Overall Risk Management

A report
On
Risks Management of Agrani Bank
Ltd
Submitted to
Department of Finance
University of Dhaka
Supervised by
Hussain Ahmed Enamul Huda
Lecturer
University of Dhaka
Submitted by
Md. Mostafa Kamal
ID- 16-058; Section: B (16th Batch)
University of Dhaka
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Date of submisssion: 22 May, 2014.
Letter of Transmittal
22 May, 2014
To: Mr Hussain Ahmed Enamul Huda
Lecturer
University Of Dhaka
Subject: Submission of internship report.
Dear Sir,
With profound reference towards the dignity of yours, I put forward my
internship report on Risks Management of Agrani Bank Limited. I
hereby submitthe internship report on Agrani Bank Limited as a requirement
of internship program of undergraduate degree in Department of Finance,
University of Dhaka. I will try my best to keep the genuineness and originality
of my internship report. Your further guidance will lead me to conduct the
analyses required for the completion of the whole report on my own. I would
like to express my profound gratitude for your kind and conscious guidance
in preparing my report in the given time.
In preparing this report I tried my best to follow the guidelines
provided to me by academic and organization supervisor. I have my sincere
efforts to make it an informative and analytical study while preparing this
report. I sincerely hope this report will live up to your expectations.
Sincerely Yours,
.
Md. Mostafa Kamal
ID- 16-058
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Section: B (16th Batch)

University of Dhaka
Letter of Endorsement
This is to certify that the internship report on Risks Management of Agrani Bank Limited is
done by Md. Mostafa Kamal, (ID-16-058) as a partial fulfilment of the requirement of Bachelor
of Business Administration (BBA) degree from the Department of Finance, University of Dhaka.
I have gone through the report and found it to be written by him.
This report has been prepared under my guidance and supervision. This report is a record of the
bonafide work carried out successfully.
Signature
..
Hussain Ahmed Enamul Huda
Lecturer
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University of Dhaka.
Acknowledgement
The successful completion of this internship report is the consequence of the contribution of
number of people, particularly those who have provided the time and effort to share their
thoughts and propositions to improve the report. At the commencement, I would like to pay my
modest gratefulness to the Almighty Allah for giving me the ability to work hard under pressure.
This report on Risks Management of Agrani Bank Limited is prepared through continuous
research for a period of about two months. This extensive span of effort would not have been
possible without the help of various generous hands.
First of all I want to show my heart full convey to Department of Finance, University of Dhaka
to give me the opportunity to do internship and prepare report based on the Internship. I am
grateful to Mr Hussain Ahmed Enamul Huda, Lecturer, Department of Finance, for his
supervision on this report. He has given a lot of assistance in coordinating the whole report.
Without his perseverance and guidance this report would have been a pile of worthless paper.
I would also like to thank Agrani Bank Limited for giving me the opportunity to do my
internship in their renowned organization. I like to convey my gratitude to Mr Ahad Ahmed, AVP
of Agnani Bank Limited for supervising me in the bank. I would also like to thank all those
people of DSE library who helped me from time to time in preparing this report. I thank all of
them for their valuable time and co-operation.
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Abstract
The recent financial crisis and scandal such as Enron have raised several questions with respect
to the growing awareness and the need for appropriate Risk Management of financial
institutions. It calls for thorough assessments of the structure and components of the risk
management frameworks and practices of banks by regulators, analysts and financial watchers
from time to time, to ascertain the adequacy of the systems, policies and procedures for
managing risks as well as their conformity to current best practices. As a contribution to this
exercise, this report is focused on Agrani Bank Limited (ABL) with the aim of evaluating the
banks risk profile as well as assessing its risk management framework to ascertain its soundness
and conformity to international best practices.
Research purpose: The researcher is trying to focus basically on various risks facing by Agrani
Bank Ltd Interest rate risk, Market risk, Credit risk, Foreign exchange risk, Liqidity risk,
Operational risk, Soverign risk and Off-balance-sheet risk and their proper management.
Research methodology: The study is based on primary and secondary sources of data. Data
have been collected from office records, discussions with employees and from different paper
circulars and annual report of Agrani Bank Ltd. For the report preparation, concepts and
techniques are gathered from bank manuals and relevant books. Data were collected personally
from Agrani bank Ltd, head office and Agrani bank training institute. The authority Agrani Bank
Ltd rechecked these collected data before entering them into data base system.
The researcher is going to follow a deductive approach where academic theories are going to
work as a guideline for the research. Since the research philosophy is positivism we will have
complete reliance over the statistical tools and techniques. The data to be used in our research is
completely secondary by its very nature and the quantitative approach is the preferred data
collection mechanism as we do not need any in-depth data collection for conducting our study.
Limitations: Our research result is highly subjective to the secondary information which was
used in our research. So, in case of any question regarding the quality of the secondary
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information our research findings are at stake. All the interpretations and conclusions made in
our study are subject to financial models and statistical implications. For any fundamental flaw
in the financial model and statistical properties the research result may be blurred.
Table of Contents
Chapter one introduction......................................................................................... 8
Background of the study......................................................................................... 8
Statement of problem............................................................................................. 8
1.3 Objective of the study....................................................................................... 9
1.4 Rationale of the study....................................................................................... 9
1.5 Research Question............................................................................................ 9
Chapter two Internship Experience........................................................................10
2.1 Experience at front Desk:................................................................................10
2.2
Experience at back desk:............................................................................. 11
Chapter three Company Profile..............................................................................12

3.1 Background of the company............................................................................12
3.2 Objectives of Agrani Bank:..............................................................................13
3.3 Activities of Agrani bank Ltd............................................................................14
3.4 Departments maintained by ABL.....................................................................15
3.5 Organizational structure.................................................................................. 16
3.6 Management and Human Resource:................................................................16
Chapter four Literature review...............................................................................17
4.1 Introduction..................................................................................................... 17
4.2 Definition of Risk............................................................................................. 17
4.3 Risk Management in Banking..........................................................................17
4.4 Categories of Risk Management......................................................................18
4.5 Major Types of Risks Faced By Banks...............................................................18
Chapter five Risk Management.............................................................................. 23
5.1 Introduction:.................................................................................................... 23
5.2 Interest rate risk (IRR) Management...............................................................29
5.3 Credit Risk Management.................................................................................36
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5.4 Foreign Exchange Risk Management...............................................................42

5.5 Liquidity Risk Management.............................................................................43
5.6 Market Risk Management................................................................................ 49
5.10 Internal Control and Compliance (ICC) Risk Management.............................51
Chapter six Findings and Recommendations.........................................................58

Findings................................................................................................................... 58
Recommendations....................................................................................................... 59
Conclusion:............................................................................................................... 59
Appendix A............................................................................................................... 61
Appendix B............................................................................................................... 70
References................................................................................................................ 72
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Chapter one introduction

Background of the study
The past decade has seen the world witnessing one of the most shocking financial meltdowns.
The effects of the crisis were pervasive and hit almost every sector of global businesses; the most
affected sector was the financial services industry, specially the banking sector. There are
numerous explanations on the causes of the current financial crisis. One factor that has received
significant attention during this crisis is risk management discourse. It seems that risk
management has become an important tool, from which banks try to achieve legitimacy in the
eyes of the public and regulators. Some reasons put forward for the failures in risk management
in this regard include the limited role of risk management in the granting of loans in most banks.
This is largely because the banks are unable to influence business decisions of its borrowers
coupled with the fact that their considerations are subordinated to profitability interests and lack
of capacity to adequately make timely and accurate forecasts. This has resulted in the flouting of
basic risk management rules such as avoiding strong concentration of assets and minimising the
volatility of returns.
Various reasons have been put forward by analysts for the deterioration in the quality of bank
loans and advances. These include increased cost of funds, inflation, depreciation of the Cedi and
the delay by government in paying contractors and other service providers. While new avenues
for banks have opened up, they have brought with them new risks as well, which banks will have
to handle and overcome. Applying the above principle will improve asset quality and risk
management practises of banks.
Statement of problem
Risk management is considered by researchers as a yard stick for determining failure or success
of a financial institution. It has not been given much attention in recent times. This report seeks
to bring to light the need for financial institutions to pay attention to the management of risk.
Shareholders wealth and acquire substantial profit either for expansion or to undertake new
product development. Across the banking industry, the most prominent area that erodes the mass
of their profit is risk management (credit, market and operational). The problem of this study is
to cram the causes of risk and how this can be anticipated and managed to improve performance
of the bank.
The researcher is trying to focus basically on various risks facing by Agrani Bank Ltd Interest
rate risk, Market risk, Credit risk, Foreign exchange risk, Liqidity risk, Operational risk,
Soverign risk and Off-balance-sheet risk and their proper management.
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Problem statement What are the ways through which Agrani Bank measures and manages
various risks, influencing the performance of Agrani Bank Ltd?
1.3 Objective of the study

The main objective of the study is to assess the role of risk management in the banking sector
using ABL as a test case. The study specifically seeks to achieve the following objectives;
To ascertain why banking risk exposure is evolving.
To examine and assess steps and methodologies used by banks to identify, assess and
develop a framework for the analysis and mitigation of risk (steps in the risk management
process).
To determine the relationship between theorical and empirical risk management in the
banking world.
To recommend the credit risk management tools that can help improve banks
performance.
1.4 Rationale of the study

Business research is a tedious job and it takes out a lot of endeavors. So, there should be some
solid rationale behind conducting the research study. Moreover, it is essential to find out the true
relationships and impact of various risks on the profitability and performance of Agrani Bank
Ltd.
1.5 Research Question
What are the various risks associated with the performance of Agrani Bank Ltd?
How risks of Agrani Bank Ltd can be measured?
How can Agrani Bank Ltd manage those risks?
What are the methodologies used to identify risk in the banking industry?
How those risks affect the profitability and performance of Agrani Bank Ltd?
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Chapter two Internship Experience
Experience at front Desk

Experience at back desk
In order to deliver a student with job acquaintance and a chance of the transition of theoretical
knowledge into real life involvement, an internship is a requisite. An improved balance between
theory & practice can be increased through this platform.
The report is related to the internship program with Agrani Bank Limited. I acknowledged
various banking tasks and routine banking actions to fulfill the obligatory internship program. In
this paper explanations have been given about the real life experience gathered from different
departments.
2.1 Experience at front Desk:

Firstly After taking the supplementary documents from the junior officer an intern needs to
separate the unstapled Vouchers and reorder and rearrange them by debit and credit. Additional
papers like postal papers must be submitted immediately in order to avoid the mixture with the
necessary documents. Then separation of the vouchers, cheque and pay orders must be done.
After separating the documents those must be arranged by account number wise in order to
quicken the work flow.Then the papers which are known as supplementary sheets must be
printed.
Next work is to match the vouchers number with the top sheet and then give a tick mark to the
founded ones. But if any voucher is missing or not corresponding with the top sheet then the
Code number must be searched and seen whether they belong to that specific branch. If the code
has matched but voucher is not found then I had to go to the officer bearing that code number in
order to make the copy of voucher or for necessary adjustments.
Finally maintaining the serial (cash, clearing and transfer) vouchers are stapled with the top
sheets.This process will go on until all the debit and credit sides of top sheet are stapled with
corresponding vouchers. Finally a balancing is done to match the total number of debit and
credits.
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In addition to preparing supplementary, it was the duty of the intern to make and check
Pay Order and Demand Drafts. It was necessary to write the P.O, obtain signatures, push
P.O into envelop and lastly take signature of the customer on the receive copy. It was also
necessary to check PO regularly.It is also a regular duty in ABL to maintain the registers
of P.O and D.D.Customers are also notified by the interns about the importance and
requirements of opening an account.
An intern needs to maintain whether the necessities are fulfill or not by recognizing their
documents such as voter ID card, TIN, trade authorization, photos, introduction,
recommendations etc. It was a regular duty to receive inward mail which comprises
Demand Draft, Pay Order, and Letter of credit etc. from the courier service and give entry
to inward registered book. Moreover, as an intern it was also my duty to give all the
required seals and signatures when the employees were busy with their individual task.
On the other hand, it was also necessary to maintain outward registered mail.One of the
regular duties was to perform balance inquiry and balance statement.Sometimes Intern
needs to maintain the daily Money Gram balancing with the assigned officer.I was also
assigned with work to fill up and check all the Deposit Account forms.
2.2 Experience at back desk:

Introduction about the account opening software.
Working experience in the cheque clearing section.
Worked in the card division.
It was duty to assist the approved officer to scan the cheques images and give MS excel
entry.
Dealing with foreign exchange divisions documents.
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Chapter three Company Profile

Background of the company
Mission, Vision, Motto
Activities of Agrani bank

Departments maintained by ABL
Organizational structure
Management and Human Resource
3.1 Background of the company

Agrani Bank Ltd is a nationalized commercial bank operating since 1972. It has been
incorporated as a Public Limited Company on May 17, 2007, Certificate of Incorporation No. C66888(4380)/07. It was formed under the presidential order no.26 issued on March 26, 1972 by
taking over legacy of assets and liabilities and all branches (i.e. 249 working branches together
with 37 closed ones) situated in Bangladesh territory of former Habib Bank Limited and
Commerce Bank Limited operating in the East Pakistan. Agrani Bank starts its headway in 1972
with authorized capital of Tk. 5 crore and paid up capital of Tk. 1 crore. Agrani Bank, as a
nationalized commercial bank, has emphasised a lot more on providing services than on
extraction profits conventionally. Keeping this in view the bank's expansion of network and its
activity have not been kept confined to urban areas only but also have been spread to pastoral
vicinities. Its authorized capital now increased from Tk. 5.00 crore in 1972 to Tk. 800.00 crore in
2002, paid up capital increased from Tk. 1,00 crore to Tk 248.40 crore, total number of branches
increased from 249 to 867, officer's increased from 796 to 6597 and staff increased from 1471 to
5534 during the period from 1972 to 2009.Under the vendor agreement, it has become a limited
company in 15 November,2007.
Mission
To operate ethically and fairly within the stringent framework set by our regulators and
assimilate ideas and lessons from best practices to improve our business policies and
procedures to the benefit of our customers and employees.
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Vision
To become the best leading state owned commercial bank of Bangladesh operating at
international level of efficiency, quality, sound management, customer service and strong
liquidity.
Motto
To adopt and adapt modern approaches to stand supreme in the banking arena of
Bangladesh with global presence.
3.2 Objectives of Agrani Bank:

Agrani Bank, as a nationalized commercial bank, has the objective of serving the nation. A few
of the main objectives are:
To assist the government in development activities by providing finance.
To provide banking service by collecting deposit from people at all strata of life and
investing it in productive sector.
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To provide advance in agriculture and industrial sector on preferential basis along with
finance in general business and trade as well as provide active assistance in development
of the economy of the country through foreign trade transaction, expansion, proper
administration.
Human resource development through training programmed,
Increase loan portfolio diversification and widen the coverage of area of operation.
3.3 Activities of Agrani bank Ltd.

General banking activities,
Credit activities.
3.3.1 General banking activities:

General banking activities involve collection of different deposits through current account,
savings account, fixed deposit account etc., and to issue and pay demand draft, pay order,
telegraphic transfer, mail transfer and transfer of other fund it also includes cash operation,
clearing house activities, collection and discounting of bills and checks, maintaining accounts
with Bangladesh Bank and other concerned banks as well as other various activities.
Current Account
Saving Account
Time Deposit
Demand Draft (DP)
Telegraphic Transfer ( T.T)
Pay Order (P.O)
3.3.2 Credit activities:

Agrani Bank Ltd. provides a wide variety of loans and advances to different sectors. Agrani Bank
extends credit in agriculture, trade and commerce, industry and other sectors. Bank has identified
the following industrial sectors as priority sector and has decided to provide loans and advances
at a concession interest rate that is going on:
Agro-based industry like processing and preservation of local fruits
Computer software and information technology-.
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Electronics.
Artificial flower production.
Frozen food.
Non traditional exportable agriculture products.
Presentation items.
Cultivation of silkworm and silk industry.
Stuffed toys,
Textile industry (except RMG).
Oil and gas.
3.4 Departments maintained by ABL
Branch & Subsidiaries / Unit Control Division

Company Affairs & Board Division
Credit Policy & Credit Risk Management Division
Establishment & Engineering Division
HR Discipline, Grievances & Appeal Division
HR Planning, Deployment & Operations Division
HR Training, Research & Development Division
Industrial Credit Division
Treasury Division
Planning, Co-Ordination & Marketing Division
Procurement & Common Services Division
Recovery and NPA Management Division
Rural Credit Division
SME Credit Division
Information Technology & MIS Division
Vigilance Division
International Trade & Foreign Currency Management Division
Foreign Remittance & Card Division
Law Division
Central Accounts Division
Reconciliation Division
Public Relation Division
Core Risk Management & Basel-2 Implementation Division
Green Banking Division
Audit & Inspection Division 1
Audit & Inspection Division 2
Audit Monitoring Division
Audit Compliance Division (Internal)
Audit Compliance Division (External)
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3.5 Organizational structure

Agrani Bank Ltd has a board of directors consist of seven members as authority of bank's
internal policy making. The government appoints chairman and director of the board. Managing
Director is the chief executive of the bank. Board of directors implement administrative, business
and financial power and internal policy of bank under the power or authority vested upon board
by the government. Organizational structure of the bank is divided into six layers such as:
Head office
Circle
Zone
Corporate branch
Branch
Head office:
3.6 Management and Human Resource:

Agrani Bank Ltd is a nationalized commercial bank. The Board of Directors plays the main role
to make policies and guidelines for the bank. The Board of Directors of the bank consists of 7
directors. The following diagram shows the structure of the Board of Directors of the bank:
Chairman
Directors
Managing Director
The total number of officer is 6597 and staff is 5534 in 2009. Agrani Bank Ltd has a pool of
diversified and skilled workforce.
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Chapter four Literature review

4.1 Introduction
This chapter reviews the literature on risk management in banking. It discusses issues on risk
management from different perspectives and with the view of giving a theoretical foundation to
the study. It starts with an exposition on risk management, followed by reviews of literature on
the rationales and categories of risk management activities as well as the kinds of risk faced by
banks and Enterprise Risk Management are also discussed in this chapter.
4.2 Definition of Risk

In the field of safety and health, risk is linked with possible hazards and dangers, while in
finance it is a technical matter of unpredictability in expected outcomes, both negative and
positive. In other businesses and political settings, risk is closely associated with the spirit of
enterprise and value creation (Power, 2007, p.3). Ewald, (1991) states: Nothing is a risk in
itself; there is no risk in reality. But on the other hand anything can be a risk; it all depends on
how one analyses the danger, consider the event (p.199). Willet (as cited in Ale, 2009, p. 4)
defined risk as the objectified uncertainty regarding the occurrence of an undesired event. Risk
is inherent in any walk of life and can be associated with every human decision-making action of
which the consequences are uncertain.
4.3 Risk Management in Banking

Risk management evolved from a strictly banking activity, related to the quality of loans, to a
very complex set of procedures and instruments in the modern financial environment. It
underscores the fact that the survival of an organization depends heavily on its capabilities to
anticipate and prepare for the change rather than just waiting for the change and react to it. Risk
is associated with uncertainty and reflected by way of charge on the fundamental /basic i.e in the
case of business it is the capital, which is the cushion that protects the liability holders of an
institution. These risks are interdependent and events affecting one area can have ramifications
and penetrations for a range of other categories of risk.
Risk Management (RM) is described as the performance of activities designed to minimise the
negative impact (cost) of uncertainty (risk) regarding possible losses (Schmidt and Roth,1990).
Redja (1998) also defines risk management as a systematic process for theidentification,
evaluation of pure loss exposure faced by an organisation or an individual, and for the selection
and implementation of the most appropriate techniques for treating such exposures. The process
involves: identification, measurement, and management of the risks. Bessis (2010) also adds that
in addition to it being a process, risk management also involves a set of tools and models for
measuring and controlling risk. The objectives of risk management include the minimization of
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foreign exchange losses, reduction of the volatility of cash flows, protection of earnings
fluctuations, increment in profitability and assurance of survival of the firm (Fatemi and Glaum,
2000).
According to Santomero (1995), the management of the banking firm relies on a sequence of
steps to implement a risk management system. These normally contain four parts which are
standards and reports, position limits or rules, investment guidelines or strategies and incentive
contracts and compensation. These tools are generally established to measure exposure, define
procedures to manage these exposures, limit individual positions to acceptable levels, and
encourage decision makers to manage risk in a manner that is consistent with the firm's goals and
objectives.
4.4 Categories of Risk Management

