Corporate Asset Diversification of BRAC Bank Limited.

CORPORATE ASSET DIVERSIFICATION OF BRAC BANK LIMITED

BY

Afsana Promee

ID: 1110548

An Internship Report Presented in Partial Fulfillment

Of the Requirements for the Degree

Bachelor of Business Administration

INDEPENDENT UNIVERSITY, BANGLADESH

May 2015

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 Corporate Asset Diversification of BRAC Bank Limited.

CORPORATE ASSET DIVERSIFICATION OF BRAC BANK LIMITED

BY

Afsana Promee

ID: 1110548

has been approved

May 2015

Dr. SamiulParvez Ahmed

Assistant Professor
School Of Business
Independent University, Bangladesh

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 Corporate Asset Diversification of BRAC Bank Limited.

Letter of Transmittal
12h May, 2015

Dr. SamiulParvez Ahmed

Assistant Professor
Independent University, Bangladesh

Subject: Submission of Internship Report

Dear Sir,
I have the pleasure to submit my Internship report on Corporate Asset Diversification of
BRAC Bank Limitedas requirement for mygraduation. You are aware that I completed my
internship program in BRAC Bank Ltd(BBL) from 8th February 2015 to 8th May 2015, in Head
office ofBBL. I feel most privileged to be associated with an experienced, efficient
andprofessional team in one of the most reputed Banks of Bangladesh. I strongly
believethat this report will satisfy your requirements and expectations.

I have tried my best to make this report as informative, practical, reliable andrelevant as
possible. In preparation of this report, I have reviewed few books, journals, articles from
internet, taking few interviews and on the basis of this availableinformation

I appreciate your kind advice, cooperation, patience and suggestions regarding thisreport,
which will definitely help me to follow as a guideline in future endeavors.

Sincerely,
Afsana Promee
ID: 1110548
Dept.: BBA
Independent University, Bangladesh

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 Corporate Asset Diversification of BRAC Bank Limited.

Acknowledgement
Firstly, I would like to thank my honorable faculty, Dr. SamiulParvezAhmed for his

kindpatience, guidance and support for the preparation of this report. I will always beindebted

to him for the valuable suggestion and the time that he had spent for guidingme through the

report.

I would also like to acknowledge my great appreciation toward Md. Sekander-E-Azam Unit

Head, Cash Management and Custodial Service (Wholesale banking Division) and

FahimIshtiaqueHossain Senior Relationship Manager, Cash Management and Custodial

Services for beingpatient and supporting me throughout my 3 month long internship

program. Theyhave provided their time and effort to direct me throughout my time at BRAC

Bank Limited.

My peers and colleagues at the bank had also been very kind and helpful and theymade my

internship a more comfortable one. I would like to specially thank MarzukHussain

Relationship Officer (Wholesale Banking), for beingthere whenever I needed his support. I

would also like to thank AuditeSaha for helping me throughout my internship.

Last but not the least; I also want to thank all the employees for being patient in takingpart in

the survey that has been so crucial for my report.

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 Corporate Asset Diversification of BRAC Bank Limited.

Table of Content

Executive Summary

1.1 Introduction..... 1
1.2 Organizational Background. 1
1.3 Corporate Vision.... 2
1.4 Corporate Mission.... 2
1.5 Core Values...... 3
1.6 Tag Line of BRAC Bank Limited......... 3
1.7 The position of BRAC Bank Limited in todays market........ 4
1.8 What set BRAC Bank Limited Apart?......... 4
1.9 Industry Initiatives................................ 4
1.10 Size of the firm...................................... 5
1.11 Subsidiaries of BRAC Bank Limited......................... 6
1.12 Achievements of BRAC Bank Limited............................................ 7
1.13 Hierarchical Structure of BRAC Bank Limited.................. 8
1.14 Business Operations of BRAC Bank Limited............... 8
1.15 Products & Services of BRAC Bank Limited.......................... 8-13

2.00 Job as an Intern at BRAC Bank Limited......................... 14-15

3.1 Research introduction..................................................... 16

3.2 Problem Statement...................................... 17

3.3 Purpose of the Study........................... 17

3.4Objectives.......... 18

3.5 Literature Review........... 19-24

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 Corporate Asset Diversification of BRAC Bank Limited.

3.6 Conceptual Framework..... 25

3.7 Questions & Hypothesis.... 26

3.8. The Design---Methods and Procedure.................... 27-28

3.9 Research Analysis................ 29-31

3.10 Limitations................ 32

4.00 Summary & Conclusion.................. 32

Reference............................................................................................ . 33-34

Appendices ........................................................................................ 35-37

List of Tables

Table 1: Shareholder of BRAC Bank Limited....... 5

Table 2: Likert Scale.................. 28

Table 3: Hypothesis Testing................... 29

Table 4: Model Summary................. 30

Table 5: Coefficients........................... 31

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 Corporate Asset Diversification of BRAC Bank Limited.

Executive Summary:

This is the internship report based on the three months long internship program that I had

experienced in the Head Office of BRAC Bank Ltd. From 8th February, 20115 to 8th May, 2015

as a requirement of my BBA program under Department of School of Business, Independent

University.

This report is divided into two broad parts: one is the organization part and another is the

research part. In the organization part, I introduced the Latest and one of the largest banks

of our country the BRAC Bank Ltd. On the other hand, in the research part, I focused on

the findings and analysis of the research.

As a part of my internship program I got a chance to work at this bank for a period of three

months. During this period I have learned about this organization and its work environment,

which inspire me to work on my topic.

The topic of my report is Corporate asset diversification of BRAC Bank Limited. My main

focus on was the functions of Corporate Banking division. The specific objective of this study

was to explore the relationship between diversification of corporate assets are depended on

financial risk, management risk, business risk and security risk. We surveyed 15 employees

of corporate division to find how diversification is depended on risks while lending out

corporate loans. The result of the research shows that security risk has relationship with

diversification and it is statistically significant.

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 Corporate Asset Diversification of BRAC Bank Limited.

