AN INTERNSHIP REPORT

On

“A Study of Credit Management of Sonali Bank

Ltd, College Gate Branch, Dhaka”

Supervisor
Shayma Ashrafy
Lecturer
Department of Business Administration
Bangladesh Army University of Engineering & Technology ()

Submitted By
Sabrina Sarmin
ID:16111010
Batch:01
Department of Business Administration
Bangladesh Army University of Engineering & Technology

Date of Submission:
10th March 2020
 LETTER OF TRANSMITTAL
10th March 2020
Shayma Ashrafy
Lecturer
Dept. of Business Administration
Bangladesh Army University of Engineering & Technology
Qadirabad Cantonment, Natore.

Subject: Submission of Internship Report on “A Study of Credit Management of Sonali Bank

Ltd.”

Madam,
This is a great pleasure for me to submit the internship report on “Credit Management System
of Sonali Bank Limited”. While preparing this report, I tried my best to follow the instructions
of the Bank.
The entire report is based on my practical experience in the bank. I have furnished all the things
what I have learnt during the internship program at “Sonali Bank Limited”, College Gate branch,
Dhaka.
I will be highly encouraged if you are kind enough to receive this report.

Sincerely Yours,
Sabrina Sarmin
Dept. of Business Administration
ID:16111010
Bangladesh Army University of Engineering & Technology

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 DISCLAIMER
I am Sabrina Sarmin, hereby declare that the presented report of internship entitled “A Study of
Credit Management of Sonali Bank Ltd” is uniquely prepared by me after completion of three
months internship program at Sonali Bank Ltd, College gate branch.

I additionally affirm that the report is arranged just for my academic prerequisite not for any
other purpose. It probably won't be utilized with the enthusiasm of inverse gathering of the
association.

Sabrina Sarmin
ID:16111010
Dept. of Business Administration
Batch: 01
Program: BBA
Major: Finance and Banking
Bangladesh Army University of Engineering & Technology

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 CERTIFICATE OF APPROVAL
This to certify that Sabrina Sarmin, ID# 16111010, Department of Business Administration,
Batch-01, Major in Finance, is a regular student of Department of Business Administration,
Bangladesh Army University of Engineering and Technology. She has successfully completed her
internship program at Sonali Bank Ltd, College Gate branch, Dhaka and has prepared this
internship report under my direct supervision. Her assigned internship topic is “A Study of
Credit Management of Sonali Bank Ltd”. I think that the report is worthy of fulfilling the partial
requirements of BBA program.
I wish her happiness and every success in life.

Shayma Ashrafy
Lecturer
Department of Business Administration
Bangladesh Army University of Engineering & Technology

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 ACKNOWLEDGEMENT
For the sake of Allah, the useful the tolerant. This paper would not have been conceivable
without the direction and the assistance of a few people who somehow contributed and
broadened their significant help with the planning and successfully completing the report.
However, the special thanks go to my helpful supervisor, Shayma Ashrafy, Lecturer,
Department of Business Administration.
The supervision and support that she gave truly help the progression and smoothness of the
internship program. The co-operation is much indeed appreciated.
I’m grateful to all the senior officials of Sonali Bank Ltd, College Gate branch, Dhaka who had
created the opportunity to get the practical knowledge and who co-operated with me join
every step to gather this practical knowledge with their great patients. Besides, this internship
program makes me realized the value of working together as a team and as a new experience in
working environment, which challenges us every minute.
Finally, I am also owed to each person who is concerned directly and indirectly in carrying out
this report.

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 EXECUTIVE SUMMARY
This report is set up based on my multi month handy involvement with Sonali Bank Limited,
Dhaka. This temporary job program causes me to take in more about the down to earth
circumstance of a money related organization. Managing an account arrangement of
Bangladesh has experienced three periods of improvement Nationalization, Privatization, and
Lastly Financial Sector Reform. The entire working procedure of Sonali Bank Limited is
separated into 8 segments (1) SME Financing (2) Retail Banking (3) Corporate Banking (4)
Foreign Trade (5) NRB Banking (6) Treasury (7)e-Banking (8) Subsidiaries. This report has been
displayed in view of my down to earth perception and experience assembled from the Bank and
the attention is given on the Credit Management Section which inherent in Retail Banking of
SBL.

The entire report is separated into six sections introductory part; organizational part; A study of
credit management system; credit management system of Sonali Bank Ltd; analysis and
calculation of loan and disbursement management; findings, recommendations and conclusion
part. The primary section is the presentation part of this report. It contains presentation, source
of the report, goal of the report, technique of the report, extent of the report and impediments
of the investigation. The authoritative part contains chronicled foundation of Sonali Bank Ltd,
corporate data, vision of Sonali Bank Ltd, mission of Sonali Bank Ltd, destinations of Sonali Bank
Ltd., results of Sonali Bank Ltd, capital and save subsidize, store, speculation, import business,
send out business and outside settlement. The credit management system part demonstrates
providian credit product, loan procedure, disbursement, collection process, non-performing
loans and overall loan performance of Sonali Bank Limited. The six and last part contains some
positive findings and some of the negative and make some recommend in the perspective of
negative site and conclusion.

Credit Management assumes huge parts through giving diverse administrations to the clients.
Retail loan and Corporate Loan is the key part of the Credit business of Sonali Bank Ltd. Small
and Medium Enterprise (SME) is considered as thrust sector of the economy. SME is the engine
of growth as this sector churns out 20%-25% of countries GDP growth but the major challenge
for a bank is to survive in the competitive environment of credit service by managing its assets
and liabilities in an efficient way. Sonali Bank Limited manages the assets and liabilities
effectively. Consequently, achieving success and prosperity.

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 TABLE OF CONTENTS
Item No. Particulars Page No.
LETTER OF TRANSMITTAL i
DISCLAIMER ii
CERTIFICATE OF APPROVAL iii
ACKNOWLEDGEMENT iv
EXECUTIVE SUMMARY v
CHAPTER ONE - Ix
INTRODUCTION
1.1 RATIONALE OF THE STUDY 1
1.2 INITIATIVE 1
1.3 BACKGROUND OF THE 1
REPORT
1.4 OBJECTIVES OF THE STUDY 2
1.5 SCOPE OF THE STUDY 2
1.6 METHODOLOGY 3
1.7 LIMITATION OF THE STUDY 3
CHAPTER TWO-AN 4
OVERVIEW OF SBL
2.1 ORIGIN OF SONALI BANK 5
LIMITED
2.2 MISSION 5
2.3 VISION 5
2.4 SLOGAN 5
2.5 CORPORATE PROFILE 6
2.6 MAIN FOCUS & 7
OPERATIONAL NETWORK
2.7 NATURE OF BUSINESS 7
2.8 ORGANOGRAM 8
2.9 OVERVIEW OF THE BANK 10
2.10 BOARD OF DIRECTORS 12
2.11 EVALUATION AND 13
COMMENTS OF WORLD
BANK
2.12 CORE VALUES 15
2.13 CORE COMPETENCIES 15
2.14 ANCILLARY SERVICES 16
2.15 LOCKER SERVICE 17
2.16 CORPORATE BANKING 17
2.17 CORPORATE SOCIAL 19

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 RESPONSIBILITY PLAYED BY SBL
Item No. Particulars Page No.
CHAPTER THREE: A STUDY 22
OF CREDIT MANAGEMENT
SYSTEM
3.1 OVERVIEW OF CREDIT 21
INFORMATION BUREAU (CIB)
3.2 ROLE OF CIB IN FINANCIAL 21
SYSTEM
3.3 CIB OF BANGLADESH BANK 21
3.4 INTRODUCTION 21
3.5 CREDIT 24
3.6 SOME IMPORTANT FACTOR 24
ABOUT CREDIT
3.7 IMPORTANCE OF CREDIT 25
3.8 CREDIT MANAGEMENT 25
3.9 THE PROCESS OF CREDIT 26
RATING
3.10 CREDIT EVALUATION 28
PROCESS
3.11 IMPORTANT FACTORS 31
CONSIDERED FOR
SANCTIONING
CREDIT
3.12 CREDIT RISK 32
3.13 CREDIT RISK POLICY 33
3.14 CREDIT RISK STRATEGY 34
3.15 FACTORS AFFECTING CREDIT 34
RISK
3.16 WHY MANAGE CREDIT RISK? 35
3.17 CREDIT RISK MANAGEMENT 35
3.18 CREDIT RISK MANAGEMENT 35
PROCESS
3.19 CREDIT RISK MANAGEMENT 36
FRAMEWORK
3.20 MEASURING CREDIT RISK 36
3.21 CREDIT RISK MONITORING 37
AND CONTROL
3.22 PRINCIPLES FOR MANAGING 37
THE CREDIT RISK

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 CHAPTER: FOUR 40
CREDIT MANAGEMENT
SYSTEM OF SBL

Item No. Particulars. Page No.

4.1 WHY DOES SONALI BANK 41
PROVIDE ADVANCES TO THE
BORROWERS
4.2 TYPES OF CREDIT IN SBL 41
4.3 LENDING INTERESTS OF SBL 45
4.4 CREDIT POLICY OF SBL 45
4.5 CREDIT PROPOSAL AND 50
SANCTION PROCESS OF SBL
4.6 TOOLS FOR APPRAISAL 51
CREDIT OF SBL
4.7 CREDIT PROPOSAL 52
PROCEDURE IN SBL
4.8 CREDIT ADMINISTRATIONS 52
OF SBL
4.9 CREDIT RESTRICTION 52
IMPOSED BY CENTRAL BANK
4.10 APPROACHES FOR SAFETY OF 54
CREDIT IN SBL
4.11 OVERALL INDUSTRIAL CREDIT 56
POSITION OF THE BANK
4.12 RECOVERY OF ADVANCE OF 56
SBL
4.13 LOAN DEFAULT IN SBL 57
4.14 REASONS OF LOAN DEFAULT 57
IN SBL
CHAPTER: Five 58
ANALYSIS AND
CALCULATION OF LOAN AND
DISBURSMENT
MANAGEMENT
5.1 FACTORS CONSIDERED TO 59
REDUCE BANK’S CREDIT RISK
5.2 THE COMMON METHODS OF 61
CHARGING SECURITY ARE
5.3 PERFORMANCE OF LOAN & 62
CASH CREDITS OVERDRAFT
OF 2016 COMPARED WITH
2017

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 5.4 PERFORMANCE OF 63
INDUSTRIAL ADVANCES OF
2016 COMPARISON WITH
2017
Item No Particulars Page No
5.5 SECTOR WISE LOAN & 64
ADVANCES
CHAPTER: SIX 65
FINDINGS,
RECOMMENDATIONS AND
CONCLUSION
6.1 SUMMARY OF FINDINGS 66
6.2 RECOMMENDATIONS 66
6.3 CONCLUSION 67
REFERENCE & 68
BIBLIOGRAPHY

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 CHAPTER: ONE
INTRODUCTION

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1.1 Rationale of the Study:
For the completion of this internship program I have chosen a bank, named “Sonali Bank
Limited” College Gate branch, Dhaka and my internship report is based on “A Study of Credit
Management of Sonali Bank Ltd”. I have prepared this report under, Shayma Ashrafy, lecturer,
Department of Business Administration, Bangladesh Army University of Engineering and
Technology. During the study period, generally students gain theoretical knowledge but now a
days, in the job market there is no substitute of principle work experience. Therefore, before
getting any job, students should have some real-world experience in the major field of study on
the career choice so that the employers get interested about the employees. This report has
given me a chance to raise my quality in developing research instrument and its applications. By
doing this I can boost my acceptability in job market and develop my real-life experience.
1.2 Initiative:
Banks play the most important role in the economy. Banks collect money from the individuals
and lend them to others. Now banks offer the widest range of financial services and perform
lots of financial functions. Thus, banks prove that they are the key factor for the business and
economy as well. It is of vital importance to understand and appreciate the risks the banking
industry is exposed to so that soundness and sustainability of the industry can be ensured. In
the regulatory and supervisory sphere, the Central Bank's activities in banking supervision have
often been determined by exogenous elements deriving mainly from the changes in the
structure and scope; activities and risks that the financial sector is facing and the changes in
regulatory standards occurring internationally. The recent financial turmoil in the US financial
system has augmented the importance of establishing more developed risk management
regime in the financial industry. Present risk management culture based on normal business
conditions and historical trends are not enough to cope with the disorders that have happened
in the financial systems globally.
Loans comprise the most important asset as well as the primary source of earning for the
banking financial institutions. On the other hand, this (loan) is also the major source of risk for
the bank management. A prudent bank management should always try to make an appropriate
balance between its return and risk involved with the loan portfolio. An unregulated banking
financial institution might be fraught with unmanageable risks for the purpose of maximizing its
potential return. In such a situation, the banking financial institutions might find itself in serious
financial distress instead of improving its financial health.

1.3 Background of the report:

The business world is getting dynamic and competitive. It is hard for an organization to run &
even survive in a fast paced, growing and uncertain world if it cannot keep tracks with the go of
business dynamism. Business plays and links important roles in developing the economy of a

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country. So, as a business graduate, I think I need to be attached with any organization to get a
handy & versatile experience about the business world before starting our career. Internship is
the arrangement, which makes a bridge between our academic knowledge and practical world
to have an acquaintance with the real business world as well as to gear me up to lead the
future competitive business. I have worked in Different divisions of SBL, College Gate Branch. In
this report, I have tried my level best to make this report informative.
1.4 Objectives of the study:
The main objective of this internship report is to gather practical knowledge along with
academic knowledge in the BBA program. We were obtained in depth knowledge regarding
banking business sectors. More precisely these objectives can be identified:
1. Major objective:
Broad Objective:
To acquire knowledge about the entire credit policy and credit management process of Sonali
Bank Ltd, College Gate Branch, Dhaka.
Specific Objectives:

 To plot a clear image of the credit Division and its sub-divisions;

 To gain knowledge about the Documentation process of credit division and its
management procedure.
 To evaluate the financial performance of College Gate branch Dhaka, Sonali Bank
Limited.
 To understand and analyze the financial strength of SBL through loan and disbursement
policy testing.

