INTERNSHIP REPORT

On

The relationship between Risk & Profitability of Commercial banks of

Bangladesh: An empirical study on Pubali Bank Limited.
Report is submitted in the Partial fulfillment of the Requirement for the Degree of Masters
of Business Administration (MBA) in the University of Chittagong with the Major in Finance

By
Name : Abdul Halim

ID: 14303075

Program: MBA

Session: 2017-18

Under the supervision of

Dr. Suraiya Nazneen

Professor

Department of Finance

University of Chittagong

Date: 18 June, 2021

 LETTER OF TRANSMITTAL
Date: 18 June, 2021

To

Dr. Suraiya Nazneen

Professor

Department of Finance

University of Chittagong

Subject: Submission of Internship Report.

Dear Sir,

With due respect, it gives me immense pleasure to submit my internship report that I have completed as
part of fulfilling the requirement for the Degree of Masters of Business Administration (MBA),
Department of Finance, University of Chittagong. I have completed my internship from Pubali Bank
Limited and tried my level best to make an effective and credible internship report. This report is based
on “The relationship between risk and profitability of commercial banks of Bangladesh: An
empirical study on Pubali Bank Limited”.

This report is the result of the internship program that I have completed in Pubali Bank Limited at
Chawkbazar Branch, Chattogram. I have put my best effort and hard work to make this report a valuable
one. It was a great experience and opportunity for me to have worked in such an organization.

It has to be mentioned that without your expert advice and cooperation it would have been impossible for
me to complete this report. This report is the result of your appropriate guideline. I shall be grateful to you
if you accept the report.

Sincerely yours,

ABDUL HALIM

ID : 14303075

Session: 2017-18

Department of Finance, University of Chittagong

 ACKNOWLEDGEMENT

At the beginning I am very much grateful to almighty God for giving me strength
and opportunity and sound mind to complete the internship report. I would like to
express my gratitude to all the people who were involved directly or indirectly in
the preparation of this report.

At first, I would like to thank my academic supervisor Dr. Suraya Naznin,

Associate Professor, Department of Finance, University of Chittagong for guiding
me and encouraging me to work on this exciting topic for my internship report. I
strongly believe that, this will assist me a lot to make me more professional and
building my future professional career.

I would like to express my sincere gratitude to Mr.Gautam Datta (Senior Principal

Officer & Head of the Branch), Mohammad Ishaque (Officer of Pubali Bank Ltd.
Chawkbazar Branch) & I would also like to express my gratitude to all the officials
and staffs of PBL, Chawkbazar Branch, Chottagram for supervising me at the time
of my internship attachment with their best efforts. They were frankly, dynamic
and gave me their valuable time. They were always very polite to answer my
questions and helped me to understand even in time of rush. I always felt that I was
under guidance of highly qualified and experienced personnel.

Finally, I would like to thank all others whose strong support makes me able to
complete this report.
 EXECUTIVE SUMMARY
Banks today are the largest financial institutions all over the world. It is exposed to different
types of risks which affect the performance and activity of the banks. Risk arises from non-
performance by a borrower. It may arise from either an inability or an unwillingness to perform
in the pre-commitment contracted manner. Therefore, the status of depositor in the bank is at risk
and probability of incurring loss from their deposited value.

At present it has become very important for everyone to study about the modern banking
activities. Study is not complete without realistic details. It helps to recognize genuine situation
of study. Internship program assists to attain realistic understanding along with scholastic
understanding. I have obtained knowledge on banking procedures by getting chance as an intern
in Pubali Bank Limited, Chawkbazar Branch, Chattogram.

Pubali Bank Limited is the largest private and leading commercial bank in Bangladesh. This
report on this bank is the fulfillment of the requirement for the internship program. In this report,
the chosen topic is - “The relationship between risk and profitability of commercial banks of
Bangladesh: An empirical study on Pubali Bank Limited”. The main purpose of the report is
to have an overall idea about functions, processes, risk and profitability of the bank.

During the six (6) weeks internship program in PBL, Chawkbazar Branch, the observation and
learning part was too good. The observation regarding the banker-customer relationship is a
major consideration for the bankers. Computerization system of all the bank is very bold,
positive and progressive towards modern technology and in the race of survival. Working with
general banking division is the most noticeable part was the bank follows traditional system in
case of handling day to day activities. Being the fast and computerized system general banking
activities would be one of the major sources of fund mobilization. Loans and advances (Credit
risk) is one of the main functions of the bank used to evaluate analyzing tools and techniques.
The bank has also strong performance on foreign exchange and administration.

This report also deals with the relationship between risk and profitability. Considering risk as a
dependent variable, I have measured profitability which is indicated by ROA (Return on Assets).
A time series analysis has also been developed to show the relation between risk and profitability
for 10 years period.

Since risk and profitability are related to each other, every bank needs to identify, measure,
monitor and control risk and also determine how risk could be lowered and targeted profit could
be gained.

Although Pubali Bank Ltd is successfully operating its banking activities, the Bank should
improve in some areas which will take help the Bank to become the leader of banking sector.
 TABLE OF CONTENTS

SL. Topic Page

CHAPTER 1 : INTRODUCTION

1.1 Background of the study

1.2 Origin of the study
1.3 Objectives of the study
1.3.1 Primary Objective
1.3.2 Secondary Objectives

1.4 Data collection & analysis

1.4.1 Data Collection

1.4.1.1 Primary Data Sources

1.4.1.2 Secondary Data Sources

1.4.2 Data Analysis

1.5 Research design

1.6 Scope of the study
1.7 Limitation of the study

CHAPTER 2 : OVERVIEW OF AGRANI BANK LIMITED

2.1 Introduction of PBL

2.2 Vision & Logo of PBL
2.3 Mission of PBL
2.4 Core values & Core
Strengths of PBL
2.5 Strategic objectives of PBL
2.6 Hierarchy of PBL
2.7 Products and services
provided by PBL
 CHAPTER 3 : WORK EXPERIENCE IN PUBALI BANK LIMITED,
CHAWKBAZAR BRANCH