1.1 Introduction: BRAC Bank was founded on 4 July 2001 as a private commercial bank

focused on Small and Medium Enterprises. BRAC Bank was founded to reach the large

number of unbanked people, which were not covered by traditional bank. The main concept

of the bank was to facilitate Small and Medium Enterprises (SME). Since then the Bank has

become a leading bank in Bangladesh. The business model of the bank was to mobilize

funds from the urban market towards lending at semi-urban and rural. The bank had to

break away from traditional banking system and thus they had to develop new ways to

assess credit proposals and to reach those people who rarely accesses a bank outside metro

cities. The strategies that were taken had made the bank successful and today it is one of

the best private commercial bank.

1.2 Organizational Background: BRAC Bank Limited is a scheduled commercial bank in

Bangladesh. It established in Bangladesh under the Banking Companies Act, 1991 and

incorporated as private limited company on 20 May 1999 under the Companies Act, 1994.

BRAC Bank will be a unique organization in Bangladesh. The primary objective of the Bank is

to provide all kinds of banking business. At the very beginning the Bank faced some legal

obligation because the High Court of Bangladesh suspended activity of the Bank and it could

fail to start its operations till 03 June 2001. Eventually, the judgment of the High Court was

set aside and dismissed by the Appellate Division of the Supreme Court on 04 June 2001 and

the Bank has started its operations from July 04, 2001. BRAC Bank Limited, with institutional

shareholdings by BRAC, International Finance Corporation (IFC) and Shore cap International,

has been the fastest growing Bank in 2004 and 2005. The Bank operates under a "double

bottom line" agenda where profit and social responsibility go hand in hand as it strives

towards a poverty-free, enlightened Bangladesh. The management of the Bank believes that

this sector of the economy can contribute the most to the rapid generation of employment

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 Corporate Asset Diversification of BRAC Bank Limited.

in Bangladesh. In the years ahead BRAC Bank expects to introduce many more services and

products as well as add a wider network of SME unit offices, Retail Branches and ATMs

across the country. BRAC bank will be knowledge-based organization where the BRAC Bank

professionals will learn continuously from their customers and colleagues worldwide to add

value. It will work as a team, stretch, they will innovate and break barriers to serve

customers and create customers loyalty through a value chain of responsive and

professional delivery. The bank promotes broad-based participation in the Bangladesh

economy through the provision of high quality banking services. BRAC Bank will do this by

increasing access to economic opportunities for all individuals and business in Bangladesh

with a special focus on currently under-served enterprises and households across the rural

urban spectrum. BRAC Bank believes that the pursuit of profit and developmental goals is

mutually reinforcing.

1.3 Corporate Vision:Building profitable and socially responsible financial institution focused

on Market and Business with Growth potential, thereby assisting BRAC and stakeholders to

build a just, enlightened, healthy democratic and poverty free Bangladesh.

1.4 Corporate Mission:

Sustained growth in Small & Medium Enterprise sector

Continuous low-cost deposit Growth with controlled growth in retail assets.

Corporate Assets to be funded through self-liability mobilization. Growth in Assets through

syndications and investment in faster growing sectors.

Continuous endeavor to increase non-funded income

Keep our debt charges at 2% to maintain a steady profitable growth

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 Corporate Asset Diversification of BRAC Bank Limited.

Achieve efficient synergies between the banks branches, SME unit offices and BRAC field

offices for delivery of remittance and Banks other products and services

Manage various lines of business in a full controlled environment with no compromise on

service quality

Keep a divers, far flung team fully controlled environment with no compromise on service

quality

1.5 Core Values:Our Strength emanates from our owner - BRAC. This means, we will hold

the following values and will be guided by BRAC as we do our work.

Value the fact that one is a member of the BRAC family.

Creating an honest, open and enabling environment.

Have a strong customer focus and build relationships based on integrity, superior

service and mutual benefits.

Strive for profit and sound growth.

Work as team to serve the best interest of our owners.

Relentless in pursuit of business innovation and improvement.

Value and respect people and make decisions based on merit.

Base recognition and reward on performance.

Responsible, trustworthy and law abiding in all that we do.

1.6 Tag line of BRAC Bank Limited:Dedicated to the people of Bangladesh because we

believe in the faith and dreams of the 158 million. It is not just a place for transactions

BRAC Bank is a place where potentials are realized.

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 Corporate Asset Diversification of BRAC Bank Limited.

1.7 The position of BRAC Bank Limited in todays market:

BRAC Bank is the youngest Bank in the country

It is countrys largest SME bank

A full scale financial hypermarket offering financial solutions to every segment: SME,

Retail, Corporate, Probashi, Capital Market

2nd largest ATM network, largest to have integrated with rest of the industry

Largest Plastic Card base (over 5 Lac customers carry Debit or Credit card)

Largest real time, online Network

BRAC Bank has 151 Branches/ KrishiBranches

They have 421 SME Unit Offices

The bank has over 300 ATMs

They have more than 1800 Remittance Delivery Points

They have 12 AponShomoy (Kiosks)

1.8 What set BRAC Bank Limited apart?

BRAC Bank has SME Banking Model where 50% of the total loan is always for SMEs.
They have Value Based Banking system where the mission of Financial Inclusion and
3P philosophy is in action.
Largest real-time, online network.

1.9 Industry Initiatives:

The SME Financing Model

Omnibus-a common platform for shared ATM network

Eldorado- a common platform for remittance distribution

First PPP in Banking

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 Corporate Asset Diversification of BRAC Bank Limited.

1.10 Size of the firm:

Number of Employees: Currently 8000 people are working in BRAC Bank Limited in

different branches all over Bangladesh.

Table 1: Shareholders of BRAC Bank Ltd

Shareholders Percent
BRAC 31.74%
IFC 9.50%
ShoreCapInternational 8.76%
General PublicthroughIPO 40%
Non-Residents Bangladeshi's 5%
Mutual Funds throughIPO 5%
Total 100%

Source: BRAC Bank

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 Corporate Asset Diversification of BRAC Bank Limited.

1.11 Subsidiaries of BRAC Bank Limited:

BRAC EPL Stock Brokerage Limited is one of the leading stockbrokers in the country. BRAC

EPL Stock Brokerage Limited has membership at both of the country's stock exchanges; the

Dhaka Stock Exchange (DSE) and the Chittagong Stock Exchange (CSE).