As noted by Merton (1989), a key feature of the franchise of financial institutions (including
banks) is the bundling and unbundling of risks. However, not all risks inherent in their business
should be borne directly by them; some can be traded or transferred whiles others can be
eliminated altogether. It is therefore useful to defragment the risks inherent in their activities and
assets into three distinctive subgroups in accordance with their nature so that the appropriate
strategies can be adapted to mitigate them. Oldfield and Santomero (1995) argue therefore that
risk facing financial institutions can be segmented into three distinguishable categories from a
management outlook.
There is yet another class of risks which should be adsorbed and aggressively managed at the
originating bank level because good reasons exist for using further resources to manage them.
This includes propriety positions that are accepted because of their risks and expected return. In
all these circumstances when risk is absorbed, risk management activity requires the monitoring
of business activity risk and returns and it is considered as part of doing business. In effect, banks
should accept only those
risks that are uniquely a part of the banks array of unique value-added services (Allen &
Santomero, 1996, Oldfield & Santomero, 1995).
4.5 Major Types of Risks Faced By Banks

Banking is the intermediation between financial savers on one hand and the funds seeking
business entrepreneurs on the other hand. As such, in the process of providing financial services,
banks assume various kinds of risk both financial and non-financial. Moreover this risk inherent
in the provision of their services differs from one product or service to the other.
These risks have been grouped by various writers in different ways to develop the frameworks
for their analyses but the common ones which are considered in this study are credit risk, market
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risks (which includes liquidity risk, interest rate risk and foreign exchange risk), operational risks
(which sometimes include legal risk, and more recently, strategic risk) and reputational risk.
4.5.1 Credit Risk

The analysis of the financial soundness of borrowers has been at the core of banking activity
since its inception. This analysis refers to what nowadays is known as credit risk, that is, the risk
that counterparty fails to perform an obligation owed to its creditor. It is still a major concern for
banks, but the scope of credit risk has been immensely enlarged with the growth of derivatives
markets. Another definition considers credit risk as the cost of replacing cash flow when the
counterpart defaults. In an article by Elmer Kunke Kupper on Risk Management and Banking he
defines credit risk as the potential financial loss resulting from the failure of customers to honour
fully the terms of a loan or contract. This definition can be expanded to include the risk of loss in
portfolio value as a result of migration from a higher risk grade to a lower one .Greuning and
Bratanovic (2009) define credit risk as the chance that a debtor or issuer of a financial instrument
whether an individual, a company, or a country will not repay principal and other
investment-related cash flows according to the terms specified in a credit agreement. Inherent to
banking, credit risk means that payments may be delayed or not made at all, which can cause
cash flow problems and affect a banks liquidity.
According to Greuning and Bratanovic (2009), formal policies laid down by the board of
directors of a bank and implemented by management plays a vital part in credit risk
management. As a matter of fact, a bank uses a credit or lending policy to outline the scope and
allocation of a banks credit facilities and the manner in which a credit portfolio is managed
that is, how investment and financing assets are originated, appraised, supervised, and collected.
There are also minimum standards set by regulators for managing credit risk. These cover the
identification of existing and potential risks, the definition of policies that express the banks risk
management philosophy, and the setting of parameters within which credit risk will be
controlled. There are typically three kinds of policies related to credit risk management. The first
set aims to limit or reduce credit risk, which include policies on concentration and large
exposures, diversification, lending to connected parties, and overexposure. The second set aims
at classifying assets by mandating periodic evaluation of the collectability of the portfolio of
credit instruments. The third set of policies aims to make provision for loss or make allowances
at a level adequate to absorb anticipated loss.
4.5.2 Market Risks

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Elmer Funke Kupper in his article on Risk Management and Banking defined Market Risk as the
risk to earnings arising from changes in underlying economic factors such as interest rates or
exchange rates, or from fluctuations in bond, equity or commodity prices. Banks are subject to
market risk in both the management of their balance sheets and in their trading operations.
Market risk is generally considered as the risk that the value of a portfolio, either an investment
portfolio or a trading portfolio, will decrease due to the change in value of the market risk
factors. There are three common market risk factors to banks and these are liquidity, interest rates
and foreign exchange rates. Market Risk Management provides a comprehensive framework for
measuring, monitoring and managing liquidity, interest rate, foreign exchange and equity as well
as commodity price risk of a bank that needs to be closely integrated with the banks business
strategy.
4.5.3 Liquidity Risk

According to Greuning and Bratanovic (2009), a bank faces liquidity risk when it does not have
the ability to efficiently accommodate the redemption of deposits and other liabilities and to
cover funding increases in the loan and investment portfolio. These authors go further to propose
that a bank has adequate liquidity potential when it can obtain needed funds (by increasing
liabilities, securitising, or selling assets) promptly and at a reasonable cost. The Basel Committee
on Bank Supervision, in its June 2008 consultative paper, defined liquidity as the ability of a
bank to fund increases in assets and meet obligations as they become due, without incurring
unacceptable losses. Bessis (2010) however considers liquidity risk from three distinct situations.
The first angle is where the bank has difficulties in raising funds at a reasonable cost due to
conditions relating to transaction volumes, level of interest rates and their fluctuations and the
difficulties in funding counterparty. The second angle looks at liquidity as a safety cushion which
helps to gain time under difficult situations. In this case, liquidity risk is defined as a situation
where short-term asset values are not sufficient to match short term liabilities or unexpected
outflows. The final angle from where liquidity risk is considered as the extreme situation. Such a
situation can arise from instances of large losses which creates liquidity issues and doubts on the
future of the bank. Such doubts can result in massive withdrawal of funds or closing of credit
lines by other institutions which try to protect themselves against a possible default. Both can
generate a brutal liquidity crisis which possibly ends in bankruptcy. There are many factors that
affect banks own liquidity and in turn affect the amount of liquidity they can create.
Santomero (1995) however, posits that while some would include the need to plan for growth
and unexpected expansion of credit, the risk here should be seen more correctly as the potential
for funding crisis. Such a situation would inevitably be associated with an unexpected event,
such as a large charge off, loss of confidence, or a crisis of national proportion such as a currency
crisis. Effective liquidity risk management therefore helps ensure a bank's ability to meet cash
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flow obligations, which are uncertain as they are affected by external events and other agents'
behaviour.
The Basel Committee on Bank Supervision consultative paper (June 2008) asserts that the
fundamental role of banks in the maturity transformation of short-term deposits into long-term
loans makes banks inherently vulnerable to liquidity risk, both of an institution-specific nature
and that which affects markets as a whole. A liquidity shortfall at a single bank can have systemwide repercussions and hence liquidity risk management is of paramount importance to both the
regulators and the industry players.
4.5.4 Interest Rate Risk
In general, interest rate risk is the potential for changes in interest rates to reduce a banks
earnings or value. Most of the loans and receivables of the balance sheet of banks and term or
saving deposits, generate revenues and costs that are driven by interest rates and since interest
rates are unstable, so are such earnings. Though interest rate risk is obvious for borrowers and
lenders with variable rates, those engaged in fixed rate transactions are not exempt from interest
rate risks because of the opportunity cost that arises from market movements (Bessis, 2010).
According to Greuning and Bratanovic (2009), the combination of a volatile interest rate
environment, deregulation, and a growing array of on and off-balance-sheet products have made
the management of interest rate risk a growing challenge. At the same time, informed use of
interest rate derivatives such as financial futures and interest rate swaps can help banks
manage and reduce the interest rate exposure that is inherent in their business. Bank regulators
and supervisors therefore place great emphasis on the evaluation of bank interest rate risk
management, particularly since the Basel Committee recommends the implementation of market
risk based capital charges.
Greuning and Bratanovic (2009) posits that banks encounter interest rate risk from four main
sources namely repricing risk, yield curve risk, basis risk, and optionality. The primary and most
often discussed source of interest rate risk stems from timing differences in the maturity of fixed
rates and the repricing of the floating rates of bank assets, liabilities, and off-balance sheet
positions. The basic tool used for measuring repricing risk is duration, which assumes a parallel
shift in the yield curve. Also, repricing mismatches expose a bank to risk deriving from changes
in the slope and shape of the yield curve (nonparallel shifts). Yield curve risk materialises when
yield curve shifts adversely affect a banks income or underlying economic value. Another
important source of interest rate risk is basis risk, which arises from imperfect correlation in the
adjustment of the rates earned and paid on different instruments with otherwise similar repricing
characteristics. When interest rates change, these differences can give rise to unexpected changes
in the cash flows and earnings spread among assets, liabilities, and off-balance-sheet instruments
of similar maturities or repricing frequencies (Wright and Houpt, 1996).
Page | 21
An increasingly important source of interest rate risk stems from the options embedded in many
bank asset, liability, and off-balance-sheet portfolios. If not adequately managed, options can
pose significant risk to a banking institution because the options held by customers, both explicit
and embedded, are generally exercised at the advantage of the holder and to the disadvantage of
the bank.
4.5.5 Foreign Exchange Risk
This is the risk incurred when there is an unexpected change in exchange rate altering the amount
of home currency need to repay a debt denominated in foreign currency. Bessis (2010) defines
foreign exchange risk as incurring losses due to changes in exchange rates. Such loss of earnings
may occur due to a mismatch between the value of assets and that of capital and liabilities
denominated in foreign currencies or a mismatch between foreign receivables and foreign
payables that are expressed in domestic currency. According to Greuning and Bratanovic (2009),
foreign exchange risk is speculative and can therefore result in a gain or a loss, depending on the
direction of exchange rate shifts and whether a bank is net long or net short (surplus or deficit)in
the foreign currency.
Page | 22
Chapter five Risk Management