1.5 Scope of the Study:

As I was an intern, my scope was limited and restricted for some purpose. I had maintained some official
formality for the collection of data of my report. This study will give a clear idea about the financial
performance of Sonali Bank Limited as well as the credit management system of Sonali Bank Limited. In
addition, you can know the financial position of the bank in the banking industry based on its last year’s
performance. These are the major scopes of this report:

 To understand the present position of SBL

 To know about the credit management system of SBL
 To Know about the new idea of loan and disbursement management
 To identify the recovery level of loan and disbursement
 To apply these data into investment portfolios in bank industry
 Follow the recommendations to improve the financial system.

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1.6 Methodology:
For smooth and accurate study everyone has to follow some rules and regulations in order to
collect right data for the right process. I have collected data from both the primary sources and
secondary sources. These sources are:
1. Primary Sources:

 Practical desk work.

 Face to face dialogue with officers.
 Face to face conversation with the Sonali Bank Supervisor and officers.
 Facing some practical situation related with the day to day banking activities .
2. Secondary Sources:

 Annual Reports (2013, 2014, 2015) of Sonali Bank Limited.

 Branch reports.
 Website of SBL.
 Brochures.
 Other business websites.
 Papers & journals about the Central Bank CMS requirement & text books.

1.7 Limitation of the study:

In my internship period, I have found some barriers to complete the work in a conducive way
within shorter period of time. Those are mentioned below:

 The time frame, 3 months is insufficient to know all the activities of the Branch and
prepare the report.
 It was very difficult to collect the information from various personnel for their job
constraint.
 As some of the fields of Banking still not covered by our courses, there were difficulties
in understanding some activities.
 Another limitation of this report is bank`s policy of not disclosing some data and
information for confidential reason, which could be very much useful.
 Because of the limitation of information some assumptions were made. So, there may
be some personnel mistake in the report,
 Bankers were so much busy with their work and did not have enough time to provide
information.

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 CHAPTER: TWO
AN OVERVIEW OF SONALI BANK

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2.1 ORIGIN OF SONALI BANK LIMITED:
Sonali Bank was established in 1972 under the Bangladesh Banks (Nationalization)Order,
Through the amalgamation and nationalization of the branches of National Bank of Pakistan,
Bank of Bahawalpur and Premier Bank branches located in East Pakistan until the 1971
Bangladesh Liberation War. When it was established, Sonali Bank had a paid-up capital of 30
Million takas. In 2001, its authorized and paid up capital were Tk 10 billion and Tk 3.272 billion
respectively. Presently, its authorized and paid up capital is Tk 10 billion and Tk 9 billion
respectively the bank's reserve funds were Tk 60 million in 1979 and Tk 2.050 billion on 30 June
2000. In 2013, $250,000 was stolen from the bank by Cyber criminals using the Swift
International payments network. In 2016 the Bank signed a Memorandum of Understanding
with PayPal.
2.2 MISSION:
Dedicated to extend a whole range of quality products that support divergent needs of people
aiming at enriching their lives, creating value for the stakeholders and contributing towards
socio-economic development of the country.
2.3) VISION:
Vision is to be socially committed leading banking institution with global presence.
2.4) SLOGAN:
Your trusted partner in innovating banking.

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2.5 CORPORATE PROFILE:

Name of the Company : Sonali Bank Limited

Chairman : Mr. Ziaul Hasan Siddiqui

CEO & Managing Director : Mr. Md. Ataur Rahman Prodhan
Company Secretary : Mr. Md. Hasanul Banna
Legal Status : Public Limited Company
Genesis : Emerged as Nationalized Commercial Bank in 1972,
following the Bangladesh Bank (Nationalization) Order No.
1972 (PO No.26 of 1972)
Date of Incorporation : 03 June, 2007
Date of Vendor's : 15 November, 2007
Agreement
Registered Office : 35-42, 44 Motijheel Commercial Area, Dhaka, Bangladesh
Authorized Capital : Taka 6000.00 Crore

Paid-up Capital : Taka 4530.00 Crore

Number of Employee : 18,167
Number of Branches : 1217
Phone-PABX : 9550426-31, 33, 34, 9552924
FAX : 88-02-9561410, 9552007
SWIFT : BSONBDDH
Website : www.sonalibank.com.bd
E-mail : itd@sonalibank.com.bd

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2.6 MAIN FOCUS & OPERATIONAL NETWORK:
The main focus of the SBL is to provide all types of banking services to the doorsteps of the
people. The bank participates in various socio-economic activities and development programs.
It also takes part in implementation of various plans and programs made by the Government.
As the largest state-owned commercial bank, SBL has the responsibility to run it as a service
oriented and professionally managed leading profitable organization of the country.
The bank has been providing services to its customers through a huge network of 1200
branches including two overseas branches in Kolkata and Siliguri in India. Out of the total 1200
branches, 856 are operating in rural areas and rest 344 in the urban areas. There are 26 booths
under different branches performing specialized functions at different locations.

2.7 NATURE OF BUSINESS:

The Principle activities of the bank include providing of all kinds of commercial banking services
to its customers. The activities can be classified in the following ways:

 Corporate Banking.
 Project Financing.
 SME Finance.
 Consumer Credit.
 International Trade.
 Trade Finance.
 Loan Syndication.
 Foreign Exchange Dealing.
 Rural and Micro Credit.
 NGO- Linkage Loan.
 Investment.
 Government Treasury Function.
 Money Market Operation.
 Capital Market Operation.
 Remittance.

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2.8 ORGANOGRAM:

Fig-1: Organogram of Sonali Bank Limited (position wise)

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 Fig-2: Organogram of Sonali Bank Limited (Branch wise)

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2.9 OVERVIEW OF THE BANK:

Soon after independence of the country Sonali Bank emerged as the largest and leading
Nationalized Commercial Bank by proclamation of the Banks' Nationalization Order 1972
(Presidential Order-26) liquidating the then National Bank of Pakistan, Premier Bank and Bank
of Bhwalpur. As a fully state-owned institution, the bank had been discharging its nation-
building responsibilities by undertaking government entrusted different socio-economic
schemes as well as money market activities of its own volition, covering all spheres of the
economy.
The bank has been converted to a Public Limited Company with 100% ownership of the
government and started functioning as Sonali Bank Limited from November 15, 2007 taking
over all assets, liabilities and business of Sonali Bank. After corporatization, the management of
the bank has been given required autonomy to make the bank competitive & to run its
business effectively.
Sonali Bank Limited is governed by a Board of Directors consisting of 11 (Eleven) members. The
Bank is headed by the CEO & Managing Director, who is a well-known Banker and a reputed
professional. The corporate head quarter of the bank is located at Motijheel, Dhaka,
Bangladesh, the main commercial center of the capital.

Some notable features of the Bank are as follows:

Capital Structure:

: Tk. 6000.00 Crore

Authorized Capital
Paid up Capital : Tk. 4530.00 Crore

Branches & Subsidiaries:

1 Total No. of Branches 1217

  a. No. of Foreign branches 2
  b. No. of Local branches 1215
       
    i) No. of Rural Branches 703
    ii) No. of Urban Branches 512
2 No. of Regional Offices 16
3 No. of Principal Offices 46
4 No. of G.M. Offices 11
     

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Subsidiaries:

1. Sonali Exchange Company Incorporated (SECI) having 10 (Ten) branches in USA.

2. Sonali Investment Limited (Merchant Banking) having 4 (Four) branches at Motijheel,
Paltan, Uttara, Mirpur in Dhaka and 1 (One) branch in Khulna, Bangladesh.

Associates:

1. Sonali Bank (UK) Limited having 2 (Two) branches in UK.

2. Sonali Polaris FT Limited

Representative Offices :3: 1(One) in Jeddah, KSA; 1 (One) in Riyadh, KSA

and 1 (One) in Kuwait.
Correspondence : 639

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2.10) Board of Directors:

Mr. Ziaul Hasan Siddiqui

Chairman and Director

Mr. Md. Fazlul Haque

Director

Mr. A.K.M Kamrul Islam, FCA, FCS

Director

Dr. Md. Nurul Alam Talukder

Director

Mr. Ishtiaque Ahmed Chowdhury

Director

Dr. Daulatunnaher Khanam

Director

Mr. Md. Mofazzal Husain

Director

Mr. Molla Abdul Wadud

Director

Mr. Md. Ataur Rahman Prodhan

CEO & Managing Director
Sonali Bank Limited

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2.11 Evaluation and Comments of World Bank:

A project titled Enterprise Growth and Bank Modernization Project (EGBMP) has been
undertaken by the Government of Bangladesh (GoB) in July, 2004 under the guidance of and
financed by World Bank. This project was designed with the aim to enhance the capacity
building of the entrepreneurial skill of the industry and trade related sector and modernize the
bank management through a program of reforms of the Nationalized Commercial Banks
(NCBs).

A. A World Bank Mission (Implementation Support Mission) visited Bangladesh over the
period June 7 to 18, 2009 to follow up with the Government of Bangladesh on the progress
of the banking component under the Enterprise Growth and Bank Modernization Project.

The mission comprised the Local Specialists / Analysts of World Bank, Dhaka Office as well as
Foreign Specialists of Washington Office. The mission discussed the banking reforms with
Ministry of Finance, the Bangladesh Bank (Central Bank of Bangladesh) and the Management of
Sonali Bank Limited. The mission submitted the Aide Memoire which contained the following
on Sonali Bank Limited (SBL) performance:

1.1 Cash recoveries from NPA This is one of the most notable achievements made by Sonali
Bank Ltd. in the overall performance indicators. The reduction in actual NPL level is
attributed to various methods used for cash recoveries of NPL including write-offs, out of
court settlements, rescheduling and appointment of private collection agents as well as
bank-wide efforts and introduction of an incentive scheme to reward employees for
recovering non-performing loans. Against the recovery target of Tk. 500 crore in 2008, SBL
realized Tk. 496 crore which represents almost 100% of the target and is the highest
amongst SCBs in terms of amount recovered in cash. All these contributed to reduction of
NPL level as a share of gross loans from 47 percent in 2007 to 33 percent in 2008. Despite
the remarkable progress in 2008, the NPL level of Sonali Bank is still the highest among the
three state-owned commercial banks (SCBs) and needs further reduction, including
realization of loans from State-owned Enterprises (SOEs).

1.2 The result for Business and revenue growth indicators and non-funded income is
encouraging. Revenue targets were met with "good loan" portfolio having a robust growth
of 46% in 2008. Meanwhile, conversion of Bangladesh Petroleum Corporation (BPC) loan
into government bond and increased market competition has seriously affected Sonali
Bank's net interest income and some of the operating efficiency indicators due to the larger
share of BPC loan in the bank's portfolio relative to other SCBs.

1.3 Operating efficiency indicators Sonali Bank Limited (SBL) has achieved the net spread & net
interest margin targets. But it could be better enough which is missed because of its larger
share of low-yielding BPC bonds and concessional interest rates and this position is

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 indicating that banking sector is becoming more competitive. The target for net operating
income to total assets and cost to income ratio have not been achieved largely due to
increased operating expenses on amortization of intangible assets by Tk. 350 crore and
salary.

1.4 Profitability As per audited financial statements, SBL made net income before provision
and tax of Tk.161.6 crore in 2008, compared to Tk.424.6 crore in 2007. This decline in profit
has been caused mainly by increase in operating expenses (e.g., salary and allowances
increased by more than double in a year and amortization of intangible assets by Tk.350
crore in 2008). Though this reduction in net profit before tax had affected its ROA, it has
improved to 0.47 percent in 2008 from a negative 6.17 percent in 2007.

1.5 Staffing The target set for staff rationalization could not be materialized due to delays in
implementation of VRS scheme. Staff cost as percentage of total operating cost reduced to
52.7% in 2008 from 75.6%o in 2007. Income per staff has also improved from 0.11 to 0.12
in 2008.

1.6 The Net Worth of the bank continued to improve under the review period. Given the
systematic importance of Sonali bank as the largest state-owned commercial bank, the
capital position needs to be further strengthened. The amount of actual provisioning for
loan losses remained higher than required provisioning in 2008.

1.7 Computerization Target on computerization of branches has been met with 56% of

deposits and 74% of loans procedures automated as of end 2008.

1.8 Disclosure requirements have been met with financial statements both for annual
statement and quarterly provisional (within one month) completed within the prescribed
time frame.

B. Performance Indicators for Sonali Bank Limited

The Implementation Support Mission of the World Bank visited the Bank recently on 16
November, 2009 and review the overall progress of implementation of the project with
particular focus on the sustainability of banking reforms and placed its comment as follows:

A significant achievement under this project has been the improvement in the financial
condition largely due to the Management Team that have been hired under this project. The
Management Team have not only turned the bank into operationally profitable organization,
but have also: improved customer services; introduced new products; developed policies and
manuals for effective and efficient operations of the bank; revised the organizational structure
of the bank; embarked on a comprehensive training program for staff; introduced incentives
for better staff performance; and are going ahead with the computerization of the bank’s
operation.