BRAC EPL Investment Limited delivers a whole range of Investment Banking services including

traditional merchant banking activities such as Issue Management, Corporate Advisory,

Corporate Finance, Underwriting and Portfolio Management.

BRAC Saajan Exchange Limited mainly provides remittance services to the large Bangladeshi

Communities living in UK. Apart from its remittance services the Company also caters to the

investment needs of the NRBs through its parent organization BRAC Bank.

bKash Limited (a subsidiary of BRAC Bank) operates with an objective to ensure access to a

broader range of financial services (mobile fund transfer facility) for the people of Bangladesh.

It has a special focus to serve the low-income masses of the country to achieve broader

financial inclusion by providing services that are convenient, affordable and reliable.

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 Corporate Asset Diversification of BRAC Bank Limited.

BRAC IT Services Ltd. (biTS) is an IT Solution and Services company and is a subsidiary jointly

owned by BRAC Bank and BRAC. biTS has been formed in 2013 through the merger of a

subsidiary IT company. It strives to become the trust worthiest company in Bangladesh

providing technology solutions and managed IT Services. biTS provides end-to-end solutions

for industries like Banks, Non-Banking Financial Institutes, Educational Institutes, Micro-

Finance, NGOs, FMCG etc. It has a team of highly capable and professional individuals

committed to deliver high productivity, efficiency as well as creativity. We are committed to

help our customers to achieve operational efficiency through transforming their existing

operations using our best value solutions and services

1.12 Achievements:

BRAC Bank wins prestigious Sustainable Marketing Excellence Award from CMO Asia

BRAC Bank wins prestigious Best Bank in Bangladesh Award from Finance Asia

BRAC Bank wins The Best Managed Bank Award from The Asian Banker

BRAC Bank Wins the Award for Best Retail Bank in Bangladesh by The Asian Banker

BRAC Bank Limited has received ICAB National Award

BRAC Bank awarded prestigious FT Sustainable Bank of the Year 2010

DHLDaily Star Bangladesh Business Awards 2008

BRAC Bank received National Award as the Highest VAT payer for the financial year

2007-2008

BRAC Bank received ICAB National Award

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 Corporate Asset Diversification of BRAC Bank Limited.

1.13 Hierarchical Structure of BRAC Limited Bank:

1.14 Business Operation of BRAC Bank Limited (Corporate Division):Corporate-banking

division operates in a centralized structure through online banking system. At every stage of

its involvement, corporate banking division adheres to strict internal control guidelines and

prevalent legal and statutory compliance.

1.1 5Product and Services: BRAC Bank Limited provides different types of banking services

to their potential customers. They have five different types of banking services, SME

banking, retail banking, wholesale banking, probashi banking and E-banking.

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 Corporate Asset Diversification of BRAC Bank Limited.

SME Banking:BRAC Bank, being the youngest bank, took a step to break away from usual

tradition and tapped into the true community entrepreneurial initiatives. Today with over

220,139 million of loans disbursement till date, BRAC Bank is countrys largest SME financier

that has made more than 410,817 dreams come true. SME banking provides both the loan

products and deposit products

Loan products:

Anonno: It is a business loan to meet any kind of business needs, which starts

from BDT 2 Lac to 15 Lac. We obtain this loan no security is needed, it has easy

installment and easy loan processing. Any kind of business having valid trade

license, partnership or sole proprietorship and small sized businesses are

eligible for this type of service.

ApurboRin:Apurbo is a loan facility for Small Entrepreneurs. Apurbo offers BDT

1 million to BDT 30 million loans against registered mortgages. It has term loan,

short term loan, revolving loan,bank guarantees and overdraft loan facilities

depending on the requirement of the customers. To avail this kind of loan

limited documents are needed and it gives easy installment and overdraft

services.

Prothoma:Prothoma is a term loan for small-scale businesses operated by

women entrepreneurs. Maximum BDT 1 million is given out to meet any kinds

of business needs. No security is needed. The interest rate is very low and loan

processing is very easy.

Shomriddi:To meet import-export related expenses, post import expenses,

tax/duty payment, local bill purchase, working capital and fixed asset finance.

Shomriddi loan is offering BDT 1 Lac to BDT 50 million. It has LC and LATR

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 Corporate Asset Diversification of BRAC Bank Limited.

facility, revolving loan, overdraft, local bill discounting facility and term loan

facility. It provides convenient interest rate and loan payment facility up to 180

days.

ShompodRin:Shompod is a business loan facility starting from BDT 1 million to

BDT 35 million against home or business premise mortgage. It consists of term

loan with monthly installment repayment facility for maximum up to 10 years

and overdraft facility to meet working capital.

ShoktiRin:Business loan under which customer can avail BDT 1 million to BDT 10

million to meet any kind of business loan.

Deposit products:

Prapti Current Account:Prapti current account allows customers to deposit and

withdraw money trough any branches, SME sales and service centers during

banking hours and through ATM and CDM 24 hours. The interest is paid on daily

balance.

Prachurjo Fixed Deposit:Prachurjo is a lucrative fixed deposit for small and

medium businesses. With a minimum 10,000 Tk any small enterprise having

valid trade license can open this account.

Shonchoy Deposit: Monthly deposit scheme for all SME clients. Ii would allow

the organization to save a monthly basis as per the organization requirement.

Along with this business concern can get up to 95% secured over draft facility.

Corporate Banking:BRAC Bank Limited offers a full array of Financial Services to Corporations

and Institutions. Having access to the deepest end of the country, BRAC Bank is there to assist

businesses in Bangladesh.

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 Corporate Asset Diversification of BRAC Bank Limited.

Corporate Loan Products:

Overdraft

Short Term Loan

Lease Finance

Loan Against Trust Receipt (LATR)

Work Order Finance

Emerging Business

Syndication

Term Loan

Project Finance

Bill Purchase

Bank Guarantees

Corporate Cash Management:

Cash & Trade Unit provide a wide range of Corporate Fund Management Solutions for the

large, medium and small business enterprise. The banks strategy is to provide tailored

comprehensive solution to the clients of this segment. BRAC bank have designed and

redefined our services, which are flexible and customizable in terms of individual corporate

requirement.