Preface

3.1 General Banking

Department
3.1.1 Account Opening Section
3.1.2 Cash section
3.1.3 Deposit section
3.1.4 Clearing section
3.1.5 Dispatch section
3.1.6 Accounts section
3.1.7
3.2 Loan & Advancement
section
3.3 Foreign Exchange
Department
3.3.1 Import
3.3.2 Export
3.3.3 Remittance
3.4 Administration
Department

CHAPTER 4 : THE RELATIONSHIP BETWEEN RISK & PROFITABILITY OF

COMMERCIAL BANKS OF BANGLADESH

4.1 Introduction
4.2 Literature review
4.3 Determinants of Risk and
Profitability
4.4 Methodology
4.4.1 Model Specification
 4.4.2 Variable Description
4.4.3 Descriptive Statistics

4.4.4 Correlation Analysis

4.4.5 Time Series Analysis
4.5 Empirical Results
Chapter : 5
Findings, Recommendations & Conclusion

5.1 Findings

5.1.1 Findings associated with PBL

5.1.2 Findings associated with

5.2 Recommendations

5.3 Conclusion

References
 CHAPTER 1: INTRODUCTION

1.1 Background of the study

Generally by the word “bank” we can easily understand that the financial institution dealing with
money. The whole scenario of the economy of a country can be ascertained by examining the
condition of the banking sector. Banking sector has a vital role to play in the economic activities
and development of any country. There are different types of banks like Central banks,
Commercial banks, Savings banks, Investment banks, Industrial banks, and Co-operative banks
etc. But when we use the term “bank” without any prefix or restriction, it refers to the
Commercial banks. Commercial banks are the primary contributors to the economy of a country.
In Bangladesh, the commercial banks are dominating the financial sector and macroeconomic
management as well as banking sector.

Banking grew primarily in the public sector with main emphasis on restructuring of the financial
system and development needs of the war-torn economy with gradual liberalization in
subsequent years. It was increasingly felt that banks should be allowed in the private sector for
giving a fillip to development process on the basis of private initiative. In the 80’s for the first
time a number of banks in the private sector were allowed. Today the banking concept is not
continuing inside the branches or the cabin of the branches. The bankers are now practicing the
non-cabin banking. The assurance of the availability of the service provider is main factor in
bank service. As a result, it has become essential for every person to have some idea on the bank
and banking procedure. At present, there are 61 scheduled banks operating all over the country.
Out of these, 6 are state-owned commercial banks, 3 are specialized banks, 43 are private
commercial banks and the rest 9 are foreign commercial banks (Source: Bangladesh Bank).

Even though banking sector in Bangladesh is going through a radical change, it still suffers from
chronic inefficiency. Some biggest problems faced by the banking industry right now are the
alarming level of non-performing loans, lack of good governance, influence of the government
over Bangladesh Bank, money laundering, and malpractices by some bankers which are affecting
the effectiveness and efficiency of the Bangladesh banking sector, posing the banking activities
to the foreign countries vulnerable and questionable (Hossen, 2019).

1.2 Origin of the study

Internship program is an efficient way to involve the students into real life situations which helps
not only to apply and reinforce their classroom learning & knowledge but also helps them to
assess their strength and weakness in the competitive business environment. Thus, the
participation in internship programs helps the students improve themselves academically and
helps them to realize the importance of good communication skills in the workplace (Koehler,
1974).

Masters of Business Administration (MBA) course requires six (6) weeks internship program in
an organization followed by a report assigned, supervised and endorsed by the faculty advisor.
Being an intern, the main challenge is to translate the theoretical concepts into the practical
business environment. The internship program and this study have following purposes:

 To gather sufficient knowledge about the job responsibility in a business organization.

 To compare the practical knowledge of business environment with the theoretical
concepts of business environment.
 To fulfill the requirement of MBA Program.
To complete the internship program, the author was placed at Pubali Bank Ltd, Chawkbazar
Branch, under the guidance of Dr. Suraiya Nazneen, academic supervisor of the author. The
report topic was approved by the supervisor to satisfy the organizational requirements and to
complete the internship program.

1.3 Objectives of the study

The objectives of the study can be viewed in the following forms:

1.3.1 Primary Objective

The main objective of this report is to determine the relationship between risk and profitability of
commercial banks of Bangladesh.

1.3.2 Secondary Objectives

Secondary objectives play roles in support of the primary objective. These break down the
primary objective and work to accomplish it.

Here’s to more specifically, this study entails the following aspects:

 To provide a brief overview of Pubali Bank Limited and their historical background.
 To understand the products and services provided by Pubali Bank Limited.
 To examine the managerial efficiency of Pubali Bank Limited.

1.4 Data Collection and Analysis

1.4.1 Data Collection

To prepare this report, the data are collected from two sources, i.e. primary sources and
secondary sources.

1.4.1.1 Primary Data Sources

Overall data collected from six (6) week internship program assigned at the Chawkbazar Branch
of Pubali Bank Ltd. Some data have been gathered through personal observation. Informal
discussion with the employees also helped to collect information.

1.4.1.2 Secondary Data Sources

The secondary sources of data used in this study are:

 Official website of Pubali Bank Ltd.
 Annual reports and other published documents of the bank.
 Books, journals, research papers, newspaper articles have been used for the purpose of
study.
 Prospectus of Pubali Bank Ltd.
 Official documents of Pubali Bank Ltd.

1.4.2 Data Analysis

For the purpose of the study, the annual reports of Pubali Bank Ltd have been examined. A
regression analysis that, ordinary least square regression estimator has been used to examine the
effect of risk and profitability of commercial banks of Bangladesh. The author has used Strata
13, a general-purpose statistical software package and Microsoft Excel to analyze the data
collected from various sources.

