
V. A bank always try to earn good
return to utilize its asset
VI. It is the most stringent & vital
part to measure return from
shareholders.
6. Profit Margin Ratio[Please Put (√)Mark]
No. Particulars SD MD Ag MA SA
I. We think a bank performance
would not be possible without
calculating PMR.
II. It gives Clear idea about the
performance of our Bank
Credit Risk Management & Private Commercial Banks Performance in Bangladesh
73
III. Rising Costs, falling Prices,
Political Violence affects our Profit
margin Ratio.
IV. It measures the efficiency of
management of any financial
institution.
V. Most of the time it helps to measure
the quality of Asset and help to take
right decision to mitigate risk.
VI. It the way to know the borrowers
information of the bank.
Thank you so much for your cooperation