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2.12 CORE VALUES:
Sonali Bank Limited (SBL)’s Core Value proposition consists of ten key elements. The values
would assist the bank in perceiving its employees to work as a team towards accomplishment
of assigned duties and responsibility for achievement of desired objectives.
 Ethics: Everyone must ensure adherence to ethical practices of banking.
 Objectivity: All persons will have definite objective in carrying out their tasks.
 Integrity: Protection and safeguard of customers’ interest is a vital element for societal
trust.
 Excellence: Excellent performance and effectiveness are preconditions to ensure quality
service to the large customer base of the bank.
 Innovation: New and innovative products are the needs of the time for which
continuous action-oriented researches are carried out.
 Commitment: Every employee is committed to work up to the expected level to ensure
satisfaction of valued customers.
 Self-Reliance: Each employee will have ownership attitude towards the bank and self
confidence in his work for betterment of the bank.
 Transparency: Information is to be kept open for all so that stakeholders can have
proper ideas about the bank’s activities.
 Accountability: All employees are responsible for their activities and will remain
accountable to their respective superior for accomplishment of tasks.
2.13 CORE COMPETENCIES:

 Knowledge
 Experience & Expertise.
 Customer Orientation/ Focus.
 Transparency.
 Determination.
 Zeal for Improvement.
 Reliability.

2.14 ANCILLARY SERVICES:

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Sonali Bank Limited offers multiple special services with its network of branches throughout the
country in addition to its normal banking operations.
Collection:

 Gas bills.
 Electricity bills.
 Telephone bills.
 Water/Sewerage bills.
 Municipal holding Tax.
 Passport fees, visa fees and Travel tax.
 Customs & Excise duties.
 Source tax and VAT.
 Jakat fund.
 Hajj deposit.
 Land development tax.
Payment:

 Pension of employees of Government and other Corporate Bodies.

 Bangladesh Bank employees’ pension.
 Army pension.
 British pension.
 Students' stipend/scholarship.
 Govt. & Non-Govt. Teachers' salary.
 Food procurement bill on behalf of the Govt.
Social Services:

 Old age allowances.

 Widows, divorcees and destitute women allowances.
 Freedom Fighters' allowances.
 Rehabilitation allowances for acid survival women.
 Maternal allowances for poor women.
 Disability allowances.
Sale & Encashment/Purchase:

 Savings Certificates.
 ICB Unit Certificates.
 Prize Bonds.
 Wage Earner's Development Bonds.
 US Dollar Premium & Investment Bond.
 Lottery tickets of different Semi-Govt. and Autonomous Bodies.

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  Sanchaypatra.
 Public Service Commission's application form.
 Judicial Service Commission's application form.
 Exchange of soiled / torn notes.
Misc. Services:

 Bank a/c information of tax payee client according to demand of NBR.

 Local Governance Support Project.
 Enlist of Non-Government Insurance company
2.15 LOCKER SERVICE:
Secured Locker Service is provided in some branches of Sonali Bank Limited. Customers may
avail this service and secures their valuables
Locker Charges:

Locker size Yearly Charge (Tk.) Security Deposit (Tk.)

Small 2,000.00 5,000.00 (refundable)
Medium 2,500.00
Large 3,000.00

* Additional 15% VAT applicable along with charges

2.16) CORPORATE BANKING:
 1.Small and Medium Business:
 Cash Credit Hypothecation (CC Hypo)
 Cash Credit Pledge (CC Pledge)
 Secured Overdraft against Financial Obligation (FO)
 SOD against Work Orders.
 2. Large Business
 Short Term Industrial Loan
 Mid Term Industrial Loan
 Long Term Industrial Loan
 Transport Loan
 Commercial House Building Loan

 3. Foreign Trade

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Sonali Bank Ltd (SBL) provides solutions in the field of international business and trade finance.

 Letter of Credit(L/C)
 Back to Back letter of Credit (BTB)
 Loan Against Trust Receipt (LTR)
 Loan Against Imported Merchandise (LIM)
 Packing Cash Credit (PCC)
 Export Development Fund (EDF)
 Payment Against Document (PAD)
 Bank Guarantee (Bid Bond/Payment Guarantee/Performance Guarantee/Advance
Payment Guarantee)
 4. Lease Financing:
An entrepreneur, under this scheme, may avail of the lease facilities to procure industrial
machinery (without having to purchase it by down payment) with easy repayment schedule.
The clients also get special rebate in their income tax payment under the scheme.
 5. Islamic Banking:
Some of the branch of Sonali Bank open profit loss sharing term/savings deposit amounts and
also allow loans on Mudaraba, Musharaka, Murabaha system. Attractive profit is given at the
end of the year after deducting the banks service fee through proper accounting.

 6. Financial products:
Financial products of the Sonali Bank Limited (SBL) are mainly in three different categories:
These are:

 Short term financing products

 Midterm financing products.
 Long term financing products.

 7. Micro Credit Financing:

To fulfill its commitment to play a vital role to its socio-economic development of the country
Sonali Bank Ltd has introduce a small and medium scale credit scheme for its customers. The
objective of the scheme is:

 To encourage and develop medium and small entrepreneurs.

 To provide credit with minimum complexity.
 To generate employment.

 8. Special services:

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To be consistent with the modern age and competing in a perfectly competitive market some
special services are needed. The Sonali Bank Ltd (SBL) has introduced some innovative banking
services that are remarkable in a country like Bangladesh. T services offered by the bank are as
follows:

8.1) ATM service:

The bank has joined the shared ATM network Bangladesh with a pool of 7 banks. The client of
any member bank will have access to any ATM situated at different location of Dhaka city. This
banks client will get 24 hours cash withdrawal and utility bills payment facility. 16 ATMs will be
installed gradually in Dhaka City and the network will be extended to other cities if the country
in the near future.

8.2) Credit Card:

To provide best possible customer services to its clients, the bank is going to launch Master
Credit card shortly.
8.3) Western Union:
Western Union is one of the innovative products of the bank. This has been functioning
satisfactory and rendering prompt and efficient services to the wage earners.

8.4) Swift:
The bank has become a member of SWIFT and is providing a fast and accurate communication
network for financial transactions to their valued clients through uninterrupted connectivity
with thousands of user’s institutions in 150 countries around the world.

2.17 CORPORAE SOCIAL RESPONSIBILITY PLAYED BY SBL:

Corporate Social Responsibility (CSR) starts with the consideration of social implications by any
corporate body which is ultimately reflected through its initiatives towards betterment of the
disadvantaged peoples of a society. As a stakeholder of the society, Sonali Bank Limited is keen
to augment CSR activities gradually in the days to come.
Sonali Bank Limited is committed to contribute towards social development through its CSR
program. The notable CSR programs implemented by SBL are as follows:
 Educational Facilities:
Sonali Bank donated Tk. 352 lacs to 150 beneficiaries. These helps were extended for
renovation/construction of building/class rooms of different schools, colleges, universities,
libraries etc; giving stipend to the poor meritorious students; sponsoring various seminars,

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conferences, convocations, alumni’s, anniversaries, drama festivals, competitions, training
programs; observing important national days etc.
 Health Care Programs:
Access to healthcare facilities is one of the fundamental rights of every human being. As such,
SBL is committed to assist those poor people, who have no way to secure basic treatment.
During the year 2012, the bank has given financial assistance from its CSR fund a sum of Tk. 98
lac to 125 beneficiaries to ease their miseries.

 Relief Activities in Disaster:

SBL’s lending policies with regard to environmental management are responsive to emergency
support needs of population groups affected by natural and manmade disasters. During the
year 2012, the bank has spent Tk. 15 lac for the donation of 14500 blankets to the cold stricken
poor people of the country in the districts of Rangpur, Dinajpur, Thakurgaon, Gaibandha,
Kurigram, Panchagarh, Mymenshingh and Pabna.
 Concern for Environmental Betterment:
In the year 2012, the bank contributed 3 lacs to ‘Make Rajshahi Green Project’ and Tk. 7.00 lac
to BAPA (Bangladesh Paribesh Andolon) for International Conference on Environment in South
Asia. Today our planet is exposed to a severe environmental catastrophe than ever before.
SBL’s corporate social responsibility contributes generously to the development of Green
Banking. Protection and thus nourishing the environment are part of SBL’s investment principle.
Environmental issues are taken into account while the bank is assessing credit proposal for the
industrial projects. As a humble effort to reduce environmental pollution, the bank is financing
CNG refueling stations. Besides, most of office vehicles of the bank have already been
converted to CNG fueling system.
 Games and Sports:
In the year 2012, the Bank has donated Tk. 25 lac to10 beneficiaries of different football and
hokey clubs and tournaments for the promotion of games and sports. SBL has its own football
team that has been participating in the national football league relentlessly since
independence. The bank has also a cricket team of its own that has been participating in the
first division cricket league since independence.
 Arts and Culture:
Sonali Bank Limited is always committed to the upliftment of Bengali heritage, art, culture and
literature. The bank donated Tk. 35 lac for ongoing construction of liberation war museum.
Besides, the bank also donated Tk.20 lac to other related projects/programs.

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  Customers and Well-wishers:
SBL feels proud to provide services to the valued customers without any hidden cost. The bank
serves to customers as a business partner. The bank sincerely strives to improve business
relationship with the customers for common benefit. By optimizing financial performance at
the least cost, the bank protects the interest of customers. The bank is maintaining a good
relationship with the business friends for mutual growth and development.

 Poverty Alleviation:
It is globally accepted that the Non-Government Organizations (NGOs) have been performing a
laud SBL role in poverty alleviation across the globe, especially in Bangladesh. With a view to
widening the access to finance to the poor and ultra-poor community, SBL has been financing
NGOs since 1997 at privileged rates of interest. SBL financed NGOs are of various categories
and capacities. Such activities also contributed to generation of income and employment as
well.

 Promotion of Crop Production:

To attain food security of the country SBL has been providing credit facilities to the farmers at a
lower rate of interest (currently at 8 percent) since 1975. A huge amount of foreign currency is
spent in every year to import pulse, oil-seeds, spices, maize etc. In order to save foreign
currency, the Government of Bangladesh encourages our farmers to boost up the production of
above crops by introducing rebate rate of interest and SBL is one of the major participants of
this initiative. In this sector, SBL disbursed an amount of Tk.1800 lac in the year 2012.

 Promotion of Entrepreneurship:
The bank envisaged fostering entrepreneurship amongst the potential, new and small
entrepreneurs and generating employment through financing Small and Medium Enterprises.

Keeping the aim in mind, SBL does not only run after the so-called blue chips towards profit
maximize of the bank. Rather, it always remains stick to the triple bottom line: People, Planet &
Profit and focused to the promotion of SMEs. In this way, a lot of entrepreneurs have grown
with us through which employment opportunities are created for a huge number of people.

 Women Empowerment:
The bank through its ‘Nari Sonali’ program has been mobilizing credit facilities in industry,
service and business sector to the potential women entrepreneurs at a reduced rate of 10
percent interest. So far, the bank has financed several woman entrepreneurs and it will gain
due momentum in the days to come.

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 CHAPTER: THREE
STUDY OF CREDIT MANAGEMENT
SYSTEM

3.1 OVERVIEW OF CREDIT INFORMATION BUREAU (CIB)

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Credit Information Bureau (CIB) is a credit record of an individual, which contains the
repayment history of liability. The CIB is generated from central bank of a country. Credit
Information Bureau (CIB) is an agency that collects credit data on borrowers from its member
financial institutions. The financial data is then aggregated in system and the resulting
information (in the form of credit reports) is made available on request to contributing member
financial institutions for the purposes of credit assessment, credit scoring and credit risk
management. The major purpose of this database is to enable the financial institutions to know
the credit history of their prospective customers thus enabling them to make a more prudent
decision. Credit information is an essential component of a financial system. Issuing any loan
without CIB report increases the risk of loan default. It provides the factual position of the
borrowers' credit exposure both negative as well as positive as of a certain date. Credit reports
are mandatory for banks in Bangladesh

3.2 ROLE OF CIB IN FINANCIAL SYSTEM

The CIB plays an important role in promoting financial discipline, better credit risk management
and making prudent lending decisions. It is globally recognized that a well-developed financial
sector must have effective credit risk detection and management system to allocate credit
efficiently. The CIB helps financial institutions in managing credit risk and assessing true credit
worthiness of existing as well as prospective borrowers.
The goal of Credit Information Bureau is to ease problems arising between borrowers and
lenders. Formal information exchanges help lenders to identify good borrowers, thus reducing
the incidence of adverse selection. The practical consequence is better risk management, which
enables banks to avoid risky large loans and increase their lending volume to small and
medium- sized enterprises (SME) thus contributing to economic growth, employment
generation and poverty alleviation.

3.3 CIB OF BANGLADESH BANK

The Credit Information Bureau (CIB) was established by Bangladesh Bank (BB) in 1992. The
scope and activities of CIB are governed under the provisions of Banking Companies Ordinance
(BCO), 1962. The Section 25 (A) vests powers with BB to call for credit information in such
manner as it may deem necessary and make such information available to any banking
company. The CIB has been in operation for several years. The need for such an organization
had been discussed for several years and the Government included this in the Financial Sector
Reform Project. The central bank established a separate unit headed by a General Manager
tasked to develop the CIB and the whole system of CIB is now automated.

3.4 INTRODUCTION
This is the survival unit of the bank because until and unless the success of this section the
survival is a question to every bank. This is important because this is the earning unit of the
bank. Bank credit is an important catalyst for bringing about economic development in a

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country. If this section is not properly working the bank may become bankrupt. No growth of
maintenance of a stable economy is possible without adequate financial supporting banks are
accepting deposits from the depositors in condition of providing interest to them as well as safe
keeping their interest. Now the question may gradually arise how the bank will provide interest
to the clients and the simple answer is advance.