1.5 Research Design

A research design is the design of study that defines the study type. It is a systematic
arrangement of the measures, factors and the tools to be applied in the collection and analysis of
the obtained data in order to achieve the objectives of the study in the most efficient and
effective way.
According to Cooper, Schindler, and Sun (2006), research design provides the framework for the
collection and analysis of data. According to Bajpai (2011), a research design is a detailed
blueprint used to guide research study towards its objectives. According to Zikmund, Babin,
Carr, and Griffin (2013), research design is the a master plan that specifies the methods and
procedures for collecting and analyzing the needed information.
There are mainly four types of research designed used in the quantitative studies which are
Descriptive research design, Exploratory research design, Experimental research design and
Quasi-experimental research design (Sekaran & Bougie, 2016). The ability to select the most
appropriate research design develops with experience as well as on some factors such as the
method of data collection, the purpose of the study, the time dimension etc (Cooper et al., 2006).
The author has selected both descriptive research study design and experimental study design to
conduct the following study. Descriptive research is directed at making careful observations and
detailed documentation of a phenomenon of interest in which observations must be based on the
scientific method and therefore, are more reliable than casual observations by untrained people
(Bhattacherjee, 2012). According to Cooper et al. (2006), descriptive research design is a
research design used to describe behavior or characteristic of a population being studied.
The author has selected the descriptive research study design in order to explain the environment
of Chawkbazar Branch of Pubali Bank Ltd, Chottagram and overall Pubali Bank Ltd. The author
has selected the experimental research study design to examine the relationship between risk and
profitability of Pubali Bank Ltd.

1.6 Scope of the study

The scope of this study on one of the largest private commercial banks is vast and it is hardly
possible to become familiarized with the total banking system decently within six (6) weeks.
Therefore, the scope of this study encompasses the areas covered by the theoretical discussion
with bank employees and customers. This report has been prepared in accordance with the
extensive analysis of financial statements and review of literatures.

1.7 Limitation of the study

Limitation in a study refers to the structural problems related to the methodological aspects of
the study. This study is not free from limitations. The following constraints have been faced by
the author while preparing this study:

 The main constraints of the study are insufficiency of information, which was highly
required for the study.
 The time frame allocated to both internship program and to prepare this study was very
limited.
 Various data and information are not disclosed by the bank personnel due to
confidentiality of such information and the restriction imposed by the bank policy.
 CHAPTER 2: OVERVIEW OF PUBALI BANK LIMITED

2.1 Introduction of PBL

The Bank was initially emerged in the Banking scenario of the then East Pakistan as Eastern
Mercantile Bank Limited at the initiative of some Bangalee entrepreneurs in the year 1959 under Bank
Companies Act 1913 for providing credit to the Bangalee entrepreneurs who had limited access to the
credit in those days from other financial institutions. After independence of Bangladesh in 1972 this
Bank was nationalized as per policy of the Government and renamed as Pubali Bank. Subsequently
due to changed circumstances this Bank was denationalized in the year 1983 as a private bank and
renamed as Pubali Bank Limited. Since inception this Bank has been playing a vital role in socio-
economic, industrial and agricultural development as well as in the overall economic development of
the country through savings mobilization and investment of funds.
At Present, Pubali Bank is the largest private commercial bank having 482 branches and it has the
largest real time centralized online banking network.

2.2 Vision & Logo of PBL

Providing customer centric life long banking service.

2.3 Mission of PBL

Mission represents the core purpose of an organization which differentiates the organization
from its rivals within the industry. The mission statement of Pubali Bank is:

 To be the most respected and preferred brand among all financial

Service providers in Bangladesh.

 Providing a superior value proposition to the customers by fulfilling

their financial needs in the fastest and most appropriate way.

 To provide world class finance, capital and risk management

products bundled with diversity and differentiation, delivered

economically through the client’s choice of distribution channel

recognizing the unique lifetime financial needs of clients.

 To build an empowering organization with the structure, career

Development, training and rewards to ensure the vision is achieved.

 Using flexible technology, scale and risk management to ensure

Our services are of superior value.

2.4 Core Values of PBL & CORE STRENGTHS

The core value of Pubali Bank Ltd is:

 Service Excellence
 Customer Focus
 Trust
 Commitment
 Integrity
 Business Ethics
 Mutual Respect
 Teamwork
 Result Driven
 Responsible Citizenship
 Building the Future
 CORE STRENGTHS

 Proficient Board of Directors

 Unique Corporate Culture
 Largest Online Branch Banking
Network
 Dedicated line of Human Resources
 Participative Management
 Forward Looking Strategies &
Management Policies
 Public Confidence &
Acceptability
Strong and Rational Capital Base
 Well Diversified line of Business
 Competitive Pricing with no
Hidden Cost
Strong Compliance &
 Risk Management Culture
 Modern Technology with
in-house Banking Software

2.5 Strategic Objectives of PBL

To survive in the competitive banking industry of Bangladesh, Pubali has developed several
strategic objectives to promote its sustainable growth in the banking industry by earning higher
profitability and at the same time, serving all the stakeholders effectively and efficiently.
The strategic objectives of Pubali Bank Ltd are shown below:

Figure: Strategic objectives of Pubali Bank Ltd.

2.6 Hierarchy of PBL
The hierarchy of Pubali Bank Ltd is shown in the below:

Figure: Hierarchy of Pubali Bank Ltd.

2.7 Products & Services provided by PBL
The various financial products and services offered by the Pubali Bank Ltd are shown in the
below:

Deposits Low cost/No cost Deposit Accounts

• Current Deposit (CD)
• Savings Deposit (SB)
• Special Notice Time Deposit (SNTD)
• Non-Resident Special Taka Account (NRTA)
• Non-Resident Investors Taka Account
(NRIT) • Students Savings A/C (School
Banking)
• Small Life Insurance Policy Holders A/C
• Ten Taka Farmers A/C
• Freedom Fighters A/C
• Other Beneficiaries A/C under Social
Securities Program
FDR Account
• Fixed Deposit (FDR)
Deposit Scheme
• Pubali Bank Pension Scheme (APS)
• Pubalii Bank Bishesh Shanchay Scheme
(ABS) • Agrani Bank Quarterly Income
Scheme
• Pubali Bank Double Benifit Scheme
• Pubali Bank Millinionaire Deposit Scheme
• Pubalii Bank Lakhpoti Deposit Scheme
• Pubalii Bank Prabash Deposit Scheme
• Pubali Bank Deposit scheme for Women
Foreign Currency Account • Foreign Currency (FC) A/C
• Non-Resident Foreign Currency Deposit
(NFCD) A/C
• Resident Foreign Currency Deposit (RFCD)
A/C
• Exporters Retention Quota (ERQ) A/C
Loans & Advances Continuous Loan
• Cash Credit (Hypo)
• Cash Credit (Pledge)
• Secured Overdraft (SOD)
 Term Loan
• Industrial Credit (IC)
• Housing Loan (General & Commercial)
• Consumer Credit
• Loan for Overseas Employment
• Weavers’ Credit
Rural & Agro Credit
• Crop Loan
• Fishery Loan
• Animal Husbandry Loan
• Rural Transport Loan
• Swanirvar Loan
• Poverty Alleviation Loan
Small and Medium Enterprise Loan
• Service Sector Loan
• Trading Sector Loan
• Manufacturing Sector Loan
• Women Enterpreneurs Loan
Other Loan Products • Agrani Bidesh Jawar Loan (ABJL)
• Green Finance
• Any purpose Loan
• Term Loan for Muktijoddha
Import Finance
• Loan Against Imported Merchandise (LIM)
• Loan Against Trust Receipt (LTR)
• Payment Against Document (PAD)
Export Finance
• Export Cash Credit
• Packing Credit (PC)
• Local / Foreign Bills Purchased (FBP)
• Loan Against Export Development Fund
(EDF)
• Advance Against Cash Incentive (Subsidy,
Assistance)
Treasury Money Market
• Maintaining CRR and SLR
• Call Money Transaction
• Term Placement (FDR)
• Treasury Bills
• Treasury Bonds
• Secondary Trading of Govt. Securities
 • Repo
• Reverse Repo
• Custodian Services
• Other Investments
Foreign Exchange Market
• Selling Foreign Currency for Import Payment
• Buying Foreign Currency against Export
Proceeds
• Fixation of Exchange Rate
• Foreign Currency Buying and Selling
• SWAP Transactions
• Forward Transaction
• Term Placement
Other Services Letter of Credit
• Letter of Credit - Sight
• Letter of Credit - Usance
• Back to Back L/C
Letter of Guarantee
• Advance Payment Guarantee
• Bid Bond
• Performance Guarantee
• Shipping Guarantee
• Guarantee - Others
• Standby Credit
Other Foreign Exchange Service • Documentary Bill Collection
• Advanced Payment for Import & Export
• Foreign Remittance (Incoming & Outgoing)
• Foreign Currency Endorsement against
Passport
• Issuance of Draft, TT
• Collection of Draft, Cheque, TC
• Opening of Student File, Medical File
Special Services Cash Service
• ATM Service
• Cheque Encashment
• Foreign Currency
Fund Transfer
• Inter-Branch Money Transfer
• SWIFT
• Telegraphic Transfer (TT)
• Issuing Foreign Draft

Merchant Banking Service
Islamic Banking Service
CHAPTER 3: WORK EXPERIENCE IN PUBALI BANK LIMITED
CHAWKBAZAR BRANCH
Preface
• Encashing Foreign Draft
• Bangladesh Electronic Fund Transfer
Network (BEFTN)
• Bangladesh Automated Clearing House
(BACH)
• Online Deposit to Accounts
• Real Time Gross Settelment (RTGS)
Value Added Service
• Locker Service
• Utility Bill Collection
• Arm forces Pension Payment
• Issue Management
• Underwriting
• Portfolio Management
Deposit
• Al Wadiah Current A/C Mudaraba Deposit
Account
• Mudaraba Savings Account
• Mudaraba Hajj Savings Scheme
• MudarabaTerm Deposit (MTDR)
• Mudaraba Special Savings Scheme
• Mudaraba Special Notice Deposit (MSND)
• Mudaraba Mohor Savings Scheme
• Mudaraba Probashi Kalyan Savings Account
• Mudaraba Cash Waqf Savings Scheme
Investment
• Bai Murabaha (Pledge)
• Bai Muazzal (Hypo)
• Higher purchase Shirkatul Meilk
• Bai Sal
Pubali Bank Limited, Chawkbazar Branch was established in 1994 to provide banking services
to the mass people in Chattogram. From the day of its inauguration till now it operates its
business and provides services successfully to the people in this area. It gains reputation from its
clients and achieve several awards from Bangladesh Bank (BB). It is the second largest branch of
Pubali Bank Ltd after the principal branch. It is the most profitable branch of the Pubali Bank
Ltd. The total number of employee in this branch is almost 20.
There are several functional departments in Pubali Bank Ltd, Chawkbazar Branch. Such as – (A)
General Banking Department including Account opening section, Cash section, Deposit section,
Bills and clearing section, Accounts section, Mail receive & dispatch section, Sonchoy potro
section and MO cell section. (B) Loan & Advance Department.
As an internee I have performed numerous activities. My main task was to assist officers and
executives in every aspects of their daily work. It includes every activity that the officials
performed like dealing with customers, computer posting, document analysis etc.
During this period, I have got chance to work in different departments and sections of the bank. I
have given a description below.

3.1 General Banking Department

General banking department is the starting point of all the banking operations. It is the
department which provides day-to-day services to the customers. In general banking department,
I basically came across the following areas:

These are:

 Account opening section

 Cash section
 Deposit section
 Clearing section
 Dispatch section
 Accounts section

3.1.1 Account Opening Section

Banker customer relationship begins through this section. It is one of the vital sections under
general banking. Various tasks are performed in this section. Such as:

 Opening of different types of account

 Fill up savings account opening form
 Issue of check books
 Register cheque to registered book by their serial number and code
  Cheque requisition
 Transfer and closing of account
 Enqiry of account

The classification of accounts of the branch is mentioned in the below:

 Savings account (SA)

 Current account (CA)
 Short term deposit (STD)
 Fixed deposit Receipt (FDR)
 Monthly savings scheme (MSS)

3.1.2 Cash Section

Cash section deals with all kinds of cash transactions. It is a core department of a bank. Cash
receipt and cash payment are main operation of cash section. This section is very sensitive area
and is controlled very cautiously. I did different types of work there as per instruction, they are:

 Giving seal on every bill and stamp to bills

 Filling up documents
 Data entry of electricity bills, CNG etc
 Current or savings account pay in slip
 Application for fixed deposit receipt
 Credit voucher
 D.D, T.T, pay order application form
 Demand loan pays in slip

3.1.3 Deposit Section

Deposit is the main part of a bank. It is impossible to imagine a commercial bank without
deposit. There are five types of bank deposits offered by the branch are mentioned in the below:

 Current deposit account

 Saving deposit account
 Fixed deposit account
 Special notice time deposit account
 Deposit schemes including PBS, PPS, PDBS etc.