5.1 Introduction:
Banks are in the business of managing risk, not avoiding it.
This statement says it all how much important it is to manage various risks accordingly. Risk is
the fundamental element that drives financial behaviour. Without risk, the financial System
would be vastly simplified. However, risk is omnipresent in the real world. Financial
Institutions, therefore, should manage the risk efficiently to survive in this highly uncertain
world. The future of banking will undoubtedly rest on risk management dynamics. Only those
banks that have efficient risk management system will survive in the market in the long run. The
effective management of credit risk is a critical component of comprehensive risk management
essential for long-term success of a banking institution.
Risk is defined as probability or threat of damage, injury, liability, loss or other negative
occurrence that is caused by external or internal vulnerabilities and that may be neutralized
through preemptive action. It is unexpected and negative outcome of an institute or an individual.
So, for every large institute like Banking, it is a must to manage risk for its better sustainability.
ABL is one of the largest SCBs in the country and it has a number of subsidiary companies at
home and abroad. It has a large exposure of assets and liabilities shown on balance sheet and
other related accounting papers. So the prime objective of its management is to safeguard its
assets and comply with the obligations or liabilities from any arisen risk during its operation.
Many types of risks may arise in banking and NBFIs sectors which widely discussed and hedged
are as follows:
Interest Rate Risk

Credit Risk
Foreign Exchange Risk
Liqidity Risk/ Asset-Liability Management Risk
Market risk
Internal Control and Compliance (ICC) Risk
Information and Communication Technology (ICT) Risk.
The future of banking will undoubtedly rest on risk management dynamics. Only those banks
that have efficient risk management system will survive in the market in the long run. The
effective management of credit risk is a critical component of comprehensive risk management
essential for long-term success of a banking institution. Credit risk is the oldest and biggest risk
Page | 23
that bank, by virtue of its very nature of business, inherits. This has however, acquired a greater
significance in the recent past for various reasons. Foremost among them is the wind of
economic liberalization that is blowing across the globe. This has resulted in multiplicity of risks
both in number and volume resulting in volatile markets. A precursor to successful management
of credit risk is a clear understanding about risks involved in lending, quantifications of risks
within each item of the portfolio and reaching a conclusion as to the likely composite risk
profile.
Effective risk management is fundamental to the success of the Bank, and is recognized as one of
the Banks five strategic priorities. ABL has a moderate risk management culture. A key aspect of
this culture is diversification across business lines, geographies, products, and industries. Risk
management framework The primary goals of risk management are to ensure that the outcomes
of risk-taking activities are consistent with the Banks strategies and risk appetite, and that there
is an appropriate balance between risk and reward in order to maximize shareholder returns. The
Banks enterprisewide risk management framework provides the foundation for achieving these
goals.
This framework is subject to constant evaluation to ensure that it meets the challenges and
requirements of the global markets in which the Bank operates, including regulatory standards
and industry best practices. The Bank assesses existing risk management programs and, if
necessary, develops an action plan to make improvements in a timely fashion. The Banks risk
management framework is applied on an enterprisewide basis and consists of three key elements:
Page | 24
Risk governance
Effective risk management begins with effective risk governance. The Bank has a wellestablished risk governance structure, with an active and engaged Board of Directors supported
by an experienced senior management team and a centralized risk management group that is
independent of the business lines. Decision-making is highly centralized through a number of
senior and executive risk management committees.
5.2 Risk appetite
Effective risk management requires clear articulation of the Banks risk appetite and how the
Banks risk profile will be managed in relation to that appetite.
Risk management principles

Provide the qualitative foundation of the risk appetite framework. These principles include:
Promotion of a robust risk culture,
Accountability for risk by the business lines,
Independent oversight exercised by Global Risk Management (GRM),
Avoidance of excessive risk concentrations, and
Ensuring risks are clearly understood, measurable, and manageable.
Strategic principles
Provide qualitative benchmarks to guide the Bank in its pursuit of the Governing Financial
Objectives, and to gauge broad alignment between new initiatives and the Banks risk appetite.
Strategic principles include:
Page | 25
Placing emphasis on the diversity, quality and stability of earnings,

Focusing on core businesses by leveraging competitive advantages, and
Making disciplined and selective strategic investments.
Governing financial objectives
Focus on long-term shareholder value. These objectives include sustainable earnings growth,
maintenance of adequate capital in relation to the Banks risk profile, and availability of financial
resources to meet financial obligations on a timely basis at reasonable prices.
Risk appetite measures
Provide objective metrics that gauge risk and articulate the Banks risk appetite. They provide a
link between actual risk taking activities and the risk management principles, strategic principles
and governing financial objectives described above. These measures include capital and earnings
ratios, market and liquidity risk limits, and credit and operational risk targets.
5.3 Risk management techniques
Effective risk management includes techniques that are guided by the Banks Risk Appetite
Framework and integrated with the Banks strategies and business planning processes.
Strategies, Policies and Limits

Strategies
Provide quantitative and qualitative guidance. This guidance is, in turn, used to set limits and
guidelines on the types of risk taking activities the Bank is prepared to assume in pursuit of its
strategic and financial objectives.
Policies
Page | 26
Apply to specific types of risk or to the activities that are used to measure and control risk
exposure. They are based on recommendations from risk management, audit, business lines, and
senior executive management. Industry best practices and regulatory requirements are also
factored into the policies. Policies are guided by the Banks risk appetite, and set the limits and
controls within which the Bank and its subsidiaries can operate.
Limits
Control risk-taking activities within the tolerances established by the Board and senior executive
management. Limits also establish accountability for key tasks in the risk-taking process and
establish the level or conditions under which transactions may be approved or executed.
Guidelines, Processes and Standards
Guidelines
They are the directives provided to implement policies as set out above. Generally, they describe
the facility types, aggregate facility exposures and conditions under which the Bank is prepared
to do business. Guidelines ensure the Bank has the appropriate knowledge of clients, products,
and markets and that it fully understands the risks associated with the business it underwrites.
Guidelines may change from time to time, due to market or other circumstances. Risk taking
outside of guidelines usually requires approval of the Banks Senior Credit Committees, Market
Risk Management and Policy Committee, or Risk Policy Committee.
Processes
Are the activities associated with identifying, evaluating, documenting, reporting and controlling
risk.
Standards
Define the breadth and quality of information required to make a decision, and the expectations
in terms of quality of analysis and presentation. Processes and standards are developed on an
enterprisewide basis, and documented in a series of policies, manuals and handbooks under the
purview of GRM. Key processes cover the review and approval of new products, model
validation and stress testing.
Measurement, Monitoring, and Reporting

Measurement
GRM is responsible for developing and maintaining an appropriate suite of risk management
techniques to support the operations of the various business lines, and for supporting the
Page | 27
measurement of economic capital on an enterprise-wide basis. The risk sections explain the
application of these techniques. Risk measurement techniques include the use of models and
stress testing. The Bank uses models for a range of purposes including estimating the value of
transactions, risk exposures, credit risk ratings and parameters, and economic and regulatory
capital. The use of quantitative risk methodologies and models is balanced by a strong
governance framework and includes the application of sound and experienced judgement. The
development, independent review, and approval of models are subject to formalized policies
where applicable, including the oversight of senior management committees such as the Model
Review Committee for market risk (including counterparty credit risk) and liquidity risk models.
Regular Monitoring
It ensures that, business activities are within approved limits or guidelines, and are aligned with
the Banks strategies and risk appetite. Breaches, if any, of these limits or guidelines are reported
to senior management, policy committees, and/or the Board depending on the limit or guideline.
Risk Reports
Aggregate measures of risk across products and businesses, and are used to ensure compliance
with policies, limits, and guidelines. They also provide a clear statement of the amounts, types,
and sensitivities of the various risks in the Banks portfolios. Senior management and the Board
use this information to understand the Banks risk profile and the performance of the portfolios.
Control and audit functions are also established that are independent of the organizations whose
activities they review, and whose role includes ensuring that all of the components of the risk
management framework are effective and being implemented on a day to day basis.
Stress testing
Programs at both enterprise-wide level and risk level allow the Bank to estimate the potential
impact on income and capital as a result of significant changes in market conditions, credit
environment, liquidity demands, or other risk factors. Each program is developed with input
from a broad base of stakeholders, and results are integrated into management decision-making
processes for capital, funding, market risk limits, and credit risk strategy. Enterprise-wide stress
testing is also integrated with both the strategic and financial planning processes. The
development, approval and on-going review of the Banks stress testing programs are subject to
formalized policy, and are under the oversight of the Stress Testing Committee, which reports to
the Liability Committee.
5.4 Risk Management Culture
Effective risk management requires a strong, robust, and pervasive risk management culture. The
Business Lines are responsible for the development and execution of business plans that are
Page | 28
aligned with the Banks risk management framework, and are accountable for the risks they
incur.
5.2 Interest rate risk (IRR) Management

Interest rate risk (IRR) may be defined as decline in earning or in the Banks portfolio value due
to interest rate fluctuations. Most of the balance sheet items generate revenues and costs which
are indexed to interest rates; since these rates are unstable over time, so are earnings. While
assuming IRR risk is a key part of its business activity, taking on excessive IRR can potentially
threaten earnings and the Banks capital base.
Interest rate risk is the risk that the fair value of future cash flows of the Companys financial
instruments will fluctuate because of changes in market interest rates. Interest rate risk is the
current or potential risk to earnings and capital arising from adverse movements in interest. This
is in respect of the banking book only from pillar 2 (SRP) contexts. Significantly reduced
earnings can pose a threat to capital adequacy. After volatility of earnings the Bank analyses to
overcome interest rate risk.
5.5.1 Types of interest rate risk:

IRR can be roughly decomposed into four categories:
Re-pricing risk
This refers to fluctuations in interest rate levels that have differing impacts on bank assets &
liabilities. For example, a portfolio of long-term, fixed-rate loans funded with short-term deposits
(i.e., a case of duration mismatch) could significantly decrease in value when rates increase,
since the loan payments are fixed and funding costs have increased.
Page | 29
Yield curve risk