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 Corporate Asset Diversification of BRAC Bank Limited.

Custodial Service:

BRAC Bank Limited offers ProbashiBiniyog a product that exclusively provides Non-

Resident Bangladeshis (NRBs) the opportunity to invest in the Bangladeshi Capital Market

through a Beneficiary Owners (BO) account which will be funded by a Non Resident

Investors Taka Account (NITA). Both BO account and NITA will be held with BRAC Bank

Limited

Retail Banking:With 157 outlets, over 300 ATMS and over 500,000 plastics in the in the

market BRAC Bank offers a wide range of financial solutions to meet customers daily needs.

BRAC Banks Retail Division is being operated centrally. Under the Retail Banking Division all

the branches, which acts as sales & service center, are reportable to Head of Retail Banking.

Premium Banking

Supreme Banking

Excel Banking

Retail Deposits Products

Retail Loan Products

Credit Cards

Non-stop Banking

ATM/ Branch Locator

Locker Services

Foreign Exchange & Related Services

Probashi Banking: Probashi Banking division of the bank caters the NRBS (Non- Resident

Bangladeshi) not only by disbursing remittance but also offering One Stop banking Solution

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 Corporate Asset Diversification of BRAC Bank Limited.

by creating a favorable environment and opportunities for the NRBs to make long term

financial contributions in the socio- economic progress of the nation. To facilitate the NRBs a

bunch of probashi banking products and services are designed to secure expatriate

Bangladeshi(s) future saving(s) and investment(s) need as well as providing a structured

financial planning for future.

E-Banking: For the first time in Bangladesh BRAC Bank Limited has introduced e-commerce

program for all VISA & MasterCard cardholders. Electronic Commerce is a convenient and

affordable way to buy and sell products and services online.

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 Corporate Asset Diversification of BRAC Bank Limited.

2.0Job As An Intern:As an intern I got the opportunity to work at BRAC Bank Limited. I

worked under cash management and custodial service of corporate banking division. I had

to work 5 days a week from 10 to 6, at times till 8. The cash management team deal with

corporate clients and manages their accounts. The corporate baking consists of four wings:

cash management and custodial services, local corporate, large corporate and structured

finance. During my internship I was assigned to work with the cash management and

custodial team. The cash management team provides a wide range of Corporate Fund

solution for the large, medium and small business enterprise. The strategy is to provide

tailored comprehensive solution to the clients of this segment. Usually they design their

services according to the needs of the individual corporate requirement. The services are

quite flexible and they are customizable in terms of customer needs.

The duty I was assigned was to calculate custodial fee for different IPO funds. Due to

political instability Bangladesh Bank assigned a project to all public and private banks. The

project name was PEP (Politically Exposed Persons in Bangladesh). I was assigned to do this

project for BRAC Bank Limited. Basically I had to check all corporate accounts and I had to

find whether the signatory or beneficiaries of the accounts are politically exposed or not. I

had to almost 37000 accounts, and most of the accounts had 5 beneficiaries. I had to search

individual name on Google and I had find out if they are anyhow related to politicians.

Throughout my internship I had to do this, as there was 37000 accounts. Moreover I was

assigned to read custodian agreements. I was even trained how to open new corporate

accounts and how to assets were diversified in corporate banking.

Skills and competencies that I acquired during my internship, was I got to know about many

politicians of Bangladesh, as I had zero knowledge about it. I actually learnt how things are

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 Corporate Asset Diversification of BRAC Bank Limited.

done in corporate work and how the corporate culture works. I also learned how accounts

are opened and pay orders are made.

Account opening form update

Procedure:

Individual information

Information about nominee

Computing coding

Transaction profile

KYC profile form

Check list

Thanks letter

Pay order preparation

Procedure:

Form fill up

Cash payment

Write down the pay order checks

Collect sign form Sub manager and a senior officer

Provide the pay order check to the customer and collect a sign.

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 Corporate Asset Diversification of BRAC Bank Limited.

3.1 Introduction: In finance diversification means to reduce non-systematic risk by

investing in various types of assets. If the asset values do not move up and down in perfect

manner then a diversified portfolio will have less risk than the weighted average risk of the

constituent assets and often less risk than the least risky of its constituent. Increased

attention is focused on methods for valuating corporate bank loans and for determining the

appropriate interest rate and fees to charge various categories of customers. BRAC Bank

Limited offers a wide range of corporate loan products to their corporate customers. Loan

products like over draft, short term loan, lease finance, loan against trust receipt, work

order finance, syndication, term loan, project finance, bill purchase and bank guarantees are

offered to corporate clients. As giving out loans to customers involves great amount of risk,

as a result bank has to always eliminate the risk associated with each and individual

products they offers to their customers. However banks also has to get the highest return

from their assets.

Corporate loans are quite different from traditional loans. Corporate loans are given on the

basis of the company needs and the risk and return varies from companies to companies.

There is no fixed interest rate set for the corporate loan products and the return varies.

Corporate loans are associated with five types of risk: financial risk, management risk,

business risk, relationship risk and security risk. Any company that requires corporate loan

needs to fulfill the Customer Grading Policy. The bank checks all the risk associated with the

company and if the company passes the grading policy then they are eligible for taking

corporate loans.The corporate assets are diversified on the basis of risk associated with the

loan products.

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 Corporate Asset Diversification of BRAC Bank Limited.

3.2 Problem Statement: As the corporate loans have no fixed rate for their loan

products, it is very difficult to measure the actual risk associated with each loan product

they offer. So if we have to find the actual risk and return for the individual loan product we

have choose individual companies to find the risk and return and based in that we can see

how the bank can diversify their corporate assets. As we know corporate loans are given on

the preference of the corporate clients and for different companies different rates are set

and as a result returns differs from company to company. Therefore corporate assets are

diversified on the basis of risk associated with companies. The bank focuses on 5 different

types of risk out of which 4 types helps the bank to diversity their corporate assets. Risk

such as financial risk, business risk, management risk and security risk are taken into

consideration for asset diversification. The bank needs to assess each and individual

corporate clients and even after assessing the company and clients it is difficult to mitigate

risks. Another problem the bank has in diversifying their corporate asset is that as the

corporate banking division caters to a board range of customized solutions and services

targeted towards corporate and institutional clients, therefore it is hard to calculate total

and risk and return associated with different loan products and thus their portfolio

diversification constantly keeps on changing.