3.1.4 Clearing Section

Clearing section plays a vital role in the banking system. Clearing house is a place where the
representatives of all member banks meet together and settle mutual obligations of banks arising
out of cheques & other instruments drawn on one bank and deposited with another bank for time
of coming to this place the representative of every bank brings with him all cheques etc drawn on
other banks along with schedules and delivers the cheques to the clearing house and receives
cheques etc drawn on his bank and on the basis of cheques etc. delivered & received the mutual
obligations between banks is ascertained and settled through their respective bank accounts
maintained with the Central Bank or any other bank which conducts the clearing house.

There are two (2) types of clearing. Such as: (i) Internal or Inter-branch Clearing

(ii) Inter-Bank Clearing

In addition, clearing house activities may be grouped into two (2) types: (1) Outward Clearing

(2) Inward Clearing

3.1.5 Dispatch Section

Dispatch section usually exits to receive papers, bills, instruments etc. from other branches of
PBL. These records can be received via post office. Further these documents can be received via
mail of a particular branch. At present this section hardly seen for transferring documents.

3.1.6 Accounts Section

Accounts section is the nerve Centre of a bank. All transactions carried by a bank is being
legalized as far as accounting is concerned. If transactions were not recorded properly there
would be dis-equilibrium in state of the bank.

The regular tasks of this section are:

 To record all transaction in the cash book

 To prepare daily fund position, weekly position, periodic statement of affairs
 Prepare necessary statements for reporting purpose
 To pay all expenditures on behalf of the branch
  Make salary statements and pay salary
 Branch to branch fund remittance and supporting accounting treatment
 Prepare statements for customer
 Publishing basic data of the branch etc.

3.2 Loan & Advance Department

Pubali Bank Ltd. provides a wide variety of loans and advances to different sectors. Pubali Bank
extends credit in agriculture, trade and commerce, industry and other sectors. Bank has identified
the following industrial sectors as priority sector and has decided to provide loans and advances
at a concession interest rate that is going on. Usually there are three (3) types of loan that PBL,
Chawkbazar branch provides:

 Continuous loan
 Demand loan and
 Fixed term loan.

This branch hardly provides SME loan.

3.3 Foreign Exchange Department

Foreign exchange is a process which converts one national currency into another and transfer
money from one country to other countries. Any kinds of dollar transactions are done in this
section. PBL’s foreign exchange section is working with the head office internal division. The
full process is governed by Bangladesh Bank (BB).

Following functions of this section are:

3.3.1 Import

 Opening of letter of credit (L/C)

 Advance bills
 Bills for collection
 Import loan and guarantees

3.3.2 Export

 Pre-shipment advances
 Purchase of foreign bills
 Negotiating of foreign bills
 Export guarantees
  Advising/confirming letters-letter of credit
 Advance for deferred payment exports
 Advance against bills for collection

3.3.3. Remittances

 Issue of DD, MT, TT etc.

 Payment of DD, MT, TT etc.
 Issues and enhancement of traveler’s cheque
 Sale and enhancement of foreign currency rates
 Non-resident accounts

3.4 Administration Department

Administrative department is one of the core departments of a bank. All kinds of administrative
tasks are done in this department. The attendance reports of officials and staffs, internship, day-
off etc. are maintained by this department.

CHAPTER 4: THE RELATIONSHIP BETWEEN RISK AND

PROFITABILITY OF COMMERCIAL BANKS OF BANGLADESH

4.1 Introduction
Banks today are the largest financial institutions all over the world. It is exposed to different
types of risks which affect the performance and activity of the banks. However, credit risk is
found as the most significant risk that is faced by banks. It is a critical part of a comprehensive
approach to manage risk. Yet it is so necessary to the long-term success of a commercial bank.

Nowadays, the importance of credit risk management is a worldwide phenomenon due to its
ability in affecting the banks’ financial performance, existence and growth. Granting credit is
one of the main sources of income (interest income) in commercial banks and also a source of
credit risk. Moreover, the effective management of credit risk can enhance banks goodwill and
depositors confidence. Thus, risk management as a discipline is being taken seriously throughout
the world.

Credit risk has been defined from different aspects by different researchers. Most researchers
agreed with the definition given by BASEL-I (1999) who defines it as the potential that debtor or
counter party default in satisfying contractually pre-determined obligations according to the
agreed upon on terms. In recent times, BASEL-II has been implemented globally and its
outcome has been constructive for financial institutions. Therefore it has become most important
to implement BASEL-II adequately to get sound financial performance around the world.

Moreover, every bank needs to identify, measure, monitor and control credit risk and also
determine how credit risk could be lowered. This means that a bank should hold adequate
capital, control the non-performing loan (NPL) and maintain the appropriate cost per loan assets.

4.2 Literature Review

Credit risk plays an important role on banks profitability. Many empirical studies has been
conducted by various scholars in the area of banks risk and profitability. Most of the studies are
carried out in examining the determinants of bank profitability. However, some studies has been
carried out to examine the relationship between risk and profitability of commercial banks.
According to Alshatti (2015), there is a positive effect of non-performing loans on banks
profitability on Jordanian commercial banks during 2005-2013. Two mathematical models have
been designed to measure this relationship. The research revealed that the credit risk
management effects on financial performance of the Jordanian commercial banks as measured by
ROA and ROE. The author also recommended that Jordanian banks need to improve their credit
risk management to achieve more profits.

Afriyie and Akotey (2012) examined the impact of credit risk management on the profitability of
rural and community banks in the Brong Ahafo Region of Ghana from the period of 2006 to
2010 (five years). The author indicated a significant positive relationship between non-
performing loans and rural banks’ profitability which reveals that, there are higher loan losses
but banks still earn profit. The panel regression model was employed for the estimation. In the
model, return on equity (ROE) and return on asset (ROA) were used as profitability indicator
while non-performing loans ratio (NLPR) and capital adequacy ratio (CAR) as credit risk
management indicators.

Boahene, Dasah, and Agyei (2012) examined that there is a positive and significant relationship
with bank profitability. This indicates that banks in Ghana enjoy high profitability in spite of
high credit risk.