3.5 CREDIT
The word credit derived from Latin word "CREDO' means I believe. Credit is a contractual
Agreement, in which a borrower receives something of value now, with the agreement to repay
the lender at some date in the future. The term credit also refers to the borrowing capacity of
an individual or company. A bank can invest its funds in many ways. Bank makes loans and
advances to traders, businessmen, and industrialists. Moreover, nature of credit may differ in
terms of security requirement, disbursement provision, terms and conditions etc. One of the
basic functions of the bank is to deposit extraction and credit extension. And managing credit
operations are the crying need for any bank. Recovery of one credit gives rise to another credit.
In banking terminology, credit refers to the loans and advances made by the bank to its
customers or borrowers.
So, Credit refers to

 Medium / Long Term Loans

 Off-Balance Sheet Transaction
 Short Term Loans & Advances

3.6 SOME IMPORTANT FACTOR ABOUT CREDIT

1 Credit Limit:
The maximum amount of credit that a bank or other lender will extend to a customer, or the
maximum that a credit card company will allow a card holder to borrow on a single card.

2 Credit Line:
An arrangement in which a bank or vendor extends a specified amount of unsecured credit to a
specified borrower for a specified time period. It’s also called line of credit.
3 Credit Market:
Credit market is a market place for the exchange of debt securities and short-term commercial
paper. Companies and the government are SBL to raise funds by allowing investors to purchase
these debt securities. Activity in credit markets is often used to gauge investor sentiment. If
more bonds from the government are being purchased, this is typically a good indicator that
investors are worried about the stock market.
4 Credit Netting:

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A process used by financial institutions which eliminates the need to do a credit check on every
financial transaction. In some situations, such as stock market transactions, it is important for
transactions to be completed in a timely manner. Most of these transactions would typically
require a credit check, to make sure that the party will be SBL to pay the contracted amount.
However, in some situations the financial institutions will agree to the system of credit netting,
where all transactions are combined into one transaction, eliminating the credit check on every
small transaction.

3.7 IMPORTANCE OF CREDIT

Credit plays a very vital role in national economy in the following ways-

 It provides working capital for industrialization.

 It helps to create employment opportunities.
 Credit controls almost all kinds of production activities of the country.
 People’s purchasing power increases for it.
 It brings social equity.
 Cash generation occurs for its successful performance.
 Business cycle can run well only by the help of lending system

3.8 CREDIT MANAGEMENT

Credit management, also known as credit control, is activity aimed at serving the dual purpose
of-
(1) Increasing sales revenue by extending credit to customers who are deemed a good credit
risk, and
(2) Minimizing risk of loss from bad debts by restricting or denying credit to customers who are
not a good credit risk.
Effectiveness of credit control lies in procedures employed for judging a prospect's
creditworthiness, rather than in procedures used in extracting the owed money. A function
performed within a company to improve and control credit policies that will lead to increased
revenues and lower risk including increasing collections, reducing credit costs, extending more
credit to creditworthy customers, and developing competitive credit terms. The objective of the
credit management is to maximize the performing asset and the minimization of the non-
performing asset as well as ensuring the optimal point of loans and advances and their efficient
management. It’s also called credit control.

3.9 THE PROCESS OF CREDIT RATING

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The Bank rates it’s individual risk exposures continuously until these have been discharged
through full payment or otherwise written off. However, actual account performance is an
additional consideration in classifying the exposures into one of the following eight categories:

1. Superior-Low Risk (AAA):

 Industry/Business & Financials: Strong industry and business performance is indicated

on the basis of volume trends and operating margins; the account may be a dominant
player in the industry.
 Account Performance: Account is cooperative, pays on time, and provides non-loan
business.
 Security: Facilities are fully secured by cash deposits, government bonds or an
unconditional guarantee from a top-tier international bank or financial institution.
2. Good-Satisfactory Risk (AA):

 Industry/Business & Financials: The account’s performance is strong, having

consistently strong earnings within a vibrant industry, good liquidity and low leverage.
 Account Performance: Account is cooperative, pays on time and provides non-loan
business.
 Security: Security is sub-prime but solid real estate. Aggregate score would be 95 or
above.
3. Acceptable Fair risk (A):

 Industry/Business & Financials: Financial condition is currently strong but may be

unable to sustain any major or continued setbacks. This classification indicates strengths
below that of the previous category, but shows consistent earnings and positive cash
flow.
 Account Performance: Account is paying, but may be delayed by less than one month
from time to time.
 Security: Security position is satisfactory. Aggregate score would be 75-94.
4. Marginal -Watch list (BBB):

 Industry/Business & Financials: These borrowers have an above- average risk due to
strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent
earnings.
 Account Performance: Account is paying, but may be delayed by less than one month
from time to time.
 Security: Security position could be less than satisfactory if default occurs longer than 3
months. An aggregate score would be 65-74.

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5. Special Mentions (BB):

 Industry/Business & Financials: These borrowers deserve management’s close

attention because of consecutive losses over two years with the potential to have
negative net worth, excessive leverage.
 Account Performance: Account is paying, but may be delayed by less than three months
from time to time.
 Security: Security position could be less than satisfactory if default occurs longer than 3
months. An aggregate score would be 55-64.
6. Substandard (B):
Financial condition is weak, and capacity or inclination to repay is in doubt. These weaknesses
jeopardize the full settlement of loans. An aggregate score would be 45-54.
7. Doubtful and Bad (Non-performing):
Full repayment of principal and interest is unlikely, and the possibility of loss is extremely high.
The adequacy of provisions must be reviewed at least quarterly and the Bank should pursue a
loan workout arrangement (e.g. restructuring), failing which legal options should be explored to
enforce security to obtain repayment. An aggregate score would be 36-44.
8. Loss (Non – Performing):
The prospect of recovery is poor after exploring all options. Legal procedures have been
initiated. In accordance with Bangladesh Bank guidelines, these accounts should be written off.
An aggregate score would be 35 or less. The deterioration of any loan account is regarded as a
serious development that requires the attention of the Credit Committee. For this purpose, any
account which is downgraded to “Substandard” should be the subject of a Classified Loan
Report. Recovery of Non-Performing Loans & Investments the NPL Recovery Unit is responsible
for all accounts assigned to it by the Credit Committee. The unit is staffed by seasoned senior
officers who undertake the following activities:

 Review the accounts thoroughly and diagnose business prospects.

 Determine the best way to recover the Bank’s exposure with the least possible losses.
 Restructure those accounts which are deemed to be cooperative and in temporary
distress.
 Monitor their performance closely until they have substantially complied with the
revised terms including payment of at least six months’ installments; rehabilitated
accounts may be returned to the originating front offices for regular monitoring and
supervision after this prescriptive period.

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 3.10 CREDIT EVALUATION PROCESS
1. Credit Scoring: Credit scoring is the use of statistical, operational research and data mining
models to determine the credit risk of prospective borrowers. Credit score models can be used
for-

 Controlling risk selection.

 Managing credit losses.
 Evaluating new loan programs.
 Improving loan approval processing time.
 Ensuring that existing credit criteria are sound and consistently applied.
 Improving profitability.
2. Financial Analysis: The analysis of financial statements is the traditional way that banks
evaluate business loans taking into consideration the following factors-

 Different perspectives: Financial analysis provides information about the past and most
recently reported financial condition of a firm. The information can yield clues about the
firm’s performance about the future. Because all analysts have the objectives in mind,
they focus on different aspects of a firm’s condition and outlook.
 Quality of the data: Year-end data should be used for making decisions, whereas
interim reports can be used for monitoring the financial condition of firm.
The quality and reliability financial statements also differ among compilation, review and an
audit.

 Effects of inflation: Inflation can distort data and it may contribute to misinterpretation
of information.
 Comparisons of relatives: The data must be judged relative to-
 Historical trends- while data for one or two years, may be an aberration, data for five
year or longest period a good basis for trend analysis and
 Other firms that are peers-financial data should be compared with the financial data of
firms of similar size, in the same industry and in the same geographic region
 Average data- comparing data for affirm to an “average” for other firms can be
misleading too. “Average” is a measure of central tendency and
 LIFO/FIFO- differences in accounting practices between firms may distort comparisons.
3. Ratio Analysis:

 Profitability ratios: Profitability is the ultimate test of the effectiveness of management.

 Return on asset: An indicator of how profitable a company is relative to its total assets.
ROA gives an idea as to how efficient management is at using its assets to generate

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 earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is
displayed as a percentage.
ROA= (Net income)/ (Total assets)
 Return on equity: The amount of net income returned as a percentage of shareholders
equity. Return on equity measures a corporation's profitability by revealing how much
profit a company generates with the money shareholders have invested.
ROE is expressed as a percentage and calculated as:
ROE= Net income/ Shareholder’s equity
 Net profit margin: The net profit margin on sales, computed by dividing net income by
net sales, is the percent of profit earned of profit earned for each dollar of sales.
Net profit margin= (Net income)/ (Net sales)
 Earnings per share: EPS is derived by dividing income available for common
stockholders by the number of shares outstanding.
EPS= (Net income-dividends on preferred stock)/ (Average outstanding shares)
 Dividend payout ratio:
The percentage of earnings paid to shareholders in dividends.
Calculated as: DPR= Yearly dividend per share/ EPS
 Liquidity ratios and measure:
Liquidity Ratios' are a class of financial metrics that is used to determine a company's ability to
pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger
is the margin of safety that the company possesses to cover short-term debts.
 Net working capital: Net Working Capital (which is also known as “Working Capital” or
the initials “NWC”) is a measurement of the operating liquidity available for a company
to use in developing and growing its business. The working capital can be calculated
very simply by subtracting a company’s total current liabilities from its total current
assets.
Net Working Capital= Current Assets -Current Liabilities.
Current assets include stocks, debtors, cash & equivalents and other current assets. Current
liabilities include all the short-term borrowings.
 Current ratio: Current ratio measures the firm’s ability to meet its short-term
obligations.
Current ratio= Currents assets/ Current liabilities

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  Acid-test ratio/Quick ratio: the acid-test ratio/Quick ratio is similar to current ratio
except that it excludes inventory, which is generally the least liquid current asset.
Acid-test ratio/Quick ratio= (Current Assets-Inventory)/ Current liabilities
Or, Acid-test ratio/Quick ratio = (Cash + Securities + Accounts receivable)/ (Current assets)
 Average collection period: The average collection period indicates that a firm waits
before receiving cash from sales made on credit. Two steps are required to calculate the
average collection period-
Step 1-Involves determining the dollar amount of credit sales per day.
Credit sales per day = (Net sales)/ (360 days)
Step 2- Is to divide accounts receivable by credit sales per day.
Average collection period = (Accounts receivable)/ (Credit sales per day)
The reduction of the average payment period may be to allow a company to take advantage of
the discounts for early payments of bills.
Credit purchase per day= (Net purchase)/ (360 days)
Average payment period= (Accounts payable)/ (Credit purchase per day)

4. Measuring Efficiency:

 Inventory turnover ratio: the objective in managing inventories is to hold the minimum
amount necessary in order to serve company’s customers’ needs and make sales. The
inventory turnover ratio is calculated by dividing the cost of goods sold by inventory.
The formula for inventory turnover:
Inventory turnover= (Cost of goods sold)/ (Average inventory)
 Age of inventory: another way to examine inventories is to determine the average
number of days that the inventory remains on hand.
Age of inventory= (360 days)/ (Inventory turnover ratio)
Asset turnover ratio: The asset turnover ratio is a broad measure of efficiency because it
encompasses all assets.
Asset turnover ratio= Net sales/ Total sales
 Financial leverage: Financial leverage refers to the relationship between borrowed
funds, such as loans and bonds, and common stockholders’ equity.
Companies with a high proportion of borrowed funds are said to be highly leveraged. Financial
leverage increases the volatility of earnings per share and the risk of bankruptcy.

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  Debt ratio: the debt ratio indicates the proportion of a firm’s total assets that is
financed with the borrowed funds. It is calculated by dividing total liabilities by total
assets. The easy way to compute total liabilities is to subtract common stockholders’
equity from total assets.
Debt ratio= Total liabilities/Total assets
Long-term debt as a percentage of Total capital:
Total capital= Long-term debt+ Preferred stock+ Stockholders’ equity
Long-term debt as a percentage of Total capital= (Long-term debt)/ (Total capital)
 Times Interest Earned: debt coverage is measured by time interest earned, which is
computed by dividing earnings before interest and taxes (EBIT) by interest expense.
EBIT= Income before income taxes+ Interest expense
Times Interest Earned= EBIT/Interest expense
5. Common-size Statement Analysis:

 Balance Sheet: Common-sized financial statements present each item listed on the
balance sheet as a percent of total assets, and each item listed on the income statement
as a percent of net sales.
This format facilitates comparisons of financial statement because the data are expressed as
percentages instead of dollar amounts.
Common-sized statements are useful in comparing financial statements of different companies,
because of all data are expressed a 0percentage of total assets or sales.
 Income statement: An income statement in which each account is expressed as a
percentage of the value of sales. This type of financial statement can be used to allow
for easy analysis between companies or between time periods of a company. Income
statement shows that the net profit margin.

3.11 IMPORTANT FACTORS CONSIDERED FOR SANCTIONING

CREDIT
Though off-balance sheet activities play a vital role in a bank’s earnings, still income earned out
of lending accounts for major portion of income of it? This lending in other words advance may
raise the standard of success of a bank to the highest possible level and at the same time can be
a sole instrument for liquidation (i.e. premature death of a bank) depending on how this
portfolio is handled. So, following factors should be given great emphasis.