3.3 Purpose of the study:The purpose of the study is to identify, on what basis the

corporate loans are given to corporate clients, as they have no fixed rate for their corporate

loan products. In doing so we can see how diversification of corporate assets is dependent

on different types of risk associated with companies while lending out corporate loans. The

corporate assets are then diversified into different companies depending on the risk and

company performance. The type of loan products requirement is dependent on companys

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 Corporate Asset Diversification of BRAC Bank Limited.

need and thus on the basis of the companys requirement the corporate asset is diversified.

The bank diversifies their corporate assets into different industries like RMG, Steel,

Pharmaceuticals, Textile, and Telecommunications etc. Companies from different industries

having feasible business plan and having less risk are the ones who gets the facilities to use

corporate loan products. The assets are then diversified into different loan products

depending on the companies need.

3.4 Objectives:

Broad Objective:On what basis the corporate clients are graded and how the corporate

assets are diversified on the basis of risks associated with corporate loans.

The Specific Objective:

To identify the risk associated with corporate loans

To find out on what basis the bank diversifies their asset into different companies

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 Corporate Asset Diversification of BRAC Bank Limited.

3.5 Literature Review:

Definition of risk:

When doing business, constantly decisions, where the outcomes cannot be foreseen with

certainty due to incomplete information, have to be made (Stroeder, 2008,). This

uncertainty connected with every kind of business activity is risks. Although this term is of

central importance, there does not exist an overall definition of the meaning of risk.

Furthermore, risk can be split into two categories. On the one hand there are pure risks or

systematic risks, which cannot be influenced by the manager and are independent of

business decisions. On the other hand there are unsystematic risks, which are the result of

managerial decision-making and can either have a negative or a positive outcome (Stroeder,

2008; Retzlaff, 2007).

However there are differences in the definitions of risk. First of all some include alsopossible

positive outcomes of a risk, also referred to as upside risks or chances. Otheronly define the

possible occurrence of negative outcomes, or downside risks, as risksbecause they are more

in the focus of the management (Dhanini et al., 2007). Theinclusion or exclusion of chances

is not the only difference in the common definitions.They range from (negative) deviations

of planned outcomes, over danger of makingwrong decisions to danger of losses due to

information lacks (e.g. Nassauer&Pausenberger, 2000; Hermann, 1996). When focusing on

the commonfeatures of the definitions, risk is the possibility of deviation from a planned

outcome orgoal. This implies that all business is connected with risks resulting from the fact

thatfuture states of the world and outcomes of decisions can only be predicted. As

businessactivities are uncertain regarding their outcome and this uncertainty implies risks to

theprofit of the firm, a company needs to manage its risk exposure (Retzlaff, 2007).

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 Corporate Asset Diversification of BRAC Bank Limited.

Financial Risk:

Financial risk is an umbrella term for multiple types of risk associated with financing,

including financial transactions that include company loans in risk of default. Risk is a term

often used to imply downside risk, meaning the uncertainty of a return and the potential for

financial loss.A science has evolved around managing market and financial risk under the

general title of modern portfolio theory initiated (Dr. Harry Markowitz, 1952). In modern

portfolio theory, the variance (or standard deviation) of a portfolio is used as the definition

of risk.Financial risk management has received increased attention over the past years

(Glaum, 2000). The reason for this is that financial risks, though they are not a core

competency of non-financial firms, also influence their business operations to a large extend

(Triantis, 2000). Financial risks can be of different forms. On the one hand there are external

financial risks depending on changes on financial markets. On the other hand there are

internal financial risks, where the company itself is the source of the risks (Eichhorn, 2004).

The internal risk consists of credit risk, operational risk and liquidity risk.

Internal Financial Risk:

Reduced volatility in cash flows or earnings and prevention of losses allow better planning of

liquidity needs. This can avoid shortcuts of available funds and consumption of equity

(Eichhorn, 2004). However, in order to maintain financially liquid and avoid end of period

losses, it needs to be analysed which the maximum tolerated loss is. The focus of the risk

management should therefore be in correspondence with the actual financial situation of

the company. Then, by managing, among others, internal and external financial risks, also

the liquidity risk and solvency risk are taken care of. Financing risk, which needs to be

managed directly, mainly depends on a mismatch between the duration of assets and their

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 Corporate Asset Diversification of BRAC Bank Limited.

financing. The company should therefore try to match the two durations in order to avoid

problems with and high costs of follow-up loans. Furthermore this reduces the risk of having

more debt than needed after the assets lifetime and by that it saves interest costs (Vickery,

2006).

Credit Risk:Credit risk, also called default risk, is the risk associated with a borrower going

into default (not making payments as promised). Investor losses include lost principal and

interest, decreased cash flow, and increased collection costs. An investor can also assume

credit risk through direct or indirect use of leverage. For example, an investor may purchase

an investment-usingmargin. Or an investment may directly or indirectly use or rely on repo,

forward commitment, or derivative instruments.

Operational Risk:Operational risks, financial risks and organizational and management risks

are internal risks as they have their source within the firm (Henschel, 2008, p.8).Operational

risks, comprising business operations(e.g., human resources, product development,

capacity, efficiency, product/service failure, channel management, supply chain

management, and business cyclicality), empowerment (e.g., leadership and change

readiness), information technology (e.g., relevance and availability), information/business

reporting (e.g., budgeting and planning, accounting information, pension fund, investment

evaluation, and taxation.