Li and Zou (2014) examined that credit risk management does have positive effects on
profitability of commercial banks in Europe from 2007 to 2012. In the research model, ROE and
ROA are defined as proxies of profitability while NPLR and CAR are defined as proxies of
credit risk management. The research collects data from the largest 47 commercial banks in
Europe from 2007 to 2012 and formulates four hypotheses.

Ndwiga (2010) examined that there is positive relationship between credit risk management
practices and financial performance of Microfinance Institutions in Kenya. Microfinance
Institutions in Kenya have adopted various credit risk management practices which are; Risk
Monitoring, Risk Identification, Risk Analysis and Assessment.

Mozib Lalon (2015) examined that the CRM and banks profitability is positive. Therefore, it can
be said that effective CRM can contributes on banks financial performance. The author used
secondary data, Ms Excel as well as SPSS software to compare relationship between CRM and
banks profitability. ROA (Return on Asset) used as dependent variable where NPLR (Non-
Performing Loan Ratio), LLPR (Loan Loss Provision ratio) and CAR (Capital Adequacy Ratio)
used as independent variables.

Ahmed, Ahmed, Islam, and Ullah (2015) examined there is a positive impact on the profitability
of the commercial banks in Bangladesh. The authors used relevant secondary data of 25 listed
private commercial banks in Bangladesh for the time horizon of 5 years (2008-2012).
Particularly, the authors used multivariate panel OLS regression model where financial
performance or profitability of commercial banks was measured in terms of relevant influencing
variables i.e. asset turnover, size of the firm, capital adequacy ratios.

Kurawa and Garba (2014) examined that there is a significant positive relationship between
CRM and profitability of Nigerian banks. Default rate (DR), cost per loan asset (CLA), and
capital adequacy ratio (CAR) influence return on asset (ROA) as a measure of banks’
profitability. Data were generated from secondary sources, specifically, the annual reports and
accounts of quoted banks from 2002 to 2011. Descriptive statistics, correlation, as well as
random-effect generalized least square (GLS) regression techniques were utilized as tools of
analysis in the study.

Almazari (2014) compared the profitability of the Saudi and Jordanian banks by using the
internal factors for the period of 2005-2011. The author found that there is a significant positive
correlation between ROA of Saudi banks and Jordanian banks. The necessary data was collected
from secondary sources. Pearson’s correlation, descriptive analysis of variance and regression
analysis were utilized in testing the hypotheses and to measure the differences and similarities
between the sample banks according to their different characteristics.

Adekunle, Alalade, Agbatogun, and Abimbola (2015) examined that credit risk management has
significant effect on financial performance of commercial banks of Nigeria. The study uses loan
and advance loss provision, total loan and advances, nonperforming loan and total asset on
accounting Return on Equity (ROE) and Return on Asset (ROA). The panel data come from 10
commercial banks listed on Nigeria Stock Exchange (NSE) between 2006 and 2010.

Akong’a (2014) examined the effect of financial risk management on the financial performance
of commercial banks in Kenya for 6 years (2008-2013). The author found that there is a
significant relationship between financial performance and financial risk management. The
researcher adopted descriptive research design and ROA which represents financial performance
was averaged for 6 years (2008-2013). The study was based mainly on secondary data which was
collected from the annual reports of commercial banks. The researcher also used multiple
regression analysis models which were presented in the form of tables and regression equation.

Kargi (2011) examined the impact of credit risk on the profitability of Nigerian banks. The data
collected from secondary sources mainly the annual reports and accounts of sampled banks from
2004 - 2008. Descriptive, correlation and regression techniques were used in the analysis. The
findings revealed that credit risk management has a significant impact on the profitability of
Nigeria banks.

Bhattarai (2016) examined that there is significant relationship between bank performance and
credit risk indicators on Nepalese Commercial Banks for the period 2010 to 2015 have been
analyzed using regression model. The regression results revealed that 'non-performing loan ratio'
has negative effect on bank performance whereas 'cost per loan assets' has positive effect on
bank performance. In addition to credit risk indicators, bank size has positive effect on bank
performance. Capital adequacy ratio and cash reserve are not considered as the influencing
variables on bank performance.

Poudel (2012) examined that credit risk management has a negative impact on the bank
performance over the period of eleven years (2001-2011). The profitability ratio used are default
rate, cost of per loan assets and capital adequacy ratio which was presented in descriptive,
correlation and regression to analyze the data. Among them, the default rate is the most predictor
of bank financial performance.

Noman, Pervin, Chowdhury, and Banna (2015) examined that credit risk effects profitability of
the commercial banks negatively for the period over 2003 to 2013. The study uses an unbalanced
panel data The study also uses NPLGL, LLRGL, LLRNPL and CAR as credit risk indicators and
ROAA and ROAE and NIM as profitability indicators.
Kaaya and Pastory (2013) examined that the credit risk indicators have negative relation with
bank performance which indicate the higher the credit risk the lower the bank performance.
Regression model was used to develop the relationship between the indicators of credit risk.

Kodithuwakku (2015) examined the impact of credit risk management on the performance of the
commercial banks in Sri Lanka for a five year period from 2009 to 2013. This study is primarily
based on both primary and secondary data. The author showed that non-performing loans and
provisions have an adverse impact on the profitability.

Serwadda (2018) examined the impact of credit risk management on the financial performance
of commercial banks in Uganda for a period of 2006 – 2015. The study employs return on assets
as a dependent variable and non-performing loans, growth in interest earnings and loan loss
provisions to total loans as credit risk measures. The author found that banks’ performance was
inversely influenced by non-performing loans which may expose them to large magnitudes of
illiquidity and financial crisis. Thus, the researcher recommends that banks need to enhance their
credit risk management techniques not only to earn more profits but also to maintain a qualitative
asset portfolio.

Kithinji (2010) examined that there is no relationship between the amount of credit, non
performing loans and the amount of profits. The author revealed that the profits of commercial
banks is not influenced by the amount of credit and nonperforming loans suggesting that other
variables other than credit and nonperforming loans impact on profits.

Haque (2013) examined the financial performance of some selected private commercial banks in
Bangladesh for the period 2006-2011. The author found that there is no specific relationship
between the generation of banks and its performance.