This refers to changes in the portfolio values caused by unanticipated shifts in the slope and
shape of the yield curve; for example, short-term rates might rise faster than long-term rates,
thereby clearly affecting the profitability of funding long-term loans with short-term deposits.
Basis risk
This refers to the imperfect correlation between index rates across different interest rate markets
for similar maturities; for example, a bank funding loans whose payments are based on Treasury
bills with deposits priced on a different basis is exposed to the risk of unexpected changes in the
spread between these two indexes.
Optionality
This refers to risks arising from interest rate options embedded in assets, liabilities and offbalance sheet positions. Such options can be explicitly purchased from established markets for
interest rate derivatives or included as terms within a loan contract, such as the prepayment
options included in many types of loans and mortgages.
IRR management is one of the key strategic and policy issues for the Banks management. If, for
example, the Bank has more rate-sensitive liabilities than assets, a rise in interest rates would
reduce profitability, while a decline in interest rates will raise Bank's profits. The principal
objectives in managing interest rate risk are: to ensure an optimal and stable income stream while
controlling risks within tolerable parameters; and to manage the level of the exposure to adverse
movements of interest rate in order to limit the potential impact thereof. The corner stone of
credit risk management is the establishment of a framework that defines corporate priorities, loan
approval process, credit risk rating system, risk-adjusted pricing system, loan-review mechanism
and comprehensive reporting system.
5.5.2 Interest rate risk in the banking book (IRRBB) of ABL:

The general qualitative disclosure requirement includes the nature of IRRBB and key
assumptions, including loan pre-payments and behavior of non-maturity deposits, and frequency
of IRRBB measurement. Interest rate risk in the banking book arises from mismatches between
the future yield of assets and their funding costs. Interest rate risk is the potential that the value
of the on- balance sheet and the off-balance sheet positions of the bank would be negatively
affected with the change in the interest rates. Changes in interest rates also affect the underlying
value of the bank assets, liabilities and off-balance sheet instruments because the economic value
of future cash flows changes when interest rates changes. Assets Liabilities committee (ALCO)
monitors the interest rate movement on a regular basis.
Page | 30
ABL measure the Interest Rate Risk by calculating Duration Gap i.e. positive Duration Gap
affects banks profitability adversely with the increment of interest rate and negative Duration
Gap increase the banks profitability with the reduction of interest rate. ABL discusses the
interest rate issue in its ALCOM meeting on monthly basis. In addition, ABL assesses the
interest rate risk using simple duration analysis as per the formula given by Bangladesh Bank in
its guidelines on Stress Testing. For change in interest rates, currently, ABL is more risk sensible
for its Assets comparable to its Liabilities. The Bank is on a continuous process of re-structuring
in its assets and liabilities to make a balance between them and to bring the situation back in its
favor for any change in interest rate.
Quantitative Disclosures: The increase (decline) in earnings or economic value (or relevant
measure used by management) for upward and downward rate shocks according to
managements method for measuring IRRBB, broken down by currency (as relevant). The bank
has been using Stress Testing based on guidelines published by Bangladesh Bank to determine
the following:
1) Impact on earnings and
2) Impact on Capital requirements.
Key Indicators of Interest Rate Risk are net interest income (earning perspective).
market value of equity (economic value perspective).
Sources of Interest Rate Risk are the regulatory environment

government policy related to economic growth indicators
The size and sources of interest-bearing assets and liabilities.
liquidity risk
market and operational risk
credit risk
5.5.3 Analytical Tools
The following analytical tools are associated with addressing the interest rate risk issues:
a) Gap Analysis
The sensitivity of Bank profitability to changes in interest rates can be more directly measured
using gap analysis, in which the amount of rate-sensitive liabilities is subtracted from rate
Page | 31
sensitive assets. The gap is the difference for a given maturity. For example, profit declines
with the increase of interest rates and, on the other hand, increases with the decline of these rates.
b) Duration Analysis
Duration analysis is a useful concept because it provides a good approximation of the sensitivity
of a security's market value to a change in interest rates over time, where % change in market
value = % change in interest rate of security x duration in years For example, if the average
duration of a Banks assets is 5 years, and the average duration of its liabilities is 3 years, a 5
percentage point increase in interest rates will cause the market value of the its assets to fall by
25% (5% x 5 Years) and the market value of the liabilities to decline by 15% (5% x 3 years). The
net result is that the net worth has declined by 10% of the total original assets value. Similarly, 5
percentage point decline in interest rate increases the net worth by 10% of the total asset value.
There are generally two approaches to assess aggregate IRR exposures across various business
lines and portfolios the traditional earnings approach and the more challenging economic
value approach. Earning approach focuses on how interest rate changes the Banks overall
earnings, which are typically measured as net interest income (i.e., the difference between total
interest income and total interest expenses). This is calculated by the following formula:
{(Interest Earnings Interest Expenses)/ Earning Assets}
5.5.4 Stress Testing

The Bank should subject its asset yield plans to various plausible scenarios, in order to discern its
sensitivity to volatility or changes in market conditions. Further readings on the subject are
contained in a summary paper issued by the Basel Committee on Banking Supervision (BCBS)
regarding the general principles on IRR management, which contain the principles for the
adequacy and effectiveness of risk management systems.
5.5.5 Application of duration principle in Agrani bank Ltd:

Page | 32
In the case of zero coupon bonds:

T-Bond A
Coupon
Face value
Frequency
Maturity
Yield
T-Bond A
Price
Coupon
Face value
Frequency
Macaulay
Maturity
Dur
Yield
Modified
Dur
Dollar Dur
Price
Macaulay
Dur
Modified Dur
Dollar Dur
T-Bond A
Coupon
0.00%Face value
Frequency
4497800000
Maturity
2
Yield
5
8.50%
Price
2,966,466,878
0.00%
.374
4497800000
Macaulay
2
5.000Dur
5
Modified
12.00%
4.796 Dur
Dollar Dur
2,511,548,027.
142276588.891
609
0.00%
4497800000
2
5
10.00%
2,761,259,031
.776
5.000
4.762
131488525.323
Table-1: duration gap calculation
duration gap calculation
Table -2:
5.000
4.717
118469246.585
In this case of coupon bond A, which is

zero coupon bond of Agnani Bank
Limited, yield rate change has no impact
on duration gap. Duration gap will
remain the same in a changing yield rate
environment assuming a coupon bond.
Table-3: duration gap calculation
Page | 33
Duration
5
4
Duration
3
2
1
0
YTM
Figure-1: Duration gap in zero coupon bond.
In the case of coupon bonds:

T Bond B
Coupon
Face value
Frequency
Maturity
Yield
Price
T Bond B
Coupon
10.00%
Face value
4497800000
Frequency
2
Maturity
5
Yield
8.50%
4,768,035,256
Price
.757
Difference,
1,801,568,378.3
A&B
83
Macaulay
4.085
Dur
Difference,
A&B
Macaulay
Dur
Modified
Modified
3.919
Dur
Dur
Dollar Dur
Dollar Dur
186841587.653
Table -4: duration gap calculation
10.00%
4497800000
2
5
10.00%
4,497,800,000
.000
1,736,540,968.2
24
4.054
3.861
173654096.822
Page | 34
T Bond B
Coupon
Face value
Frequency
Maturity
Yield
Price
Difference,
A&B
Macaulay
Dur
Modified
Dur
Dollar Dur
10.00%
4497800000
2
5
12.00%
In the case of coupon bond, T bond B, changes

in the yield rate has an impact on duration gap.
Duration gap decreases when yield increases and
vice versa.
4,166,758,004
.601
1,655,209,976.9
93
4.011
3.784
157679039.180
Duration
4.1
4.08
4.06
Duration
4.04
4.02
4
3.98
3.96
YTM
Figure-1: Duration gap in coupon bond.
Page | 35
5.3 Credit Risk Management