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1. Who shall get credit?
It is easier to find out a depositor than finding out a good borrower. Public money in hands of a
bad borrower is never safe and secure. Then the question comes whom to lend? In a nut shell
the answer is the entrepreneur who, for attaining his own pecuniary interest as well as mental
satisfaction together with offering additional services and well-being to the society at large,
undertakes efforts to collect together various types of necessary goods, labor materials, other
wealth etc. and by means of application of his wisdom, foresight, creativity, devotion and self-
confidence, takes initiative to add additional utility and value to the collected materials and
wealth by bringing change and or modification in their form.
2. How much to lend?
Over financing and under financing is very common phenomenon in credit portfolio; neither of
which is desirable as a sound principal of advance. The highest priority of consideration is that
bank credit must not be extended for speculative purpose and sound credit policy always finds
out actual credit need depending on nature, volume, turnover of business as well as capability
of the prospective borrower, which in turns depends on the test of good entrepreneurship.
3. Why to lend?
The recommending as well as sanctioning authority must ascertain and satisfy himself that all
advance are for productive purpose, genuine business and trade need based and neither for
speculative nor for unproductive purpose. It is primary responsibility of recommending officer
to visualize whether the loan, he is recommending for will generate cash to desired extent
benefit to the bank, to the borrower and to the society at large.
4. Where to Finance?
Financial activities of a bank, depends upon portfolio management of its funds through
deposit. Bank’s lending activities may be classified into following broad segments-

 Trade and Commerce.

 Industries
 Lease Financing.
 Real Estate and Civil Construction
 Agro-based.

3.12 CREDIT RISK

Credit risk refers to the risk that a borrower will default on any type of debt by failing to make
required payments. The risk is primarily that of the lender and includes lost principal and
interest, disruption to cash flows, and increased collection costs.

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Credit risk arises from the potential that a bank's borrower will fail to meet its obligations in
accordance with agreed terms. Credit risk also refers the risk of negative effects on the financial
result and capital of the bank caused by borrower's default on its obligations to the bank.
CAUSES BEHIND THE CREDIT RISK:
Credit risk mat arise for the following reasons:

 A consumer may fail to make a payment due on a mortgage loan, credit card, line of

credit, or other loan.
 A company is unable to repay asset-secured fixed or floating charge debt.
 A business or consumer does not pay a trade invoice when due.
 A business does not pay an employee's earned wages when due.
 A business or government bond issuer does not make a payment on a coupon or
principal payment when due.
 An insolvent insurance company does not pay a policy obligation.
 An insolvent bank won't return funds to a depositor.
 A government grants bankruptcy protection to an insolvent consumer or business.

3.13 CREDIT RISK POLICY

Every financial institute should have a credit risk policy document that should include risk
identification, risk measurement, risk grading/ aggregation techniques, reporting and risk
control mitigation techniques, documentation, legal issues and management of problem
facilities. The senior management of the FI should develop and establish credit policies and
credit administration procedures as a part of overall credit risk management framework and get
those approved from Board. Such policies and procedures shall provide guidance to the staff on
various types of lending including Corporate, SME, Consumer, Housing etc. Credit risk policies
should:

 Provide detailed and formalized credit evaluation/ appraisal process

 Provide risk identification, measurement, monitoring and control
 Define target markets, risk acceptance criteria, credit approval authority, credit
origination maintenance procedures and guidelines for portfolio management
 Be communicated to branches/controlling offices. All dealing officials should clearly
understand the FI’s approach for credit sanction and should be held accountable for
complying with established policies and procedures
 Clearly spell out roles and responsibilities of units/staff involved in origination and
management of credit.

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 3.14 CREDIT RISK STRATEGY
 The very first purpose of FI’s credit strategy is to determine the risk appetite of the FI.
Once it is determined the FI could develop a plan to optimize return while keeping credit
risk within predetermined limits.
 Each FI should develop, with the approval of its Board, its own credit risk strategy or
plan that establishes the objectives guiding the FI’s credit-granting activities and adopt
necessary policies/ procedures for conducting such activities. This strategy should spell
out clearly the organization’s credit appetite and the acceptable level of risk-reward
trade-off for its activities.
 The strategy should provide pricing strategy and ensure that FI’s overall credit risk
exposure is maintained at prudent levels and consistent with the available capital
 The strategy should provide continuity in approach and take into account cyclic aspect
of country’s economy and the resulting shifts in composition and quality of overall credit
portfolio. While the strategy would be reviewed periodically and amended, as deemed
necessary, it should be viable in long term and through various economic cycles.
 Senior management of a FI shall be responsible for implementing the credit risk strategy
approved by the board.

3.15 FACTORS AFFECTING CREDIT RISK

 Macro External Variables:
 Economy
 International environment
 Physical environment
 Institutional issues and legislation
 Technology
 Politics
 Social issues

 Industry/Sector in Which Company Operates:

 Competition
 Market growth
 Capital required
 Dependency on economic cycle
 Social values
 Technological changes
 Union influences

 Clients:

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  Safety
 Suitability
 Profitability

 Marketing Environment of Banks:

 Competitions

 Banks Internal Variables:

 Credit policy
 Staffs
 Management
 Decision making process
 Supervision
 Product
 Target market choice
 Systems

3.16 WHY MANAGE CREDIT RISK?

The reasons behind managing credit risks are as follows:

 Increase shareholder value

 Value creation
 Value preservation
 Capital optimization
  Increase confidence in the market place
  Alleviate regulatory constraints and distortions.

3.17 CREDIT RISK MANAGEMENT

Risk management contains:

 Identification
 Measurement
 Aggregation
 Planning and management
 As well as monitoring of the risks arising in a bank's overall business.

3.18 CREDIT RISK MANAGEMENT PROCESS

Credit risk management process should cover the entire credit cycle starting from the
origination of the credit in a financial institution's books to the point the credit is extinguished
from the books.  It should provide for sound practices in:

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  Credit processing/appraisal
 Credit approval/sanction
 Credit documentation
 Credit administration
 Disbursement
 Monitoring and control of individual credits
 Monitoring the overall credit portfolio (stress testing)
 Managing problem credits/recovery (Bank of Mauritius, December 2003)

3.19 CREDIT RISK MANAGEMENT FRAMEWORK:

A typical credit risk management framework in a bank may be broadly categorized into
following main components:

 Board oversight.
 Senior management's oversight.
 Organizational structure.
 Systems and procedures for identification, acceptance, measurement of risks.
 Monitoring and control of risk.

3.20 MEASURING CREDIT RISK:

The measurement of credit risk is a vital part of credit risk management. To start with, banks
should establish a credit risk rating framework across all type of credit activities. Among other
things, the rating framework may, incorporate:

a. Business risk

 Industry characteristics
 Competitive position (e.g. marketing/technological edge)
 Management

b. Financial risk

 Financial condition
 Profitability
 Capital structure
 Present and future cash flows

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 3.21 CREDIT RISK MONITORING AND CONTROL
Banks need to develop and implement comprehensive procedures and information systems to
monitor the condition of each individual credit across various portfolios. Banks need to
enunciate a system that enables them to monitor quality of the credit portfolio on a day-to-day
basis and take remedial measures as and when any deterioration occurs. These procedures
need to define criteria for identifying and reporting potential problem credits and other
transactions to ensure that they are subject to more frequent monitoring as well as possible
corrective action, classification and/or provisioning.The banks credit policy should explicitly
provide procedural guideline relating to credit risk monitoring. At the minimum it should lay
down procedure relating to:

 The roles and responsibilities of individuals responsible for credit risk monitoring.
 The assessment procedures and analysis techniques (for individual loans & overall
portfolio)
 The frequency of monitoring.
 The periodic examination of collaterals and credit covenants.
 The identification of deterioration in any credit.

3.22 PRINCIPLES FOR MANAGING THE CREDIT RISK:

A. Establishing an Appropriate Credit Risk Environment:
Principle 1: The board of directors should have responsibility for approving and periodically
reviewing the credit risk strategy and significant credit risk policies of the bank. The strategy
should reflect the bank’s tolerance for risk and the level of profitability the bank expects to
achieve for incurring various credit risks.
Principle 2: Senior management should have responsibility for implementing the credit risk
strategy approved by the board of directors and for developing policies and procedures for
identifying, measuring, monitoring and controlling credit risk. Such policies and procedures
should address credit risk in all of the bank’s activities and at both the individual credit and
portfolio levels.
Principle 3: Banks should identify and manage credit risk inherent in all products and activities.
Banks should ensure that the risks of products and activities new to them are subject to
adequate procedures and controls before being introduced or undertaken, and approved in
advance by the board of directors or its appropriate committee.

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B. Operating Under a Sound Credit Granting Process:
Principle 4: Banks must operate under sound, well-defined credit-granting criteria. These
criteria should include a thorough understanding of the borrower or counterparty, as well as
the purpose and structure of the credit, and its source of repayment.
Principle 5: Banks should establish overall credit limits at the level of individual borrowers and
counterparties, and groups of connected counterparties that aggregate in comparable and
meaningful manner different types of exposures, both in the banking and trading book and on
and off the balance sheet.
Principle 6: Banks should have a clearly-established process in place for approving new credits
as well as the extension of existing credits.
Principle 7: All extensions of credit must be made on an arm’s-length basis. In particular, credits
to related companies and individuals must be monitored with particular care and other
appropriate steps taken to control or mitigate the risks of connected lending.
C. Maintaining an Appropriate Credit Administration, Measurement and Monitoring Process:
Principle 8: Banks should have in place a system for the ongoing administration of their various
credit risk-bearing portfolios.
Principle 9: Banks must have in place a system for monitoring the condition of individual
credits, including determining the adequacy of provisions and reserves.
Principle 10: Banks should develop and utilize internal risk rating systems in managing credit
risk. The rating system should be consistent with the nature, size and complexity of a bank’s
activities.
Principle 11: Banks must have information systems and analytical techniques that enable
management to measure the credit risk inherent in all on- and off-balance sheets activities. The
management information system should provide adequate information on the composition of
the credit portfolio, including identification of any concentrations of risk.
Principle 12: Banks must have in place a system for monitoring the overall composition and
quality of the credit portfolio.
Principle 13: Banks should take into consideration potential future changes in economic
conditions when assessing individual credits and their credit portfolios, and should assess their
credit risk exposures under stressful conditions.
D. Ensuring Adequate Controls over Credit Risk:
Principle 14: Banks should establish a system of independent, ongoing credit review and the
results of such reviews should be communicated directly to the board of directors and senior
management.

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Principle 15: Banks must ensure that the credit-granting function is being properly managed
and that credit exposures are within levels consistent with prudential standards and internal
limits. Banks should establish and enforce internal controls and other practices to ensure that
exceptions to policies, procedures and limits are reported in a timely manner to the appropriate
level of management.
Principle 16: Banks must have a system in place for managing problem credits and various
other workout situations.
E. The Role of Supervisors:
Principle 17: Supervisors should require that banks have an effective system in place to identify
measure, monitor and control credit risk as part of an overall approach to risk management.
Supervisors should conduct an independent evaluation of a bank’s strategies, policies, practices
and procedures related to the granting of credit and the ongoing management of the portfolio.
Supervisors should consider setting prudential limits to restrict bank exposures to single
borrowers or groups of connected.

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 CHAPTER: FOUR
CREDIT MANAGEMENT SYSTEM OF
SBL, College Gate, Branch.

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 4.1 WHY DOES SONALI BANK PROVIDE ADVANCES TO THE
BORROWERS?
Basically, SBL provides advances to its customers for the following factors-
1. To earn interest from the borrowers and give the deposits interest back.
2. To accelerate economic development by providing different industrial as well as agricultural
advances.
3. To create employment by providing industrial loans.
4. To pay the employees as well as meeting the interest groups.

4.2 TYPES OF CREDIT IN SBL

Sonali Bank offers the following types of loans and advances:

Secured Overdraft (SOD) Small loan

Cash-Credit (CC) Customer loan
Mid-term loan Industrial loan
Export Credit Bills purchased & discounted
Loan Against Trust Receipts (LTR) Staff loan.
Import Credit House building loan
Working Capital Transport loan
Demand loan

1.Secured Overdraft (SOD): Secured overdraft is a continuous advanced facility. Under this
facility, customers are allowed to overdraw from his current account up to his credit limits
sanctioned by the bank. The interest is charged on the amount withdrawn from the account
only, not on the sanctioned amount. Sonali bank sanctioned SOD against different security.
Based on different types of security, we can divide SOD in the following two categories-

 SOD (General): This type of over draft is allowed to the individuals against financial
obligations i.e. lien of FDR or defense savings certificate, ICB unit certificate etc. This
type of over drafts is allowed against assignment of advance is generally allowed for a
specific purpose. It is not a continuous loan.
 SOD (Export): This type of over draft is allowed to purchasing foreign currency to make
payment against L/Cs where the exporter cannot materialize before the date of import
payment.