4.3 Determinants of Risk and Profitability

Bhattarai (2016) provided a comparative study on the effect of credit risk on the performance of
Nepalese Commercial Banks for the period 2010 to 2015. This study has used ROA as dependent
variables to represent bank performance. ROA measures the effectiveness of management in the
utilization of the assets of a commercial bank. Pooled data regression model has been used in the
analysis. It is hypothesized that bank performance is influenced by three credit risk indicators
which are the capital adequacy ratio (CAR), non-performing loan ratio (NPLR), and cost per
loan assets (CLA). Moreover, cash reserve ratio and bank size appear as control variables.

Alshatti (2015) did a study on the effect of credit risk management on financial performance of
the Jordanian commercial banks for the period 2005-2013. The dependent variables represent the
profitability which are measured by ROA and ROE. The independent variables represent the
credit risk management indicators which include the capital adequacy ratio (CAR), credit
interests/credit facilities ratio, provision for facilities loss /net facilities ratio, the leverage ratio
and non-performing loans/gross loans ratio.
Afriyie and Akotey (2012) did a study on credit risk management and profitability of selected
rural banks in GHANA for the period 2006 to 2010. The panel regression model was employed
for the estimation. Return on Equity (ROE) was used as profitability indicator which measures
the return on shareholders’ investment in the bank while Non-Performing Loans Ratio (NLPR)
and Capital Adequacy Ratio (CAR) as credit risk management indicators.

Poudel (2012) did a study on the impact of credit risk management on financial performance of
commercial banks in Nepal for the period 2001 to 2011. This study has used ROA as dependent
variables to represent bank performance. Default rate (DR), Cost per loan asset (CLA), Capital
Adequacy Ratio (CAR) were used as independent variables.

Mozib Lalon (2015) did a study on the CRM and banks profitability of commercial banks of
Bangladesh. This study has used secondary data. ROA (Return on Asset) used as dependent
variable where NPLR (Non-Performing Loan Ratio), LLPR (Loan Loss Provision ratio) and
CAR (Capital Adequacy Ratio) used as independent variables.

Kurawa and Garba (2014) did a study on the CRM and profitability of Nigerian banks for a
period of 2002 to 2011. Default rate (DR), cost per loan asset (CLA), and capital adequacy ratio
(CAR) influence return on asset (ROA) as a measure of banks’ profitability. Descriptive
statistics, correlation, as well as random-effect generalized least square (GLS) regression
techniques were utilized as tools of analysis in the study.

4.4 Methodology
4.4.1 Model Specification

The ordinary least square method has been used in this analysis to examine the relationship
between risk and profitability of Pubali Bank Ltd for the study period of 2011 to 2020.

The basic model which has been developed in this study is shown in the below:

Risk= β0 + β1 Capital + β2 ROA + β3 LTA + β4 LRISK + €

Where;

Risk = NPLTL (non-performing loans to total loans)

Capital = Total eligible capital to total assets

ROA = Return on assets

LTA = Loan to total assets

LRISK = Lag risk

β0 = The constant

β1, β2, β3, β4 = Coefficients of the independent variables

€ = Error terms

Here, Risk is a dependent variable which is measured by non-performing loans to total loans
(NPLTL). Capital, ROA, LTA, LRISK are the independent variables that are used as indicators
of credit risk.

4.4.2 Variable Description

Pubali Bank Ltd, a private owned commercial bank of Bangladesh, is taken as a sample for
analyzing the model. The meanings of the variables that have been used in this model are
explained in the following table:

Table-1

Variables Description
NPLTL The ratio of non-performing loan to total loan is known as NPLR. It is a good
indicator of credit risk management.
Capital This is the ratio that is used as a proxy for banks capital regulation.
ROA It is the ratio that serves as a good indicator of banks profitability.
LTA It is the ratio that serving as a better proxy for liquidity.
LRISK It is the ratio which implies that last year risk has impact on current year risk.

4.4.3 Descriptive Statistics

Table-2
 Maximu
  Minimum m Mean Std. Deviation
NPLTL .1107 .2574 .183823 .0463438
capital -.0035 .0675 .036592 .0274320
ROA -4.9300 2.0400 .038000 1.9322169
LTA .4230 .6164 .504264 .0666482

Valid N        
(listwise
)

The summary of the descriptive statistics for all variables used in the study is presented in Table
2. The table reports four (4) credit risk indicators which are the non-performing loans to total
loans (NPLTL), capital, return on assets (ROA) and loan to total assets (LTA).

From the table it is revealed that, over the 10 years period, the non performing loan ratio
(NPLTL) of Pubali Bank Ltd is varied from .1107 to .2574 with the mean and standard deviation
.183823 and .0463438 respectively which indicates a high volatility of the bank’s ability in credit
risk management. Capital has a negative minimum value of -.0035 and maximum of .0675 with
an average (mean) of .036592. This indicates that Pubali Bank Ltd is financed by approximately
3.6592 equity. The result shows that the average value of the return on assets (ROA) is .038000
indicating that, on average, the total assets of Pubali Bank Ltd generate .038000 return. The
standard deviation of the ROA is 1.9322169, which shows the sufficiency of substantial
variation. In the table, the average value of loans to total assets (LTA) suggests that Pubali
Bank Ltd is highly levered, with an average loan to total assets standing at 50.4264.

4.4.4 Correlation Analysis

In an effort to analyze the nature of the correlation between the dependent and the independent
variables and also to ascertain whether there’s multicollinearity exists or not as a result of the
correlation among variables, the correlation analysis have been computed. The correlation matrix
that is shown in Table 3 provides some insights into the independent variables that are
significantly correlated to the dependent variable NPLTL (Risk).

From the table, the results indicate that ROA is significantly negatively correlated with non-
performing loan ratio (NPLTL). The result implies that as the value of non-performing loan ratio
increases, the performance of banks will decrease. However there is negative but insignificant
correlation between NPLTL and capital which indicates that the relationship is not strong.