Credit risk is described as potential loss arising from the failure of counter party to meet its
contractual obligations to the Bank. Bank is exposed to credit risk from its dealing with or
lending to corporate, individuals, and other banks or financial institutions. As regards capital
charge for Credit Risk, all assets in Banking Book have been risk-weighted strictly based on prespecified weight as determined by Bangladesh Bank as per RBCA guidelines. However, the
Bank has conducted proper mapping with the grading of Bangladesh Bank for those exposures or
claims graded by External Credit Assessment Institution (ECAI). The objective of credit risk
management is to minimize the different dimension of risks associated with credit exposures and
to maintain credit risk profile of the bank within a tolerable range.
Credit Risk, that is, default by the borrower to repay lent money, remains the most important risk
to manage till date. The predominance of credit risk is even reflected in the composition of
economic capital, which banks are required to keep a side for protection against various risks.
Credit risk has proved to be the most critical of all risks faced by a banking institution. It is the
risk of loss that may arise on outstanding financial instruments should a counterparty default on
its obligations. The companys exposure to credit risk arises primarily from other receivables and
financial assets (including cash and cash equivalents). The credit risk is controlled by the
application of credit approvals, limit and monitoring procedures. An internal credit review is
conducted if the credit risk is material. Credit risk is the risk of negative effects on the financial
result and capital of the bank caused by borrowers default on its obligations to the bank. Credit
risk is defined as the risk that parties with whom the Group has contracted fails to meet their
obligations (both on and off balance sheet).
Broadly speaking, Risk arising from noncompliance of commitment of the counterparty or the
borrower is defined as Credit risk. Lending with terms and conditions in line with regulatory
bodys directives and governments policies is the main business of a bank. ABL had a
sophisticated risk management system from the very beginning of its operations.
Credit risk has proved to be the most critical of all risks faced by a banking institution. This
signifies the role of credit risk management and therefore it forms the basis of present research
analysis. Researchers and risk management practitioners have constantly tried to improve on
current techniques and in recent years, enormous strides have been made in the art and science of
credit risk measurement and management6. Much of the progress in this field has resulted form
the limitations of traditional approaches to credit risk management and with the current Bank for
International Settlement (BIS) regulatory model. Even in banks which regularly fine-tune credit
policies and streamline credit processes, it is a real challenge for credit risk managers to correctly
identify pockets of risk concentration, quantify extent of risk carried, identify opportunities for
diversification and balance the risk-return trade-off in their credit portfolio.
Page | 36
The principal sources of credit risk within the bank arise from loans and advances to retail
customers, financial institutions, sovereigns and corporate clients. Credit risk exposures are
categorised as retail, arising primarily in the Retail and Wealth, Asset Finance and International
Divisions, commercial and corporate, financial institutions or Sovereigns arising in the
Commercial Banking and Wealth, Asset Finance and International Divisions. In terms of loans
and advances, credit risk arises both from amounts lent and commitments to extend credit to a
customer as required. These commitments can take the form of loans and overdrafts, or credit
instruments such as guarantees and standby, documentary and commercial letters of credit. With
respect to commitments to extend credit, the Group is potentially also exposed to loss in an
amount equal to the total unused commitments. However, the likely amount of loss is less than
the total unused commitments, as most retail term commitments to extend credit can be cancelled
without notice and the creditworthiness of customers is monitored frequently. In addition, most
corporate commitments to extend credit are contingent upon customers maintaining specific
credit standards, which are monitored regularly. Credit risk can also arise from debt securities,
private equity investments, derivatives and foreign exchange activities.
But at todays global and domestic socioeconomical scenario it has got a new dimensional
nimbleness. So before sanctioning a credit, it is a must to analyze future risk. For this, ABL has a
dedicated team of officers and executives to assess the future (simple and complicated) uneven
situation that may hinder the return of lending with its spread. To overcome this adversity, ABL
has a rigorous policies and procedures on various key risk factors regarding initiation to the
settlement of a loan for the safeguard of Banks assets. Bank selects quality borrowers who have
the ability or potentiality of willingness to honor all credit commitments in stipulated time. The
potentiality of the project is carefully justified in this regard. In ABL a thorough assessment of
risk is done before granting or extending credit and a plan in this regard is worked out. The Bank
has segregated duties among the officers and executives involved in credit related activities. The
total team works accordingly. ABL has a system of tracking risky and potentially weak loan
accounts. Bank has dedicated teams to monitor and supervise them. Respective assigned person
promptly reports to delegated authority to take measure so that the loan may not be downgraded
and hindered the assets portfolio of the bank. To co-ordinate with higher management and field
level, Recovery Division is assigned to monitor and report the NPLs status. This division chalks
out plans to recover classified loans including write-off loans. It reviews progress quarterly and
reports to the higher management.
The two distinct dimensions of credit risk management can readily be identified as preventive
measures and curative measures. Preventive measures include risk assessment, risk measurement
and risk pricing, early warning system to pick early signals of future defaults and better credit
portfolio diversification. The curative measures, on the other hand, aim at minimizing postsanction loan losses through such steps as securitization, derivative trading, risk sharing, legal
enforcement etc. The bank follows Bangladesh Bank circulars and Guidelines related to
classification and provisioning to define past due and impairment.
Page | 37
The Bank has been following Standardized Approach for assessing the requirement of Capital
charge against Credit Risk. The methodology used for this approach is to rate the exposures by
the External credit Assessment Institution (ECAI).
The Bank has a well structured delegation of credit approved authority for ensuring good
governance and better control in credit approval system. Considering the key elements of credit
risk, the bank has established Credit Risk Management framework in line with the Banks Credit
Risk Management (CRM) policy guideline and the Credit Risk Grading (CRG) system. This
framework defines CRM structure, role, responsibilities and the processes to identify, quantify,
and manage risk under the given policy. The CRM policy is reviewed from time to time for
adoption of new techniques, policies for measurement and management of risks in line with the
socioeconomic scenario and investment environment of the country.
ABLs credit policy is based on the customers need for their business and security, earning
capacity of borrower, the repayment capability of the business, and the value of collateral.
The Credit policy of the bank is focused on the economic goal of the country and policies
adopted by the Government. It strives towards the materialization of the Government policies
leading to overall economic development of the country.Banks Loan Review Policy stresses the
need to give special attention to problem loans and to initiate appropriate action to protect the
Banks interest on a timely basis. ABL strictly adheres to the regulatory policies; rules etc. as
regard to credit management and are in compliance with regulatory requirements as stipulated by
Bangladesh Bank from time to time.
5.6.1 Principal Guidelines for Credit Risk Management: ABL manages its credit risk by
strictly following some stepsCredit Eligibility Criteria
The Bank's criteria for loan and investment eligibility are strictly maintained.
Guidelines for Lending and Investments
The Bank follows Guidelines for Lending and Investments in managing its credit risk.
Basis for Approval of Loans and Investments
Viability
Creditworthiness
Sufficiency
Leverage
Security and Protective Requirements
Page | 38
5.6.2 Organizational structure of ABL for Credit Risk Management:

Principles
The Board is primarily responsible for guiding the Bank's credit strategy, approving policy., and
for setting limits for risk exposures related to operations and the attainment of business
objectives.
Functional Chart
The credit structure of the Bank is shown below, in accordance with the modified organization
presented to and accepted by the Board in principle.
Credit Operations & Administration
The principal tasks of this back office are to provide efficient, common credit-based services,
namely: security appraisal, credit checking, documentation & safekeeping, disbursements, loan
accounting, and data base management.
NPL Recovery
This is a specialized unit whose principal task is to maximize recovery and/or minimize losses on
non-performing assets through extra-judicial workouts, or through litigation and the subsequent
sale/lease/ operations of physical assets.
CRISL has rated Agrani Bank Limited (ABL) from two distinct perspectives, first, as a Highly
Integrated Government Support Entity (GSE) and second, as a commercial bank on standalone
basis i.e. without considering the Government support and on the basis of its actual position as a
commercial bank. As a highly integrated GSE, CRISL has reaffirmed AAA (triple A) rating in
the Long Term and ST-1 in the Short Term to Agrani Bank Limited. The above ratings have
been assigned in consideration of implied commitment of the Government of the Peoples
Republic of Bangladesh to the bank for providing required support in distressed situation. In
addition, the Government has also been utilizing the services of the bank in many commercial
and government purposes through guarantee. Government has also been extending its support
through policy and others to handle any adverse situation which is also a key consideration for
the above ratings. In CRISLs opinion, the likelihood of Government support withdrawal to the
bank is underpinned by the high economic cost of the banks default. Hence, CRISL believes that
the Government would do its utmost to maintain confidence in the banking system at any
stressed position.
Page | 39
Banks rated in this category are adjudged to be of best quality, offer highest safety and have
highest credit quality. Risk factors are negligible and risk free, nearest to risk free Government
bonds and securities. Changing economic circumstances are unlikely to have any serious impact
on this category of banks. The short-term rating indicates highest certainty of timely payment.
Short-term liquidity including internal fund generation is very strong and access to alternative
sources of funds is outstanding. Safety is almost like risk free Government short-term
obligations. As a stand-alone commercial bank CRISL has reaffirmed the rating of ABL to A+
(Pronounced as single A plus) in the Long Term and ST-2 in the Short Term . The above rating
has been reassigned due to consistent maintenance of its fundamentals such as improvement in
financial and operating performance, wide network of branches, considerably low cost of fund,
investment in diversified sectors etc.
I here take the case of an average customer of ABL to demonstrate the credit risk. Following
tables contain customers balance sheet, income statement and necessary information. From
those data, I have calculated Z score to explain credit risk of ABL. Z score can be calculated by
the following formula:
Z = 1.2X1+1.4X2+3.3X3+.6X4+1.0X5
= 1.2*0.065+1.4*0.072+3.3*0.24+0.6*0.19+1.0*0.62
Z= 1.7048
Now, Z score states that if the calculated value is less than 1.81, credit should not be approved.
Here, the average customers Z is less than standard Z value. So, credit should not be approved
and agrani bank has a significant creit risk.
X1=Working
capital/Total
asset
X2= Retained earnings/Total
asset
X3= EBIT/Total asset
X4= MV of equity/ Long term
debt
X5= Sales / Total asset
0.065517241
Z
=
1.2X1+1.4X2+3.3X3+.6X4+1.
0X5
1.7048
0.072413793
0.24137931
0.19
0.620689655
Table 14: Z calculation
Page | 40
Asset
Cash
Accounts receivable
Inventory
Plant & Equipment
Total Asset
Amount
50000
200000
200000
1000000
1450000
Liabilities and Equity

Accounts payable
Notes payable
Accruals
Long term debt
Equity
Total
liabilities
equity
and
70000
210000
75000
500000
595000
1450000
Table 15: Balance sheet of an average customer
Sales
COGS
Profit
Interest payment
EBT
Tax
Net Income
900000
550000
350000
50000
300000
90000
210000
Table 16: Inc ome statementof an average customer
X1=Working
capital/Total
asset
X2= Retained earnings/Total
asset
X3= EBIT/Total asset
X4= MV of equity/ Long term
debt
X5= Sales / Total asset
0.065517241
Z
=
1.2X1+1.4X2+3.3X3+.6X4+1.
0X5
2.311241379
0.072413793
0.24137931
1.19
0.620689655
Table 17: Components of Z score.
Page | 41
5.4 Foreign Exchange Risk Management

Foreign exchange risks arise from the variation in rates of exchange that prevail at domestic and
international markets. Fund Management Division handles the forex and money market
operations, including treasury function with maximum efficiency. The risk of foreign exchange
transactions has been streamlined to earn a potential gain through the Treasury Department. i.e.
Fund Management Division which is run by a group of structured manpower. Although the
global economic scenario was very much alarming because of the crisis in all economic
phenomena, still the Bank has faced it prudently leading to higher profit compared with the
previous record of the Bank. It has become possible by Treasury Department through optimum
use of open position limit fixed by Bangladesh Bank with a view to generating maximum
revenue.
Managing foreign exchange risk is a fundamental component in the safe and sound management
of all institutions having exposures in foreign currencies. Foreign exchange risk is defined as the
risk that a bank may suffer losses as a result of adverse exchange rate movements during a period
in which it has an open position either spot or forward currency. Investors or businesses face an
exchange rate risk when they have assets or operations across national borders or if they have
loans or borrowings in a foreign currency.
A comprehensive foreign exchange risk management program requires establishing and
implementing sound and prudent foreign exchange risk management policies, developing and
implementing appropriate and effective exchange rate management and control procedure. The
responsibility of managing foreign exchange risk rests with the Treasury Division of the bank.
Treasury Division always monitors the market scenario of risk and manages the foreign
exchange operations in such a way that earnings are not hampered against any adverse
movement in market prices.
To address the issue, all foreign exchange activities have been segregated into Front Office
which is responsible for currency transactions, Mid Office which deals verification & limit
monitoring & Back Office which deals settlement of transactions. These offices have separate
and independent reporting lines to ensure minimization of risk.
Agrani Bank Limited has formulated policies and manuals with a view to reducing the foreign
exchange risk. Treasury division of the bank manages and controls day-to-day trading activities
Page | 42
under the supervision of ALCOM that ensures continuous monitoring of the level of assumed
risks.
In ABL, FOREX risk is minimal as all the transactions are carried out on behalf of the
customers, i.e. foreign exchange trading exposures are principally derived from customers driven
transactions. All Foreign exchange transactions are revalued at mark-to-market method
according to Bangladesh Banks guidelines. All Nostro accounts are reconciled on 15 days
basis.The management reviews outstanding entry beyond 15 days for settlement purpose.
The Bank has an accounting procedure and management information system to measure and
monitor foreign exchange position, foreign exchange gains or losses and foreign exchange risks.
Besides, these are independently inspected and audited.
5.5 Liquidity Risk Management