Liquidity Risk:As well as consumption of equity, liquidity risk is mainly the result of other

risks, which cause a deviation of the planned outcome and might lead to lower cash inflows

or higher cash outflows. Liquidity measures the ability of the firm to cover its expenses and

therefore it also shows whether the company is able to cope with some losses due to risk

occurrence (Smithson, Smith &Wilford, 1995). A lack of financial funds can cause problems

28
 Corporate Asset Diversification of BRAC Bank Limited.

in the ability of the firm to pay its bills on time and by that lead to additional costs (Brner,

2006). On the one hand costs occur for arrears fees. On the other hand the rating of the

company can be lower and therefore future financing leads to higher interest payments

(Eichhorn, 2004). Due to that the financing risk becomes more urgent and can lead to higher

liquidity and solvency risks.As external and internal financial risks can have a huge impact on

the company and its business continuity, a management of these risks is essential also for

non-financial companies.

Management Risk:

Management risk refers to the chance that company managers will put their own interests

ahead of the interest of the company and shareholders. An example of this is the recent

scandals with Enron, WorldCom and other large companies, whose managers acted in a

manner that eventually bankrupted the companies and destroyed shareholder wealth.

Management risk also applies to investment managers, whose decisions and actions may

divert from the investors' wishes or reduce the value of an investment portfolio.Operational

risks, financial risks and organizational and management risks are internalrisks as they have

their source within the firm (Henschel, 2008).Different researchers tried to find sets of ratios

according to these requirements. Their aim was to find a reliable method for predicting the

default risk of a company based on a set of key ratios. By comparing a companys ratios to a

group of other companies a classification of the company as at default risk or not should be

possible. Different methods have been developed to evaluate the usability of different

ratios in assessing a companys insolvency risk (Baetge&Bruggemann, 2006, Baetge, 2002).

In the beginning the research concentrated on analyzing different ratios separately and

combining the single outcomes to an overall picture of default risk (Balcaena&Ooghe, 2006).

29
 Corporate Asset Diversification of BRAC Bank Limited.

Business Risk:

The term business risk refers to the possibility of inadequate profits or even losses due to

uncertainties e.g., changes in tastes, preferences of consumers, strikes, increased

competition, change in government policy, obsolescence etc. Every business organization

contains various risk elements while doing the business. Business risks implies uncertainty in

profits or danger of loss and the events that could pose a risk due to some unforeseen

events in future, which causes business to fail. Business risks can be classified by the

influence by two major risks: internal risks (risks arising from the events taking place within

the organization) and external risks (risks arising from the events taking place outside the

organization).

Business risk is defined to be the risk inherent in the firm, independent of the way it is

financed (Van Horne, pp. 207-8). Business risk generally is reflected in the variability of net

operating income or net cash flows. A high (low) coefficient of variation of net cash flows,

for example, would indicate high (low) business risk. Business risk may be evaluated at a

point in time based on the probability distribution of net cash flows.

Security risk:

Security risk analysis, otherwise known as risk assessment, is fundamental to the security of

any organization. It is essential in ensuring that controls and expenditure are fully

commensurate with the risks to which the organization is exposed.However, many

conventional methods for performing security risk analysis are becoming more and more

untenable in terms of usability, flexibility, and critically... in terms of what they produce for

the user.

30
 Corporate Asset Diversification of BRAC Bank Limited.

Diversification:

Diversification strives to smooth out unsystematic risk events in a portfolio so that the

positive performance of some investments will neutralize the negative performance of

others. With respect to industry concentration, (Berry 1974) found that diversificationinto

new industries raised concentration in concentrated industries,but decreased it in

concentrated industries. Similarly, (Caves 1981) alsofailed to find a positive relationship

between diversification and concentrationin highly concentrated industries, finding instead

an increase only in concentratedindustries. He concluded (p. 292): "The appearance of a

positiverelation between changes in concentration and diversification only in the

leastconcentrated industries does not support a market-power interpretation. It canhardly

pay to dip into the deep pocket in order to lift four-firm concentrationfrom 18% to 25%."

31
 Corporate Asset Diversification of BRAC Bank Limited.

3.6 Conceptual Framework:

FINANCIAL RISK

MANAGEMENT RISK

DIVERSIFICATION

BUSINESS RISK

SECURITY RISK

32
 Corporate Asset Diversification of BRAC Bank Limited.

3.7 Questions and Hypothesis:

1.Is there any relationship between financial risk anddiversification?

2.Is there any relationship between management risk and diversification?

3.Is there any relationship between the business risk and diversification?

4.Is there any relationship between security risk and diversification?

Hypothesis:

Ho1: There is no relationship between financial risk and diversification.

Ha1: There is a relationship between financial risk and diversification.

Ho2: There is no relationship between management risk and diversification.

Ha2: There is a relationship between management risk and diversification.

Ho3: There is no relationship between business risk and diversification.

Ha3: There is a relationship between business risk and diversification.

Ho4: There is no relationship between security risk and diversification.

Ha4: There is relationship between security risk and diversification.

33
 Corporate Asset Diversification of BRAC Bank Limited.

3.8 The Design Methods and Procedures

Research design:

The conceptual framework work shows that there is a direct relationship between the

independent variables and the dependent one. But it will be important to explore the type

& intensity of this relationship so that the earlier mentioned purpose of the study can be

met. The study how corporate loans are diversified, I went to Head Office BRAC Bank

Limited in the corporate department for my internship.. The basic data both primary and

secondary used in the preparation of this report are obtained from:

Personal observation of different tasks.

Face to face conversation with the bank officers studying of different files and

books.

Annual report of BRAC Bank Ltd.

Periodicals published by Bangladesh Bank.

Sources of Data:

Both the primary as well as the secondary form of data is used to prepare the report. The

details of these sources are highlighted below.

Primary Data:Primary data were collected through interviewing, conversation and

discussion with the corporate employees of BRAC Bank Limited. The employees were given

questionnaires and based on that we have done our data analysis.The executives & officers

of BRAC Bank were quite friendly & cooperative to provide lots of information to prepare

this report

Secondary Data:Secondary information was collected from:

Annual report of BRAC Bank Ltd.

Books on general banking.

34
 Corporate Asset Diversification of BRAC Bank Limited.

Sampling Method:

Convenient sampling method was adopted whereby the entire respondents are employees

of corporate division of BRAC Bank Limited.