Likely, there is negative and insignificant correlation coefficient between LTA and NPLTL
meaning that the relationship is weak.
 Table-3

NPLTL Capital ROA LTA

NPLTL 1
*Corre
Capital -.517 1
lation is
ROA -.713* .520 1
LTA -.395 .169 -.097 1

significant at the .05 level(2-tailed)

The correlation matrix of the variables presented in Table 3 reveals that all correlations
coefficients among the independent variables are less than 0.8 (D.N. Gujurati), thus there is no
evidence of presence of multicollinearity among the independent variables.

4.4.5 Time Series Analysis

The time series analysis presents the ratios of independent variables that are used in the model
for 10 years period (2011-2020).

Table-4

Year NPLTL capital ROA LTA

2011 0.19 0.05 0.63 0.57
2012 0.13 0.07 1.33 0.62
2013 0.11 0.07 0.72 0.56
2014 0.25 0.00 -4.93 0.56
2015 0.18 0.05 2.04 0.45
2016 0.17 0.05 0.40 0.47
2017 0.19 0.04 0.12 0.43
2018 0.26 0.04 -1.10 0.42
2019 0.17 0.00 1.03 0.47
2020 0.18 0.00 0.14 0.50
The above stated time series ratios are shown in a line chart in the follow:

2020
2018
2016
2014
2012
ROA
2010
NPLTL
2008 Year
2006
2004
2002
2000
1 2 3 4 5 6 7 8 9 10

Figure: Time series analysis of risk & profitability

4.5 Empirical Results

This section presents the empirical finding of simultaneous model that described in the data and
methodology part where risk is the endogenous variable. Ordinary least square method is applied
to get the result. The estimated results from ordinary least square method are presented in the
following table.

Table-5

Variable Coefficient Std. Error t-Statistic Prob.

         
Capital 1.278778* 0.415933 3.074483 0.0276
Profitability -0.041221** 0.004665 -8.836961 0.0003
Loan to Total assets -0.091412 0.05674 -1.611051 0.1681
Risk (-1) 0.793853** 0.132855 5.975336 0.0019
R-squared 0.9161
Adjusted R-squared 0.86576
Notes: The table shows the results of estimator. Risk is dependent variable
measured as ratio of NPLTL; **, and * indicate level of significance at 1%
and 5% respectively
The table reports the results of the estimation of risk equation using ordinary least square method
for the period over the years 2000-2018. Non-performing loans to total loans (NPLTL) used as a
proxy for risk measure.

From the table it is observed that, capital has significant positive relationship with risk. This
indicates that capitalized banks are taking more risk than low capitalized banks. Profitability, a
measure of return of assets (ROA), has significant but negative relationship with risk. This
means that higher the ROA, higher the profitability and lower the risk. Loan to total assets
(LTA) shows no significant relation with risk. Risk (-1), known as lag risk, has significant
positive relationship with risk. It implies that previous year risk has impact on current year risk.

In the table, Adjusted R-squared (0.86576) indicated that the independent variables explain
about 86.6% of dependent variable. An examination of the results of the table also shows that all
the coefficients are individually statistically significant at both 1% and 5% respectively.
 CHAPTER 5: FINDINGS, RECOMMENDATIOS & CONCLUSION

5.1 Findings
Pubali Bank Ltd. is one of the leading private owned commercial bank in Bangladesh. Its major
operations are profit, growth, development and welfare oriented. The findings of the bank can be
focused on the overall bank as well as on the selected branch of PBL.

5.1.1 Findings associated with PBL

 Pubali Bank training institute provides training facilities to its medium and junior level
officers of the bank and also provides executive development and internship programs.
 Training, all the employees should be upgraded with latest technological development
with the changing edge.
 Management system of this bank is fully democratic. It always maintains the rules
declared by Bangladesh Bank.
 Recruitment, young persons can work with young power, skill and inspiration. New
generation is being developing themselves with latest technology, education and world of
challenge. So new recruitment should be a part of continuous development.
 Political power should not be considered to maintain credit management module and
project finance procedure. In our Bangladesh most of the cases procedure is too weak for
financing so, ultimate result is being bankrupted.
 Pubali Bank Ltd. has only 245 ATMs to serve its wide customer base which is not
sufficient compared to its rivals.

5.1.2 Findings associated with

 The employees of the branch deal with the customers cordially and professionally which
has helped the employees to have a high level of trust and good customer relationship
with them.
 Most of the customers of this branch are institutional customers which is creating a good
brand value for the branch in the corporate business environment of Bangladesh.
 No use of permanent IT specialist.

5.2 Recommendations

Pubali Bank Ltd. is one of the potential banks in the banking sector in Bangladesh. The
Chawkbazar branch of ABL is one of the important branch of PBL. It was a wonderful
 experience working at this branch. The employees of the bank were very helpful and nice to
me. In spite of, it was not an easy job to find so many things during the very short period of
practical orientation program. The recommendations given below are not decisions; rather
they are only suggestions to improve the customer’s service in order to fulfill the customer’s
satisfaction so that customers give more preference to PBL. The recommendations are given
below:

 Website of the branch need to be enriched.

 Continuous improvement should be made in the lending procedure which would reduce
the default risk of the bank and increase profitability.
 Develop more customized parameters for credit approval process under the general
guideline of BB to increase its market.
 Employees should enrich their knowledge more on computer.
 By using computerized networking system the bank could disbursement of services on
ATM, Debit card, Master card, Q-Cash facilities.
 To increase the Profitability of banks, bankers must be honest and sincere about their
duty.

5.3 Conclusion

Banking is the backbone of national economy. To have understanding of this sector is very vital
for any business graduate. I am really glad to be oriented to this sector through the nation’s one
of the largest commercial bank “Pubali Bank Ltd”. This bank performs hundreds of important
activities both for the public and for the govt. as a whole. It is doing an outstanding job to
develop business sector. It has strong performance on general banking, loans and advances and
foreign exchange. Pubali Bank continues to play its lending role in socio-economic development
of the country as a companion of independent Bangladesh. Since the inception of Pubali Bank, it
has been rendering its’ banking services to meet the needs of the state and the nation and to cope
up with the demands of mass people of the country giving priority to service. Almost there is no
area in Bangladesh where Pubali Bank is not existed. Not only loan sector but also general
banking, foreign exchange dealings etc. are efficiently and effectively guided by Pubali Bank,
that’s why it has been established as a trustee of the people of Bangladesh.
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