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2. Cash Credit (CC): Cash Credit (CC) is an arrangement by which a banker allows his customer
to borrow money up to a certain limit for meeting the working capital requirements of existing
industries. It is operated like overdraft account. The borrower withdraws cash from his/her CC
account and depositing money, he can adjust his loan account Sonali Bank charges interest on
the daily balance basis in the account. Depending on charging security there are two forms of
cash credit-
 1. Cash credit (Hypothecation): Hypothecation is a legal transaction whereby goods are
made available to the lending banker as security for a debt without transferring
possession of goods. Since the goods always remain in the physical possession of the
borrower, there is much risk to the bank. So, in sanctioning CC, additional security
(Collateral) is obtained.
 2. Cash Credit (pledge): Pledge is the bailment of goods as security for payment of a
debt or performance of a promise. In a contract of pledge, the borrower (pledge) must
deliver the goods pledged to the pledge (Pawnee) either actually or constructively.
3. Mid-term Loan: Considering the capital structure, constitution and liquidity requirement,
Sonali Bank allows short-term loans. Mid –term loans are sanctioned for the period more than
one year and up to five years. Both modern banks have state lending a safe proportion of their
demand and time liabilities for fairly long periods to house building, industrial, agricultural,
transport and many other sectors. Such loans are repayable by installments over a number of
years ranging from 2 to 12 (Agricultural loans ranging from 6 to 15 months), as far as, nature
and conduct are concerned.
4. Working Capital: Loans allowed to the manufacturing units to meet their working capital
requirements irrespective of their size, big, medium or small, fall under the category. These
usually take the character of continuing credit.
5. Import Credit: Loan Against Imported Merchandise (LIM): Bank provides loan against
imported merchandise to the importer in case of failure of the importer to pay. The importer
will bear all the expenses inherent to the goods imported. Bank keeps hold of the ownership of
the goods.
6. Loan against Trust Receipts (LTR): Advances against a trust receipt are allowed when the
documents covering an import shipment are given without prior payment. This type of facility is
generally given to the reliable clients. Goods are handed over to the importer with the
arrangement that sale proceeds will be deposited to liquidate their advances within a given
period.
7. Export Credit: Export credit is a type of financing to a variety of parties of the bank that is
required to facilitate export. Export financing is mainly of two types:

 Pre-shipment credit
 Post shipment credit

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Pre-shipment Credit facilities are essentially a short form credit, which is to be liquidated by
purchasing of export bill covering the particular shipment. Generally, the pre-shipment credit
takes the following forms:

 Packing Credit is generally a short-term advance granted by the bank to an exporter for
supporting him to buy, process, and pack and ship the goods. This credit facility is
allowed by way of cash credit with or without any security.
 Back to back Credit is a secondary credit opened by the advising bank in favor of a
domestic supplier on behalf of the beneficiary of the original foreign L/C. Generally, the
post shipment credit takes the following forms:
 Negotiation of documents.
 Purchase of foreign bill.
8. Demand Loan: This is the fixed type of lending in its original form. The entire amount is paid
to the debtor at one time, either in cash or by transfer to his saving account. On subsequent
debit is ordinarily allowed except by way of interest, incidental charges, insurance premium,
expense incurred for the protection of security etc. A separate ledger id used for the
maintenance of this account and as no subsequent withdrawal is allowed, no check is issued
into this account.
9. Small Loan: It refers to the lending allowed to small traders; cottage industries, small- scale
industries and self-employed persons. The maximum ceiling for this loan is at present is
tk.5,000.00 for small traders and self-employed persons, tk.200,000.00 for cottage industries
and small-scale industries. Such loans are generally productive/development oriented rather
than security oriented & this is the way of emphasis in these cases is on the purpose of the
advance as well as skill reputation capacity of the borrower. The security requirements are
substituted the end-use and frequent supervision of the credit.
10. Staff Loan: Staffs of Sonali Bank are provided with “Staff Loans” for buying motorcycles and
bicycles, for wedding of their sons or daughter etc. Bank provides this advance facility under
installment system. The amount of loan is recovered from their monthly salary.
11. House Building Loans: Sonali Bank provides long term advances for building residential
house. Advances for construction of residential houses against real estate as primary securities
as allowed by banks up to tk.5.00 lacks per party (including cost of land) minus any loan taken
from HBFC for this purpose. The rate of interest for “house Building Loans” is 16% per annum
and maximum repayment period is 12 years. In such cases, parties have to pay down payment
of 30% of the total amount and rest of the amount should be repaid within 2 years.
12. Purchase & Discount of Bills: Sonali bank normally purchase demand bills of exchange that
are called “Drafts” accompanied by documents of title to goods such as Bill of Lading, Railway
or Truck receipt. It is a special kind of advance. Sonali bank purchases “Bills of Exchange” that

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would be matured after a certain period and not payable on demand or sight. This is termed as
discounting a bill and the charge recovered by Bank for this is called “Discount”.
13. Consumer Loans: The main purpose of the scheme is to improve life standard of the
consumers by providing them loans for purchasing house hold items, for example, computer,
television, freeze, motor car & cycle, air- condition & cooler, furniture etc. Various commercial
banks offering various types of loans to the consumer so that they can enjoy these innovations
and fixed a very easy installment process to repay that money. Sonali Bank is offering loan
calling Consumer Credit scheme in various types of goods.
14. Transport Loan: Genuine transport businessmen are allowed advances for “Power-Driven
Vehicles” (PDV) including water crafts against hypothecation at 30% margin and suitable
guarantee from persons and sufficient collateral. In case of acceptance of mortgage, the
minimum margin may be reduced up to 10%. These loans should be repayable within maximum
period of two years, which is subject to renewal with approval from head office.
15. Bank Guarantee: A bank guarantee is an irrevocable undertaking to a third party by a bank
on behalf of his customer to pay if the customer fails to meet the certain contractual obligation.
Banks get commission from issuing guarantee. The person who gives the guarantee is called the
‘surety’. The person in respect of whose default the guarantee is given is called ‘the principal
debtor’ and the person to whom the guarantee is given is called the ‘creditor’. In case of bank
guarantee, the bank is ‘surety’ and customer are ‘principal debtor’. It is a contingent liability i.e.
depends on the happening of a certain event. Sonali Bank Ltd., Court Building Branch, Comilla
issues different types of guarantee as stated below:
 1. Tender or Bid Bond Guarantee: The bank issues bid bond guarantee on behalf of the
customer favoring the beneficiary (third party which has requested the bid) to submit
the tender schedule by the customer.
 2. Performance or Earnest Money Guarantee: In case of a performance guarantee the
banker commits that it will pay a certain sum of money if the bidder fails to perform the
contractual job. A performance guarantee expires on completion of the delivery or
performance.
 3. Repayment or Advanced Payment Guarantee (APG): This type of guarantee is given
against work order. Here we can cite an example. Before the beginning of Jamuna
Bridge construction, the government collected money from different sources to pay the
contractors in advance. But there was a risk for the government that the contractors
might not do their construction work even they were paid in advance. So the
government asked bank guarantee from them. Then the contractors submitted bank
guarantee to the government. This type of guarantee is called Advanced Payment
Guarantee (APG). This type of guarantee is given against work order.
 4. Counter Guarantee: Counter guarantee is issued against another bank’s guarantee.
 5. Security Guarantee: This type of guarantee is given when security is required.

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  6. Issuance Procedure of Guarantee: Bank guarantee is a contractual relationship
between the account (Client) and the beneficiary. For issuing bank Guarantee, a
customer has to apply to Sonali Bank in his or her own pad. Normally the bank prepares
the format of the guarantee. A Guarantee Issue Register is maintained to record
following information about guarantee:
 Name of the customer.
 Account no.
 Guarantee no.
 Issuing date.
 Date of approval.
 Beneficiary of the guarantee.
 Amount of guarantee.
 Margin (percent and amount).
 Commission.
 Date of Expiry.

4.3 LENDING INTERESTS OF SBL

Name of Scheme Rate of Interest (%)
Special HBL 15%
Loan General 15%
Loan against HB 15%
Consumer finance scheme 15%
Project loan 15%
Small business loan scheme 17%
House renovation LS 17%
Export finance 15.5%
Import finance 15.5%
Lease finance 15%
Personal loan scheme 17%
SOD general 15.5%
SOD fin. Obligation 15.5%
CC(Hyp) 15.5%
Festival SBL 15.5%
Staff car loan At bank rate, minimum 8%
Loan against provident fund Do
LDBP 15.5%
All other commercial lending 15%

Sonali bank Ltd. gives advances to its potential clients by following the above-mentioned
interest rates.

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 4.4 CREDIT POLICY OF SBL
A credit policy includes all rules relating to loans and advances made by the bank to the
borrowers. It includes types of credit extended by banks, method of judging the credit
worthiness of borrowers, the collateral or securities that are accepted by the banks and so on.
These policy guidelines refer to all credit facilities extended to customers including placement
of funds on the interbank market or other transactions with financial institutions. Although,
unlike other commercial banks, there is no prescribed and published manual or policy
guidelines regarding credit management in SBL, it follows some rules which are very necessary
for credit management. All credit extension of the bank must comply with the requirements of
the Bank Companies Act 1991 and Bangladesh Bank instructions as amended from time to time.

1. Approach to the Bank:

When a borrower approaches to SBL for a loan s/he is required to fulfill the following criteria-
 S/he has to be a client of this bank.
 S/he needs to apply properly describing the purpose of the loan amount needed and
his/her capability of repayment.
After receiving the application from the client, the branch manager scans the papers and
decides if s/he will be allowed for an advance or not. For these reasons’ manager goes through
the following process.
2. Borrower Selection:
In borrower selection emphasis is given firstly on 3Ms, which are
 Man: The manager has to study the man applied for an advance. For this s/he gathers
information about the applicant’s character, credit worthiness and social status. To
judge the credit worthiness of borrowers SBL follows some basic principles of lending.
These are safety, liquidity, diversification, profitability, suitability, integrity, reliability
etc. The manager can obtain information from Branch Records, Credit Information
Bureau (CIB) of Bangladesh Bank, Personal interviews with the client, Credit Report,
Market Information, Financial Statements (Balance sheet, income statement) etc.
 Management: Management is the heart of the business concern. So a careful judgment
has to be made about it. It is sought if there are enough experts and technical knowhow
in the management of the firm. Management’s integrity is also need to be evaluated.
 Money: If management is heart of the business concern, money is blood, which is
another vital factor to survive. A credit manager needs to analyze the debt- equity ratio

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 of the firm. S/he also needs to be sure if there are sufficient assets to recover the
advance.
3.Financial Data Analysis: Secondly, the credit manager has to compare financial statements of
at least three years. For this s/he takes help of different ratios such as liquidity ratio, solvency
ratio, profitability ratio and activity ratio. S/he also needs to examine bank account statement
of the applicant very keenly. In addition to analysis, the manager should visit the business
concern to get a true picture of it.

a. Industry Analysis: In this part, the manager is required to study the business behavior, which
includes market demand, competitors and government barriers.
b. Lending Risk Analysis: It is a systematic and structural way to assess lending risk, which
covers all the factors described above. Here a form has to be completed by the lending officer.
If lending risk is found to be low, financing can be done and vice versa.
If the applicant is found to be OK after going through all the above process, the branch manager
sends it with other necessary papers to the credit division of the Head Office with his/her own
recommendation. The credit division after appraisal, sends it to the Board (in the case of
amount more than 10 lac) or to the credit committee. The credit committee consists of
Managing Director, one General Manager and one Deputy General Manager from International
Division. If the Board/ Credit Committee agree, the proposal is accepted and is sent back to the
credit division. The credit division informs it the branch manager. Following this the branch
manager, maintaining other law and regulation sends a sanctioning letter to the applicant.
4. Security & Facility Offer Letter (FOL)
1. Preparation of facility offer letter.
2. Processing security offer letter.
3. Preparation and dispatch of security documents.
4. Charge creation of registrar of joint stock companies.
5. Creation of legal equitable mortgage of loan.
6. Co-ordinate legal matters with lawyers.
7. Attending customer queries regarding FOL.
8. Issuance of Bank certificate.
9. Coordinate search and inspection report.
10. Responding to auditors of customers.
11. Renewal of hold letters.

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12. Cancellation of facilities.
13. Circulation security tracking list to senior management on a monthly basis after having RM s
comments.
14. Update and monitor one off facilities of trade services.
5. Preparation and Dispatch of Facility Offer Letter:

1. Receive approval for CARM (Credit and Risk Management) application through lotus notes.

2. Review the approval terms of CRM.

3. Check whether the facilities are in line with Bangladesh Bank and banking companies act directives.

4. Check the CIB (Credit Information Bureau) report from Bangladesh Bank, Memorandum of articles &
association and search report.

5. Prepare FOL in standard format as per set up service level agreement (SLA).

6. Hand over the draft FOL to the respective RM (Relationship Manager) for checking amendment and
conformation.

7. Discuss with RM regarding different issues of the FOL.

8. Finalize the FOL.

9. Mail the FOL along with security papers to the client for their signing.

10. Receive the duplicate FOL duly signed by the as an indication of the acceptance of the letter.

11. Update SLA tracking, security -tracking list.

12. Review fees will be finalized according to the FOL terms.

6. Issuance of Bank Certificate:

1. Receive request from customer or from the auditor issuance of Bank's certificate.
2. Verify the signature.
3. Prepare the certificate as the standard format.
4. Realizes charges and VAT.
5. Take signature from the authorized signatories of the bank.
6. Keep a copy of the certificate in credit file.
7. Cancellation of Facilities:

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1. Check the CARM approval for cancellation of facility.
2. Send lotus notes to related departments and RM for “no claim” confirmation.
3. Upon recipient confirmation from concern departments, delete securities, limits & pre facility
from SBL.
4. Prepare memorandum of satisfaction for vacation of Charges.
5. Advise lawyer for preparing the Deed of Redemption for mortgage.
6. Cancel the securities and transfer them to central store.

8. Loan Disbursement:

1. Receive customers request letter and verify the signature.

2. Check FOL for terms and condition.

3. Check the invoices.

4. Process the loan.

5. Disburse the loan through A5 debit/Credit vouchers.

6. Send the customers advice through courier.

7. File the documents after final checking.

9. Loan Rollover:

1. Review customers request letter and verify the signature.

2. Check FOL for terms and conditions.

3. Process the rollover.

4. File the documents after final checking in credit file.

10. Loan Repayment:

1. Receive customer's request letter verify the signature.

2. Check FOL for terms and conditions.

3. Cross the letter with red ink and write “entry passed on”.

4. Process the repayment through A5 debit/credit.

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5. File the documents after final checking in repayment file

4.5 CREDIT PROPOSAL AND SANCTION PROCESS OF SBL

The total process of proposal and sanction is a continuous process. In a particular stage the
describe loan is sanctioned or rejected by the authority. The total process consists maximum of
6 steps:

Step-1: The client applies for a certain amount of loan in a prescribed form which is available in
the branch office. He has to mention the amount; the purpose, the mortgage property that he
can assure and the time when he wishes to enjoy the amount.