Sample size: 15

Survey Instrument:

Questionnaires will permit us to gather information that cannot be found elsewhere from

any secondary information such as books, newspapers and Internet resources. So the

questionnaire survey is the most successful method for this study to collect the data. I have

used a structured questionnaire. In a structured questionnaire, quantitative data is required

and for this reason the researcher will use questionnaire. There are Five (5) response

choices:

1 2 3 4 5

StrongDisagree Disagree Neither Agreenor Agree StronglyAgree

Disagree

Table 2: Likert scale

Types of data and sources:

I have select questionnaire method to collect data from the primary sources. I will confirm

our respondents that all the data collected from them will be kept confidential and

exclusively used for academic purposes and their individual identity would be kept

undisclosed individuals, each taken 18 questionnaires to be filled out by respondents from

the devised sample. While filling out the questionnaires the researchers assisted the

respondents to get a better idea of their actual behaviors to minimize the margin of error.

Data entry is done in SPSS 17 data editor and analyzed under some specific hypothesis.

Statistical tools like correlate and regression were used to assess and interpret data. To interpret

35
 Corporate Asset Diversification of BRAC Bank Limited.

the data, frequency and correlate were used in the first phase. To test the hypotheses, multiple

regressions were used as a statistical tool at 0.05 and significance level.

3.9 Research Analysis:

Table 3: Hypothesis testing

FinRisk MgtRisk BusiRisk SecuRisk Diversification

FinRisk Pearson Correlation 1 -.068 -.300 -.003 .143

Sig. (2-tailed) .811 .277 .992 .610

N 15 15 15 15 15

MgtRisk Pearson Correlation -.068 1 .439 .160 -.017

Sig. (2-tailed) .811 .101 .568 .952

N 15 15 15 15 15

BusiRisk Pearson Correlation -.300 .439 1 -.337 .334

Sig. (2-tailed) .277 .101 .220 .224

N 15 15 15 15 15

SecuRisk Pearson Correlation -.003 .160 -.337 1 -.607*

Sig. (2-tailed) .992 .568 .220 .016

N 15 15 15 15 15
*
Diversification Pearson Correlation .143 -.017 .334 -.607 1

Sig. (2-tailed) .610 .952 .224 .016

N 15 15 15 15 15
*. Correlation is significant at the 0.05 level (2-tailed).

The hypothesis testing shows that there is no relationship between financial risk,

management risk and business risk with diversification. Only security risk has relationship

with diversification. As the p value is less than 0.025 that means the relationship of

dependent variable with the independent variable is statistically significant.

36
 Corporate Asset Diversification of BRAC Bank Limited.

The Pearson correlation table represents:

Ho1: There is no relationship between financial risk and diversification

Ho2: There is no relationship between management risk and diversification.

Ho3: There is no relationship between business risk and diversification.

Ha4: There is relationship between security risk and diversification.

Regression Analysis:
Table 4: Model Summary

Model R R Square
a
1 .653 .426

a. Predictors: (Constant), SecuRisk, FinRisk, MgtRisk, BusiRisk

In statistics, regression analysis is a statistical process for estimating the relationships

among variables. It includes many techniques for modeling and analyzing several variables,

when the focus is on the relationship between a dependent variable and one or more

independent variables. R is the correlation and it measures how variables move in relation

to each other. As we can see the value of the R is 0.653 or 65.3% and as we know the higher

the value of the R the model is good fit for the research. R2or the covariance is the

proportion of the variability in the Y that is explained by the independent variables, the x

variable in the model. In our model we have four independent variables and one dependent

variable. The independent variables are financial risk, management risk, business risk and

security risk and the dependent variable is diversification. We can say 42.6% of

diversification is due to financial risk, management risk, business risk and security risk.

37
 Corporate Asset Diversification of BRAC Bank Limited.

Table: 5 Coefficientsa

Standardized
Unstandardized Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) 3.196 1.870 1.709 .118

FinRisk .209 .255 .209 .820 .431

MgtRisk -.015 .242 -.018 -.063 .951

BusiRisk .228 .319 .228 .714 .492

SecuRisk -.341 .179 -.527 -1.904 .086

a. Dependent Variable: Diversification

We can explain the coefficients by:

y= + B1X1+ B2X2+B3X3+B4X4
y= 3.196 + 2.09X1 0.015X2 + 0.228X3 0.341X4

Therefore we can conclude that if financial risk increases by 1unit, then diversification

increases by 2.09 units. If the management risk increases by 1unit, then diversification is

decreases by 0.015 units. If business risk increases by 1 unit, then diversification increases

by 0.228 units. If security risk increases by 1 unit, then diversification decreases by 0.341

units.

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 Corporate Asset Diversification of BRAC Bank Limited.

3.10 Limitations:

BRAC Bank authority did not want to disclose all the information needed.

Load at the work place was also a barrier to prepare this report.

Although the officers of the BRAC Bank Ltd. have been very helpful, they didnt have

enough time to provide, as they are very busy with their assigned works. So, in some

cases, observation was needed.

The sample size was small.

Finally, the length of this internship program is not sufficient conduct a detailed

study on the subject of research.

4.0 Summary and Conclusion:

This report is an effort to show what could be the reason behind diversification of corporate

assets of BRAC Bank, though there are other reasons as well but corporate loans are lend

out on the basis of this four risks and depending on the risk the assets are diversified.

After doing the research and running the data on SPSS I am really surprised to see that the

data showed there were no relationship between some of the independent variables with

diversification. This may be due to the number of people I took as a sample.

I was assigned to BRAC Banks Corporate Division, located in Tejgoan where I worked for 3

months and I have gained many new things from working here and I tried to integrate what I

have learned at office on my research which was really helpful, it help me to get my work

done faster.

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 Corporate Asset Diversification of BRAC Bank Limited.