Step-2: The branch manager and the cashier then take the responsibility to visit and evaluate
the concern. They have to prepare a credit report mentioning the present condition, assets and
liabilities ratio, and reputation along with the origin of the concern. He should be some
recommendation about the dependency of the firm.

Step-3: Then the credit report is forwarded to the original office for approval. In the regional
office two dealing officer under the direct supervision of AGM made some other
recommendations by considering the credit report and direct investigation. Then they will
justify the net worth of the concern and its economic position. Here if the amount is with the
ability of the regional head (AGM) he can sanction the loan. Otherwise the proposal file will be
forwarded to the principal office. If the dealing officers found something dissatisfied, they can
reject the proposal.

Step-4: The head of the corporate branch (DGM) can sanction a certain level of amount greater
than the regional office. Here the file is strictly observed by the dealing officers under the direct
supervision of DGM. He may sanction the mentioned amount or reject for the logical cause or
send to the GM office or Head office for the further consideration.

Step-5: After reviewing every aspect of the loan proposal the GM can approve the proposal up
to certain level. He may reject or send the file to the managing director for the directors’
approval. Here it may be sanctioned or rejected.

Step-6: After the approval of the proposal in any of the stage region to the board of directors.
Bank send the proposal file along with the necessary papers of the mortgage and to verify the
validity of the ownership of the property for a little dissatisfaction of the solicitor the proposal
may be rejected. Otherwise he will request the bank to disburse the amount.

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 4.6 TOOLS FOR APPRAISAL CREDIT OF SBL
In order to secure a balance between liquidity, profitability and security, Sonali Bank uses the
following tools for appraisal its credit -

 1.Liquidity: Liquidity means enchasing ability of security i.e. securities that are more
easily cashable are more liquid. So, while SBL is lending money to any project or
industry, adequate care has to be taken so that the liquidity is not compromised. That’s
why Sonali bank chooses such securities which possess sufficient liquidity.
 2. Safety: While lending depositors’ money, there should be guarantee of returning the
funds. Sonali Bank exercises the lending function only when it is safe and that the risk
factors are adequately mitigated and covered. Safety depends upon-
a) The security offered by the borrower.
b) The repaying capacity and willingness of the debtor to repay the loan with interest.

 3.Diversity: There is a proverb “Don’t put all the eggs in a basket”. Keeping the proverb
in mind, Sonali bank invests its funds in different types of securities of different
industries situated in different regions of the country.
 4. Viability: Financial assistance is granted only to those entities whose operations have
been evaluated as technically, commercially and financially visible. For this purpose, the
Bank requires the use of screening processes with strict pass-fail criteria, as well as a
scoring system to determine relative risks for the purpose of pricing and subsequent
guidance in the management of loan accounts.
 5. Creditworthiness: In addition, applications for financial assistance are granted only
when the entities and their principal proponents/management teams are deemed
credit-worthy (demonstrated by past repayment performance with the Bank or other
financial institutions, capability to absorb debt repayments from sources external to the
main business being applied for, and general credit consciousness and responsibility).
 6. Sufficiency: No funded or non-funded credit exposures may be granted unless it is
sufficient, together with the owners’ equity, to fully finance the proposed project or
business requirements.
 7. Yield: In order to survive and develop, each bank has to make profit. From the
commercial point of view, Sonali bank considers sufficient yield or return while financing
a project.

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We often use loans and advances as an alternative to each other. But academically this concept
is incorrect. Academically advance is the combination of such items where loan is a part of
advance only. For this credit section of the bank is known as advance section. Academically
advance is the combined form of the following items:

 Types of advances provide by the branch.

 Types of security charged and their valuation.
 Procedures of loan appraisal.
 Documentation.
 Classification of loan.
 Analysis of secondary data.
 Follow up and reporting.

4.7 CREDIT PROPOSAL PROCEDURE IN SBL

Customers come to the Credit Division of the Bank to take loans. Knowing the category of
the loans and the requirements they supply the necessary papers and information. Credit
committee takes that information form credit office and disposes it to the Head office credit
committee. The executive committee takes the decision by the prior decision of the board
of directors whether the load will be sanctioned or not. The decision transferred to the
branch office with the results

4.8 CREDIT ADMINISTRATIONS OF SBL

The board of directors being at the highest level of organization structure plays an important
role on the credit administration. The board of directors is not directly concerned with the day
to day operation of the bank. The board has delegated the authority to the managing director.
The Head Office credit committee and other assigned credit officers under the guidance of the
managing director approve, direct, monitor and review lending operations throughout the bank
and ensure that the credit policies are adhered to and the credit operation is conducted in an
effective way. In order to ensure the effective credit portfolio, the board, in turn, monitors the
credit department and ensures placement of qualified officials who have got the right aptitude,
formal training in finance, risk analysis, bank credit procedures as well as required experience.

4.9 CREDIT RESTRICTION IMPOSED BY CENTRAL BANK

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 At the time of sanctioning loan, the commercial banks must have to follow the restrictions that
are imposed by the Bangladesh Bank from time to time.
1. General Strategies:

 The bank shall provide suitable credit services and products for the market it operates.
 Credit will be allowed in manners, which will in no way compromise the Banks standards
of excellence and to customers who will complement such standards.
 Loans and advances shall normally be financed from customer’s deposits and not out of
short-term temporary funds or borrowing from other banks.
 All credit extensions must comply with the requirement of Bank companies Act-1991
and Bangladesh Banks instructions as may be amended time to time.

2. Direct facilitates:

 Term Loan
 Continuous loan
 Demand loan
3. Term Loan:
Short term industrial loan, midterm industrial loan, and long-term industrial loan,

 Transport loan
 House building loan
 Loan against FDR
4. Short /mid/long term industrial loan:
By industrial credit we mean financing of industrial enterprise in the form of term loan. This
may be categorized as follows:

 Short term industrial finance: Term of the loan is equal or less than one year.
 Midterm industrial finance: Term of the loan is up to 5 years.
 Long term industrial finance: Term of the loan is more than 5 years.
An industrial finance is allowed for the purpose:

 To set up a manufacturing facility

 To finance for BMRE where B means for balancing, M for modernization, R means for
replacement and E for expansion.
 Purchasing of adequate inventories comprising of raw materials, stock in process and
finished goods and extending credit to their customers.

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5. Transport loan:
Any finance, which is given against hypothecation of vehicles like trucks, buses, marine vessel
etc., is termed as transport loan. Advance under transport sector may be allowed for the
following purposes:

 Purchase of imported/local assembled Buses, Minibuses, trucks etc.

 Import if reconditioned buses is subject to import regulations.
 Construction of purchase of water vessels passengers & cargo vessels locally built.

6. House building loan:

House building loan means loans that are given for construction of buildings or structures to be
used not for residential accommodations of the borrower' but for commercial utilization like
renting or sale after the construction.

7. Loan against FDR:

This kind of loan is allowed by marking lien or creating charge against FDR or another financial
instrument.

8. Continuous Credit (as working capital finance):

 SOD (secured overdrafts) against easily en Cashable securities.

 Overdrafts
 SOD (secured overdrafts) against work orders
 Cash credit
 Cash credit (Hypo)
 Cash credit (Pledge)
 Overdrafts
 SOD against FDR

4.10 APPROACHES FOR SAFETY OF CREDIT IN SBL

Safety of loans is directly related to-
 The basis on which decision is taken to lend.
 Type and quantum of credit to be provided.
 Terms and conditions of the credit.

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11.1) Pre-Sanction Appraisal: It is concerned with measurement of risk of a loan proposal to
determine the ‘bankability’ of each loan proposal.
Requirements are:

 Financial data of past and projected working results.

 Detailed credit report is compiled on the borrower / surety.
 Market reports.
 Final / audited accounts.
 Income tax and other tax returns / assessments.
 Confidential reports from other banks and financial institutions.
 Credit Report (CR) needs to be regularly updated.
 Appraisal should reveal whether a loan proposal is a fair banking risk.

11.2) Post-Sanction Control: It depend at large extent upon findings of pre-sanction appraisal to ensure
proper documentation, follow-up and supervision.

Requirements are:

 Documentation of the facility and ‘after care’ follow- up

 Supervision through monitoring of transactions in loan amount
 Scrutiny of periodical statements submitted by the borrower
 Physical inspection of securities and books of accounts of the borrower
 Periodical reviews etc.
SBL follows the following securities and protective measures when it intends to lend fund to its
clients:

 In general, all forms of financial assistance are extended on a fully-secured basis, where
coverage of the Bank’s exposure by acceptable tangible assets is not at any time be less
than 1.5 times the principal exposure. Exceptions to this policy may be granted only-
 In cases where loan products are designed to be unsecured or
 By the Board of Directors upon the recommendation.
b) As a matter of principle, the Bank do not participate in credit transactions where it have an
inferior security position compared to any other pre-existing or proposed new lenders.

c) In the case of private limited companies, all the directors must execute a joint and several
deed of guarantee towards the performance of the terms and conditions of loan and other
credit facilities.

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d) The Bank requires that its security is fully protected against risk whenever applicable (e.g.,
fire, riot, strike) by a duly-accredited insurance firm, Furthermore, such risk coverage is always
in force until all the obligations are fully discharged.

e) Regular inspections (i.e., monthly, quarterly, half-yearly, and yearly) are to be conducted as
to the general state of the securities.

4.11 OVERALL INDUSTRIAL CREDIT POSITION OF THE BANK

SL No. Nature of Loan No. of Amount Amount Outstanding

Units sanctioned recovered
1. Large & Medium 698 3811.31 1050.55 2646.66
2. Small & Cottage 21152 675.02 648.62 158.70
3. W.C to industries 1298 1421.32 851.49 2474.92
Total: 23148 5907.65 2550.66 5280.28

4.12 RECOVERY OF ADVANCE OF SBL

Sonali Bank’s profitability and sustainability mostly depends on the recovery of its outstanding
amount. Outstanding amount includes both principal and interest because, 80% of bank’s
earnings comes from advances. A poor recovery rate indicates the weak condition of the
banking operation and vice versa.
13.1. Recovery Procedure:
Recovery procedure is a lengthy one that requires efforts of the bank, society and legal
institutions. It also takes time and money. Like other banks, RB Bank follows four steps to
recover the outstanding amount. This are-
 Reminders to the clients
 Creating social pressures
 Sending legal notice and
 Legal action
13.2. Recovery Rate:

Year Recovery Rate

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 2012 4.82%
2011 4.95%
2010 4.80
2009 4.75

4.13 LOAN DEFAULT IN SBL

Along with this specialized bank, Sonali Bank, being the biggest state-owned scheduled bank of
Bangladesh, demonstrated all out failure to recover arrears and now become notorious for
biggest bank scandal of Bangladesh – “Hallmark scandal”. It succeeded in collection of only 4
crore 87 lac taka from 20 leading loan-defaulters which was only 4.20 percent of the target as it
was fixed to 116 crore takas. For such a failure to recover, Bangladesh Bank just warned under
MOE in a meeting with the executive of Sonali Bank recently held. From the meeting with BB, it
was discovered that Sonali Bank authority tried to hide the total information regarding the
default of loan. Worth of default loan of the bank has been peaked to 1 thousand 313 crore
taka which is 39.35%. Sonali Bank neither recovered arrears from Hallmark group, the biggest
scandal of the bank, which lead the bank in loss motion, nor did it minimize the management
cost thus to make up the loss, lead the bank constant loss. In 2012, spending more 820-crore
taka compared to 2011, the management cost of Sonali Bank was 1 thousand 902 crores in
2012, breaking down the backbone of the bank, although it closed 11 branches, some argues it
is a shame to the bank management.

4.14 REASONS OF LOAN DEFAULT IN SBL

A borrower can default for many intentional and unintentional reasons. There has been a mal
practice of loan defaulting since the mid-80s. This creates a great threat to the financial
institutions.
Location of Main Risk Elements and Reasons of Loan Default in SBL:
There may be hundreds of reasons for loan default of SBL out of which following are the prominent
causes-

 Sick Management: Sick Management means lack of integrity, co-operation, financial/

marketing knowledge and experience, endurance and judgment

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  Sick Marketing: It means lack of freedom, no restriction, openness (no monopoly),
depth, growth and stability.
 Sick Product: Sick product means lack of quality, competitiveness, demand and
durability.
 Sick Operation: It indicates lack of efficient machineries, skilled labor, good labor
relation, utilities, raw materials, access to transport etc.
 Sick Finance: It is lack of fund, repayment period, flexible rate of interest, matching to
assets, collateral, efficient capital market etc.
 Other reasons: They include lack of reputation, analysis of balance sheet, Lending risk
analysis, adequate margin, past satisfactory performance, credit need analysis, good
relation with other banks, credit information bureau report, other bank report, quality
of security offered, demand etc.

CHAPTER: FIVE
ANALYSIS AND CALCULATION OF
LOAN AND DISBURSEMENT
MANAGEMENT

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 PART ONE
FACTORS CONSIDERED IN LOAN SANCTIONING
5.1 Factors Considered to Reduce bank’s Credit risk:

Ris
k

Safet Liquidit Purpos Profitabilit Diversificati

y y e y on

Nation 6 Securit Othe

al C’s y r

Person Primary Pledg Hypothecati Mortgage

al And e on s

Figure 1: Factors to be consider in loan sanctioning

5.1.1 RISK:
A major part of the bank in come comes from the loan and advances. Credit risk is the risk of
losing money when loan defaults. If credit risk becomes too high then bank faces crisis. So, to
reduce the credit risk and also to protect the bank and country’s interest rate, in the time of
sanctioning loans NCC bank considers several factors. These are the followings:

 Safety: The survival of a bank depends on safety. Bank must not never be sacrificed the
safety. Extreme care should be taken that the fund lent out are not subject to any risk of
being lost. The bankers have to ensure in the best possible manner that the money
advanced by him goes to the right type of borrowers. And it should utilize such a way
that it will not only be safe at the time of lending but will remain so throughout the
maturity period.
 Liquidity: The liquidity of an advance means its repayment on demand or on due date or
after a short notice, the loan must stand fair chances or repayment according to the

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 repayment schedule. It is utmost important that bank loan must be repaid as they
become due otherwise the liquidity position of the bank is endangered.
 Purpose: Credit department has to concern about the disbursement amount providing
to the client whether utilize it in respective project or not because repayment is made
from this source. The purpose for which lending is made should be productive as to
ensure definite source or repayment. Banks discourage advances for investing in stocks
or for speculative activities.
 Profitability: Profit is the main purpose of any organization. Without making profit,
organization cannot run their business except non-profit organization. In bank advances
profitability is equally important as the other factors. Like other commercial institutions,
banks must make profit. Firstly, they have to pay interest on the deposits received by
bank.
 Diversification: Another important principle of good lending is the diversification of
advances. An element of risk is always present in every advance; however secure it
might appear to be. In fact, the entire banking business is one of taking calculated risks
and a successful banker is an expert in assessing such risks, he is keen on spreading the
risks involved in lending over a large number of borrowers, over a large number of
industries and areas, and over differentiae’s securities.
 National interest: Even when an advance satisfies all the aforesaid principle it may still
not be suitable. The advance may run counter to national interest. These principles may
have to be relegated to a certain extent. So as to fit in the overall national development
plans necessary flow of credit to priority sectors in the larger national interest.
Suitability of an advance from national viewpoints has, therefore, come to be regarded
as a basic principle of lending.
 Security: Financing loan is the key investment for bank with keeping collateral as
security. As a result, bank has to concern when loan is disbursed and consider the
security as bank financial performance based on that. Security creates an obligation on
the borrower to make the payment on time. Sometimes bank wants some tangible
security from which he can obtain repayment in case the borrower is unable to meet his
obligations. Without taking such security the business of money lending would be too
speculative. Security is considered as insurance or a cushion to fall back in case of
emergency
 Personal Security: In all advances the banker has a right if action against the borrower
personally. Still then bank takes demand promissory notes from the borrower.
Sometimes the banker in addition to borrower’s personal security obtains guarantee
from a respectable third party as personal security. These securities may be termed as
personal security.
 Primary and collateral Security: Primary security is that security which is regarded as
the primes cover for an advance and ordinary is tendered by the borrower himself. The
term’s collateral security is applied to security tendered by the first party or third party
to secure as advance.

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 5.2 THE COMMON METHODS OF CHARGING SECURITY ARE
 Pledge:
When goods are bailed as security against advance of performance of a promise then it
is called pledge. Ownership remains with the pledge and profession lies with the pledge
that acquires and special priority and lien so long his loan is not repaid.
 Hypothecation:
It creates a charge on property or goods for the amount of the debt. The owner retains
his ownership as well as possession. But in case of default bank will be the legal owner
of the goods.
 Mortgages:
Transfer of an interest in specific immovable property for the purpose of securing the
payment of money advanced or to be advanced by way of loan, existing or future debt,
and the performance which may give rise to a pecuniary liability. Usually there are two
types of mortgage such as registered mortgage & equitable mortgage.
 Assignment:
An assignment means transfer of right, property or debt or to make it over to another
person. It is same as mortgage with the difference that in mortgage there is always a
right of redemption but in the assignment, it is provided by a separate agreement.
Assignment relates to actionable claims. Actionable is a claim to any debt other than a
debt secured by mortgage of immovable property or by Hypothecation or pledge of
movable assets.
 Lien:
Lien is a right to retain goods/ properties belonging to the debtor given to the creditor
as security until he has discharged the debt due. Lien entitles the retainer to only retain
the goods. He cannot sell the goods in the absence of a contract to the contrary.
 Set off:
Right of set is the right of debtor to the total or partial of a claim of a creditor against
him in his counter claim against the latter. It is the combining of accounts between a
debtor & a creditor so as to arrive at the net balance payable to one or the other. The
right of set off enables a banker to adjust wholly or partly, a debit balance in a
customer’s account with any balance lying at his credit in any other account.
 Guarantee:
Guarantees are obtained from third parties to secure advances under different
situations such as in case of clean advances which is subject to credit restrictions. Or in
case of advances to a partnership firm, limited company, advances where collateral
security in the form of real estate/ FDR BSPs are owned by third person etc.
 Insurance:
Insurance is a written and definite contract between two parties under which one party
pays the other party, the insurer, a definite sum of money called premium in

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 consideration of which the insurer agrees to indemnify the losses, under agreed terms
and conditions.

PART: TWO
ANALYSIS, DISCUSSION AND FINDINGS
Analysis is the most crucial part of a report. Quantitative analysis has been done in this report.
This analysis will give an idea about the credit performance of Sonali Bank Limited.
Included quantities analysis will be: Time Series Analysis, Ratio Analysis, and Comparative
Analysis.

5.3 PERFORMANCE OF LOAN & CASH CREDITS OVERDRAFT OF

2016 COMPARED WITH 2017-

Particulars Year 2016 (Tk.) Year 2017 (Tk.)

Loans 21,474,615 27,005,479
Cash credit 68,76,360 68,76,360
Overdraft 71,84,950 71,84,950
Loan against merchandise 23,76,998 26,79,670
Packing credit 21,50,007 95,34,276
Loan against trust receipts 83,16,923 32,17,959
Agriculture credit 32,69,130 54,58,859
Payments against document 215,610 857,841
Consumers loan scheme 36,05,897 25,65,715
Lease finance 20,78,568 23,27,900
Margin finance 94,16,736 72,28,576
Others 879,890 512,936
Total 22,570,115 28,376,256

Table 1: Performance of Loan & Cash Credits Over Draft Comparison (2016-17)

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Findings: Here cash credit, loan against trust receipt, payment against document, consumer
loan scheme, lease finance, margin finance, was increasing by comparing with previous year.
Others are decreased.
Total amount of Loan increased by Tk. 28,376,256 from the year of 2017.

5.4 PERFORMANCE OF INDUSTRIAL ADVANCES OF 2016

COMPARISON WITH 2017

Industrial Advance Year 2017(Tk.) Year 2016 (Tk.)

Agriculture 62,470,000 79,626,017

Jute 12,36,600 21,21,395
Textile 21,87,837 71,49,501
Readymade garments 1,51,827 2,90,337
Steel & engineering 11,13,848 12,89,525
Ship Scraping 1,006,293 1,398,133
Edible oil 2,78,239 1,12,775
Cements 11,21,854 29,83,899
Food and allied products 28,34,808 21,317,26
Paper & packaging 1,114,037 1,189,259
Construction 50,64,417 85,46,799
Energy & power 1,162,029 2,844,874
Transport& communication 50,457,375 46,386,822
Pharmaceutical 95,51,282 10,991,943
Service industry 69,987,754 5,401,589
others 215,951,07 2,846,534,

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 Total 186,197,488 147,838,637

Table 2: Performance of Industrial Advances of 2017 comparison with 2016

Findings: According to this chart, all the sectors of industrial advances were increasing compare
to previous year except paper and packaging, construction. In industrial sector specially textile,
jute, readymade garments are playing a major role in our national economy. So, by increasing
advance in this sector, Sonali Bank Limited performs well in productive unit in our country
which can help to increase the total GDP.
Total industrial advances increased by Tk 186,197,488 from the year of 2017.

5.5 SECTOR WISE LOAN & ADVANCES:

A wide range of business industries and sectors constitutes the Bank's advance portfolio. Major
sectors where the Bank extended credit include steel & engineering, readymade garments,
textile, ship breaking, edible oil, sugar, housing & construction, pharmaceuticals, chemicals,
electronic & automobiles, energy & power, service industries, trade finance, personal or
consumer credit, leasing etc. The Bank continued to support Small and Medium Enterprises
(SME) and expended credit facilities to them through its SME Cell. Sectorial allocation of
advances reveals a well-diversified portfolio of the Bank with balance exposure in different
sectors.

SL Items 2017 2016 2015 2014 2013

No
Local currency
advances
1 Term Loan 10,267.97 9,369.57 6,072.42 3,660.65 1,069.57
2 SME Financing 2,646.76 549.99 301.47 59.23 294.18
3 Consumer Financing 1,378.09 1,197.71 668.40 142.59 104.48
4 House Building Loan 1,103.81 861.53 805.40 604.08 114.89
5 Trust Receipts 6,127.68 6,156.53 7,610.92 6,465.68 772.97
6 Cash Credit 5,758.85 5,427.70 4,656.65 3,749.20 687.64
7 Secured Overdraft 4,774.98 5,906.17 3,624.78 2,946.37 718.50
8 Lease Finance 196.00 254.55 257.25 251.07 36.45
11 Others Loans & 1,742.83 1,735.82 1,496.81 1,962.69 349.55
Advances

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 Sub-total 38,404.45 33,849.88 28,521.44 22,682.06 4148.23
Foreign 1271.67 34.04 7.90 1.17
Currency Advances
Total 39,676.12 33,883.92 28,529.34 22,683.23
Table 4: Sector wise Loan & Advances

CHAPTER: SIX
FINDINGS, RECOMMENDATIONS AND
CONCLUSION

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 6.1 SUMMARY OF FINDINGS
 The total investment of the bank is growing year by year. And from the current rend it
can be expected that this growth rate will be continued in future.
 The standard loan and advances of Sonali Bank is increasing year by year. And it carries
positive sign for Sonali Bank. It also induces trust ability among its stakeholders.
 The interest income from loan and advances of Sonali Bank Limited is increasing year by
year. This means the bank’s net profit will increase further and it can expand more
widely.
 From the last two years of analysis it has been seen that Sonali Bank was providing more
credit facilities in urban areas than rural areas which encourages governments to be
more sympathetic their causes.
 Total Deposit is increasing which represent the positive sign for the bank as deposits are
increasing than the bank can use more proportion of deposit for loans and advances.
 The recovery rate of Sonali Bank has decreased year by year which means number of
bad debts has increased.
 Day by day non-performing loan of Sonali bank has been decreasing.
 Debt ratio of Sonali bank has been decreasing year by year.
 Capital adequacy ratio was above the standard line which is crucial for any bank.
 Higher rate of interest plays a great role in credit management. Some times the rate is
so high that the return from the investment is not so adequate enough to repay the
loan. And hence default occurs.
 Sonali Bank is providing loan to those who are experienced enough in their respective
field. But this practice is discouraging small entrepreneurs and startups.

6.2 RECOMMENDATIONS
 Sonali Bank was focusing urban areas to provide credit facilities. Still they are ignoring
rural areas. But they can earn from agro sector so Sonali Bank should provide more
credit facilities in rural areas.
 Proper and effective monitoring system should be developed in order to minimize the
amount of non-performing loan.
 Capital adequacy is important for a financial institution. Sonali Bank capital adequacy
ratio was in better position and they should maintain it.
 The bank should strictly follow “The Principle of Sound Lending”. The bank should not
sanction loan to the customer without all necessary documents.
 As we have seen that the bank was providing a large portion in unproductive sector,
which is not a good sign for our economy. So, the bank should pay more concentration
on productive sectors like industrial loan instead of unproductive sector as car loan.

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  As recovery rate from classified loan was in satisfactory level but still 18% of loan goes
default. So Sonali Bank should have to increase more of its recovery rate of classified
loan.
 Sonali Bank should strictly follow the Bangladesh Bank’s guidelines for credit deposit
ratio as its credit deposit ratio was quite higher than Bangladesh Bank’s guidelines.
 The bank should increase more of its investment to deposit ratio as it decreased in year
2013. It should increase in order to generate more profit.
 Sonali Bank should maintain a satisfactory level of interest rate for managing the credit
to minimize the rate of default.

6.3 CONCLUSION
Proper financial system of country can contribute towards the development of the country’s
economy. In our country banks are leading in the financial system. Again, private commercial
banks, which are much better than state owned bank, are playing significant as well as
imperative role and the development of our country. Certainly, Sonali Bank is mobilizing all of
its resources on this same track to achieve maximum possible contribution to the nation.
Despite stiff competition among banks operating in Bangladesh both foreign and local, Sonali
Bank limited has achieved satisfactory progress in areas of its operations and earned an
impressive operating income over the previous years. The bank hopes to achieve a satisfactory
level of progress in all areas of its operations including target of profitability. In achieving the
aforesaid objectives of the bank, credit operation is of paramount importance as the greatest
share of total revenue of the bank is generated from it, maximum risk is centered in it and even
the very existence of bank depends on prudent management of its credit portfolio. The writer
would like to suggest, a bank requires some special personal traits that not every bank
possesses. Among the most important of these are honesty, reliability, thoroughness and
willingness to always be open to new ideas and new ways of meeting customer needs. Today is
not like yesterday and tomorrow will be different from today. Given the fast changing, dynamic
global economy and the increasing pressure of globalization, liberalization, consolidation and
disintermediation, it is essential that Sonali Bank limited has a robust credit risk management
policies and procedures that are sensitive to these changes.

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 BIBLIOGRAPHY
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