References:
Alexander J. Triantis REAL OPTIONS AND CORPORATE RISK MANAGEMENT
Volume 13, Issue 2, Summer 2000, Pages: 6473.
Andreas Brner 12, (2006,) Preservation of plant genetic resources Volume 1,
Pages: 13931404,
Baetge/ Kirch/ Thiele(2005), Bruggemann/Luhn/Siegel(2004a) Mezzanine-Kapital in
der HGB- und IFRS-Rechnungslegung: Ausprgungsformen
Balcaen, S. &Ooghe, H. (2006). 35 Years of studies on business failure: an overview of
the classic statistical methodologies and their related problems. The British
Accounting Review, 38, 63-93
Berry, Charles H., "Corporate Diversification and Market Structure," Bell Journal of
Economics and Management Science, Spring 1974, 5 196-204
Caves, Richard E., "Diversification and Seller Concentration: Evidence from Changes,
1963-72," Review of Economics and Statistics, May 1981, 63, 289-93.
Dhanani, A.; S. Fifield; C. Helliar; and L. Stevenson. Why UK Companies Hedge
Interest Rate Risk. Studies in Economics and Finance, 24 (2007), 72-90.
Eichhorn and O. Chapelle. Object categorization with SVM: kernels for local features.
Technical Report TR137, Max Planck Institute for Biological Cybernetics, Tubingen,
Germany, July 2004. 112, 134, 135
HENSCHEL, T. (2009). Implementing a Holistic Risk Management in Small and
Medium Sized Enterprises (SMEs). Edinburgh Napier University School of Accounting,
Economics & Statistics, UK.
Markowitz, H.M. (March 1952). "Portfolio Selection". The Journal of Finance7 (1):
7791
Martin Glaum (2000), A Comprehensive approach to the measurement of
Macroeconomic exposure.
Pausenberger and Nassauer 2000, Governing the Corporate Risk Management
Function.
RetzlaffHenkin (2007).A New Model to Identify Bankruptcy Risk of Corporations,
Journal of Banking and Finance, 1 (1), 29-51.
Ronald A. Fisher. Metron, 1: 3-32 (1921) On the "Probable Error" of a Coefficient of
Correlation Deduced from a Small Sample

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 Corporate Asset Diversification of BRAC Bank Limited.

Shaw nee Vickery, Roger Calantone and Cornelia DrgeJOURNAL OF SUPPLY CHAIN
MANAGEMENTVolume 35, Issue 2, June 1999, Pages: 1624, Shaw nee Vickery,
Roger Calantone and Cornelia Drge
Smithson, Smith &Wilford, (1995), Derivatives Securities, Risk Management &
Speculation.
Stroeder, T., and Pagnucco, M. 2009. Realizing deterministic behavior from multiple
non-deterministic behaviors. In Proc. of the International Joint Conference on
Artificial Intelligence (IJCAI), 936941.
Van Horne, J. C. Fundamentals of Financial Management. Englewood Cliffs, N.J.:
Prentice-Hall, 1974

Website:http://www.bracbank.com/about.php

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 Corporate Asset Diversification of BRAC Bank Limited.

Appendices:
Hypothesis testing:

FinRisk MgtRisk BusiRisk SecuRisk Diversification

FinRisk Pearson Correlation 1 -.068 -.300 -.003 .143
Sig. (2-tailed) .811 .277 .992 .610
N 15 15 15 15 15
MgtRisk Pearson Correlation -.068 1 .439 .160 -.017

Sig. (2-tailed) .811 .101 .568 .952

N 15 15 15 15 15
BusiRisk Pearson Correlation -.300 .439 1 -.337 .334

Sig. (2-tailed) .277 .101 .220 .224

N 15 15 15 15 15
SecuRisk Pearson Correlation -.003 .160 -.337 1 -.607*

Sig. (2-tailed) .992 .568 .220 .016

N 15 15 15 15 15
*
Diversification Pearson Correlation .143 -.017 .334 -.607 1
Sig. (2-tailed) .610 .952 .224 .016
N 15 15 15 15 15
*. Correlation is significant at the 0.05 level (2-tailed).

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 Corporate Asset Diversification of BRAC Bank Limited.

Regression Analysis:

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

a
1 .653 .426 .196 .32663

a. Predictors: (Constant), SecuRisk, FinRisk, MgtRisk, BusiRisk

Coefficientsa

Standardized
Unstandardized Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant) 3.196 1.870 1.709 .118

FinRisk .209 .255 .209 .820 .431

MgtRisk -.015 .242 -.018 -.063 .951

BusiRisk .228 .319 .228 .714 .492

SecuRisk -.341 .179 -.527 -1.904 .086

a. Dependent Variable: Diversification

43
 Corporate Asset Diversification of BRAC Bank Limited.

Financial Risk
While lending out corporate loans financial risk is the important factor the bank looks
1 into 1 2 3 4 5
2 50% of the total risk is focused on the financial risk while giving loans to companies 1 2 3 4 5
3 Corporate credit risk policy helps ensure the quality of the companies 1 2 3 4 5
Liquidity risk and market risk aslo plays a vital role for compaines to get corporate
4 loans 1 2 3 4 5
Management Risk
5 Coporate loans are only given to well managed companies 1 2 3 4 5
6 Management risk is checked by visisting the companies (client visist) 1 2 3 4 5
7 18% 0f the total risk is focused on management risk while lending out corporate loans 1 2 3 4 5
8 Well managed companies usually gives better return to the bank 1 2 3 4 5
Business Risk
9 Coporate loans are given to companies only on the basis of company's busisness plan 1 2 3 4 5
Credit history and financial data helps the bank to identify the risk associated with
10 individual company 1 2 3 4 5
11 22% of the total risk is focused on business risk while lending out corporate loans 1 2 3 4 5
12 Companies with achievable business plan gets more loan facilities 1 2 3 4 5
Security Risk
13 The bank emphasizes less on security risk 1 2 3 4 5
14 10% of the total risk is focused on security risk while giving out corporate loans 1 2 3 4 5
Diversifications
15 Companies having less financial risk gets getter amout of loan facilities 1 2 3 4 5
16 The companies which are less exposed to market risk gets maximum amount of loan 1 2 3 4 5
17 Most of the corporate loans are given to big industries with feasible business plan 1 2 3 4 5
The bank diversifies their corporate assets by seeing the business structure of
18 individual company 1 2 3 4 5

44