Asset-liability risk or liquidity risk is the risk of a banks earnings as well as capital which arises
from inability to meet obligations in time when they become due without incurring unacceptable
losses. Liquidity risk arises as a result of mismatch during the time of cash flows. When a bank
does not have sufficient financial resources to meet its obligations and commitments, as they fall
due, then the bank makes its payment at an excessive cost. Infact, liquidity risk is considered a
major risk for Banks.
Asset and liability management risks may be categorized into 3 levels:
Risks that arise from the composition and dynamics of the balance sheet, specifically in
their impact on liquidity, earnings and, ultimately, adequacy of capital;
Risks that arise from the actual management process, specifically with regard to: the roles
and responsibilities of senior management; the timely availability and quality of
operational information; and the ability to interpret information, plan appropriately, and
to execute those plans; and
Risks that arise from day-to-day treasury operations, specifically in front-office
investment and trading activities, middle-office monitoring and in back-office settlements
and recording.
Liquidity risk can best be described as the risk of a funding crisis. While some would include the
need to plan for growth and unexpected expansion of credit, the risk here is seen more correctly
as the potential for a funding crisis. Such a situation would inevitably be associated with an
unexpected event, such as a large charge off, loss of confidence, or a crisis of national proportion
such as a currency crisis. In any case, risk management here centers on liquidity facilities and
Page | 43
portfolio structure. Recognizing liquidity risk leads the bank to recognize liquidity itself as an
asset, and portfolio design in the face of illiquidity concerns as a challenge.
In liquidity management, the counterpart to the risk approval process for market risk limits is the
Funding and Liquidity Plan. At least once annually, the Treasurer shall present the business plan
that will include the request for liquidity limits from the ALCOM, for final approval and
ratification by the Board of Directors. To effectively manage liquidity risk, it is imperative to
understand the internal and external risk drivers which are discussed below:
a) Factors Responsible for Increase/Decline in Liquidity Risks

The quantum of liquidity in a Bank may be attributed to a number of factors which are
enumerated as follows:
Liquidity Risks increase
Liquidity Risks decline
Growth of deposits
Payment of deposits
Receipt of bills receivable
Payment of bills payable
Issuance of Bank Drafts, TT, MT
Increase in Loan, Cash, Credit, Overdraft, Bill

purchased/discounted
Acquisition of fixed assets
Receipt of interest in Cash
Repayment of Loan, Cash Credit, Overdraft, Payment of salaries and other expenses in cash
etc.
Investment of Capital
Payment of Interest and borrowings
Sale of Investments
Increase in investments
b) Liquidity Strategy
Liquidity management starts with the formulation and dissemination of a clear liquidity strategy
that shall map out the general approach the Bank will have towards liquidity, including various
quantitative and qualitative targets. This strategy should address a key Bank goal of protecting its
financial strength and its ability to withstand stressful events in the marketplace. Because of the
importance of liquidity, the Board of Directors retains responsibility for approving the liquidity
strategy which is recommended by the Asset-Liability Committee (Alcom). The Alcom and the
Treasury function subsequently implement this on a day-to-day basis within the approved
parameters/limits.
Page | 44
c) Strategies for Liquidity Gap Management The Bank will determine the best strategy to
manage gaps in liquidity that are caused by changes in its balance sheet structure from time to
time. A range of options are available from which to choose, and the final one selected at any
given time will have to achieve the best balance between cost (or forgone income) on one hand,
and the speed with which the transaction can be undertaken.
Available strategies when liquidity is positive are the following:
Shrinkage strategy
lend funds on longer tenor/term
invest in longer-term securities
Liability Restructuring Strategy
accept short-term deposits
not to renew term deposits
Asset Restructuring Strategy
Convert short term securities into long term securities
In case of negative liquidity gaps, the following strategies may be considered:
Growth Strategy
Borrow long term funds from the market
Invest in short term securities
Liability Restructuring Strategy
Roll-over of short term deposits offering high interest rate

Asset Restructuring Strategy
Sell long term assets
Buy short term securities
Contingency plan
Arrange credit line from larger Banks.
Liquidity Instruments
1) Repo (Repurchase Agreement)
Page | 45
Repo is the sale of a security with a commitment by the seller to buy the security back from the
purchaser at a specified price and date. The transaction is called Repo from the viewpoint of the
seller of the security. Security means Bangladesh Govt. Treasury Bills. In case of Repo with
Bangladesh Bank, Banks/Financial Institutions inject Taka into the money market which
increases system liquidity. With the additional fund of SLR, Bank purchases Treasury Bills. For
urgent need of funds, treasury bills are required to be encashed before maturity. Consequently,
Bank will be deprived of the interests on the bills for the maturity period or Bank has to borrow
funds from Call market. In this case, Bank may opt to borrow funds to the extent of 95% lien
against the face value of treasury bills for a temporary period through REPO, with an
undertaking that the Bank will repurchase the Treasury bill before its maturity. The Bank that
offers higher interest rates will be given preference in the REPO agreements. Of late, REPO
arrangement can be effected through inter- Bank negotiations.
Impact of REPOs
An effective monetary tool for day-to-day liquidity management in the Money
Market(MM)
Smoothens temporary unexpected disturbances in the supply and demand of money in the
Money Market
Short-term liquidity increases in the MM by injecting Taka through the Repo mechanism
Banks and FIs may meet their short-term demand of Taka by Repo transactions without
liquidity or sale of the security.
2) Reverse REPO
Reverse REPO is the purchase of Govt. securities from Bangladesh Bank with a commitment of
resale after the agreed tenor. The terms and operational guidelines laid term for REPO
mechanism are also applicable in the case of Reverse REPO. It is an effective tool for mopping
up and absorbing excess liquidity from the money market. The minimum tenor of Treasury Bills
is 28 days. In case of inflow of funds for a temporary period, the Bank cannot accommodate
credit with this fund or cannot purchase treasury bills because the funds cannot be retained for 28
days. Besides, Bank has to wait for Sunday. In that case, the Bank cannot earn profits with this
fund. Under Reverse Repo, the Bank can earn through short-term investments with the additional
funds beyond CRR. In case of Reverse REPO also, the Bank has to offer a bid to Bangladesh
Bank specifying the rate of interest. The Bank offering a lower rate of interest is usually
acceptable to Bangladesh Bank. In the same manner as Repo, bids are offered to Bangladesh
Bank daily except Sunday and in case of inter-Bank arrangements, negotiation is effected for this
purpose.
Impact of Reverse REPOs
Page | 46
Intended participating institutions are to place excess short-term liquidity with

Bangladesh Bank
Used as a monetary management tool to smoothen and stabilize the Money Market by
absorbing excess liquidity.
Liquidity Contingency Plan

It is a good practice for the Bank to maintain a liquidity contingency plan to adequately address
unforeseen circumstances in its operations and in the environment. This needs to be approved by
the ALCOM and reviewed at least annually to take care of changes in the balance composition.
The objectives of the plan would be to:
Ensure that Bank has a liquidity management framework to sufficiently withstand a range
of crises (e.g., bank run, system illiquidity, etc.)
Analyze various scenarios and their potential impact on the Bank
Determine liquidity needs in the event of loss of funding sources or large drawings under
committed facilities; and
Determine available liquidity from existing assets and/or additional funding capacity
For purposes of initiating the liquidity contingency plan, any one or a combination of the
following trigger points should prompt the Treasury Officer to request for an emergency
meeting of the ALCOM:
Call rates in the money market have exceeded 25% for seven consecutive trading days;
The Banks advances-to-deposit (AD) ratio has exceeded 100% for fifteen consecutive
calendar days;
The Bangladesh Bank has declined the Banks request for REPO rediscounting;
The inter-bank market does not grant the Bank call facilities or charges premium rates.
5.8.1 Calculating credit risk by using Funding Gap:

Here we calculate the credit risk of Agrani Bank Limited by calculating funding gap. Firstly
assets and liabilities are grouped by maturities. Each maturitys liabilities (Deposits) are
subtracted from each maturitys assets (investment + loans). Then each maturitys funding gap
can be found for 3 month - 1 year, 1 year - 5 year, more than 5 years period. Now If
interest rate rises by 50 basis points, impact on net interest income will be positive
for 2011 and negative for 2010(3 month - 1 year). If int rate decrease by 75 basis
Page | 47
point, Impact on net interest income will be positive for 2010 and negative for 2011
(3 month - 1 year). If int rate rise by 50 basis points, Impact on net interest income
will be positive for year 2011 and negative for year 2010 (1year-5year). If int rate
decrease by 75 basis points Impact on net interest income will be positive for year
2010 and negative for year 2011 (1year-5year).
Grouping of asset and liability by maturity:

investment
upto
3
month
3 month - 1
year
1 year - 5
year
more than 5
yr
Loans
upto
3
month
3 month - 1
year
1 year - 5
year
more than 5
yr
2011
2,423,620,21
8.00
23,180,174,53
2.00
24,131,584,09
2.00
33,697,856,40
7.00
2010
14,264,459,59
1.00
1,873,994,42
6.00
9,752,688,16
1.00
18,010,763,92
5.00
14,682,394,32
7.00
42,853,222,21
0.00
93,715,005,31
5.00
21,493,968,70
1.00
21,608,656,51
6.00
33,115,722,63
6.00
48,014,882,42
0.00
44,757,668,83
0.00
Table 10: Grouping of asset and liability by maturity
Deposits
2011
upto
3 month
3 month - 1
14,167,806,14
year
2.00
1 year - 5
111,983,745,37
year
4.00
more than 5
84,793,163,66
yr
4.00
Table 11: Deposits by maturity
Funding
Gap
2011
2010
21,680,361,41
7.00
52,609,833,90
9.00
62,487,647,78
9.00
41,513,801,03
3.00
2010
Page | 48
3 month - 1
51,865,590,60
year
0.00
1 year - 5
5,862,844,03
year
3.00
more than 5
(29,601,338,55
yr
6.00)
Table 12: Funding Gap by maturity
(17,620,116,84
7.00)
(4,720,077,20
8.00)
21,254,631,72
2.00
If int rate rise by 50 basis

points
Impact
on
(3month-1year)
period=
Change in net interest income
2011
2010
259,327,95
3.000
(88,100,584
.24)
If int rate decrease by 75 basis

points
Impact
on
(3month-1year)
period=
2011
2010
-388991929.5
132150876.
4
If int rate rise by 50 basis

points
Impact
on
(1year-5year)
period=
2011
2010
29314220.17
-23600386.04
If int rate decrease by 75 basis

points
Impact
on
(1year-5year) 2011
2010
period=
-43971330.25
35400579.06
Table 13: Impact on net interest income in interest rate change
5.6 Market Risk Management

The market risk which may drive from loss of earnings due to change in the interest rate, foreign
exchange rate etc. is handled with care of the company.
Page | 49
Traditionally, credit risk management was the primary challenge for banks. With progressive
deregulation, market risk arising from adverse changes in market variables, such as interest rate,
foreign exchange rate, equity price and commodity price has become relatively more important.
Even a small change in market variables causes substantial changes in income and economic
value of banks. Market risk takes the form of:
1) Liquidity Risk
2) Interest Rate Risk
3) Foreign Exchange Rate (Forex) Risk
4) Commodity Price Risk and
5) Equity Price Risk
Management of market risk should be the major concern of top management of banks. The
Boards should clearly articulate market risk management policies, procedures, prudential risk
limits, review mechanisms and reporting and auditing systems. The policies should address the
banks exposure on a consolidated basis and clearly articulate the risk measurement systems that
capture all material sources of market risk and assess the effects on the bank. The operating
prudential limits and the accountability of the line management should also be clearly defined.
The Middle Office should comprise of experts in market risk management, economists,
statisticians and general bankers and may be functionally placed directly under the ALCO. The
Middle Office should also be separated from Treasury Department and should not be involved in
the day to day management of Treasury. The Middle Office should apprise the top management /
ALCO / Treasury about adherence to prudential / risk parameters and also aggregate the total
market risk exposures assumed by the bank at any point of time.
Market Risk Management provides a comprehensive and dynamic framework for measuring,
monitoring and managing interest rate, foreign exchange as well as equity, commodity price risk
of a bank that needs to be closely integrated with the banks business strategy. Market risk arises
from the movement of market prices. The Board of Directors (BOD) of the Bank views the
Market Risk as the risk to the banks earnings and capital due to changes in the market level of
interest rates of securities, foreign exchange and equities as well as the volatilities of those
changes.
Decision taken in the monthly meeting of Core Risk Management and ALCOM is an important
tool for managing market risk. ALCOM is in place in the bank to administer the system. Policies
and processes for mitigating market risk The only mitigation tool that the Bank uses is the
Marking to Market for mitigating market risk. Besides, a set risk/loss tolerance level is in place
to mitigate market risk.
The capital requirements for various risks of ABL are stated belowPage | 50
The capital requirements for
(Taka In crore)
Interest rate risk
88.69
Equity risk
133.69
Foreign exchange risk
12.44
Commodity risk
0.00
Case Study on Market Risk calculaation:

I have taken a case where, Agrani Bank has a 15 year zero-coupon bond with a face value of
400,000,000 taka. The bond is yielding 9.5% in the market.
Modified Duration of the Bond: (MD) = D/ (1+r)
= 15/ (1.095)
= -13.6986
Price Volatility (if the potential adverse move in yield is 25 basis points):
= (-MD) (potential adverse move in yield)
= (-13.6986) (.0025)
= -0.03425
DEAR (Daily Earnings at Risk): Taka value of position Price volatility
15
Taka value of position = 400,000,000/ (1+.095)
= 102,529,349.9 Taka
DEAR = 102,529,349.9 Taka -0.03425
= 3,51,1630.23 Taka
10 Day VAR (Value at Risk) = Dear N
= 3,51,1630.23 10
= 11,104,749.83 Taka.
Page | 51
5.10 Internal Control and Compliance (ICC) Risk Management

Banking function entails high risk. Effective internal control and compliance system, efficient
corporate governance, transparency and accountability are very important for the banking sector
worldwide. Internal control system identifies the risk in the process, adopts mitigation Annual
Report 2012 47 measures and ensures compliance thereof. Current or prospective compliance
risk to earnings and capital arises from violation or non-compliance with laws, rules, regulations,
agreements, prescribed practices or ethical standards, as well as from the incorrect interpretation
of laws and regulations. Proper internal control system integrates compliance risk management
into overall risk management process.
Operational loss may arise from error and fraud due to lack of internal control and compliance.
Management, through Internal Control and Compliance Division, controls operational procedure
of the Bank. According to the Bangladesh Bank guidelines, Agrani Bank Ltd. has introduced
three Units under Internal Control and Compliance (ICC). The three units are: Compliance,
Monitoring and Audit and Inspection.
The Monitoring unit is named as Audit Implementation Division. Internal Audit and Inspection
Division undertakes periodical and special audit of the branches and divisions at Head Office for
review of operational effectiveness and internal/external compliance requirements. The Board
Audit Committee subsequently reviews the very serious lapses (VSLs) identified by Audit and
Inspection Division.
5.10.1 Operating Guidelines

5.10.1.1 Audit Procedure
At the start of each year, the Audit and Inspection Division (AID) shall set out its audit
plan on the basis of branch size/risk perception and rotation. This plan shall be prepared
in the month of December of the previous year and will be approved by the Audit
Committee and intimated to the Managing Director.
At the end of the year, the AID shall prepare a summary report on the audit program,
audit findings and corrective actions taken, which shall be forwarded to Audit
Committee, MD and Head of Internal Control Unit.
5.10.1.2 Branch Inspection
Circle General Managers and Zonal Heads will ensure inspection of their respective branches
activities on a regular basis (see table below for inspection frequency), and report in accordance
with the Branch Inspection Report format.
Page | 52
5.10.1.3 Risk Analysis of Control Functions

Individual items in the DCFCL shall be risk rated in accordance with the rating report
shown in Appendix 4.
The volume of inspections and frequency of reporting shall be determined on the basis of
the state of perceived risks, as follows:
5.10.1.4 Loan Documentation Checklist
The lending units/branches of the bank shall use a loan documentation checklist for each
loan account as a guide in ensuring that the execution of required documents has been
completed prior to the operation of approved credit facilities.
This checklist should always be available as part of the credit files at the lending
unit/branch for inspection by the Internal Control Team and senior management.
5.10.1.5 Operations Report
Page | 53
The branches shall prepare and retain operations report certification on the activities of
the branch. (See Appendix, figure 4)
This certification shall be sent to Central Accounts Division along with closing
statements half-yearly and at annual closing.
This certification shall be reviewed by Internal Control Team and higher management.
5.10.1.6 Reporting
ICT shall prepare reports on individual inspection programs and submit it to Monitoring
Division, with a copy to Internal Control Division.
The deficiencies detected by ICT shall be forwarded to branches for correction.
Matters concerning serious deviations detected by ICT shall be placed before the Audit
Committee and the Managing Director.
The inspection report of ICT shall be prepared in the prescribed format. (See Appendix,
figure 5)
5.10.1.7 Monitoring and Follow-up
The internal control team (ICT) shall be established and will remain under the
supervision of Monitoring Unit/Division. (See Appendix, figure 6)
5.10.1.8 Compliance Process
The Compliance Unit of the Internal Control Division shall be responsible for receiving
all regulatory guidelines, proper recordkeeping and distribution among all relevant units.
ICT shall be responsible for monitoring of regulatory compliance.
ICT shall be treated as point of contact when regulatory inspection is conducted.
5.10.2 Internal Control Support Functions

5.10.2.1 Reliable Accounting System
One of the pre-conditions for effective internal control is the existence of a reliable accounting
system that complies with internationally accepted standards (IAS) and is operated by skilled
personnel. For this reason, the Bank shall ensure that its periodic accounts are prepared and
presented accurately and in a timely manner.
5.10.2.2 Management Information System
Page | 54
A robust reporting system should be established to ensure that decisionmakers have access to
reliable and timely information.
5.10.2.3 Staff Training
The Banks training institute (ABTI) shall conduct training programs on Internal Control and
Compliance to ensure that all its staff are regularly updated on developments in their areas of
responsibility and that they have the necessary skills to perform their functions effectively.
5.11 Information and Communication Technology (ICT) Risk Management

We are living in an era of ICT. Banks have become more technology driven these days. Uses of
computer and internet have become inseparable phenomenon in the banking industry. There are
certain risks involved in the use of information and communication technology. This risk may
arise from malfunctioning of the system, failure of network, lack of knowledge about the use of
technology, virus attack, hacking etc.
Use of ICT in Agrani Bank Limited is increasing tremendously with the increased use of ICT. It
become necessary to be more careful to address the risk associated to ICT security. Bank has
formulated well defined ICT policy in line with the international best practices and prudential
guidelines of Bangladesh Bank on ICT security.
Besides the policy bank also prepared implementation manual for user at all level in conformity
with the ICT policy. An ICT Audit manual has been prepared and is in use for auditing ICT
activities of the bank to assure that the policy and the procedure are meticulously followed while
using ICT by the user at any level.
5.11.1 Prevention of Money Laundering Management
Money laundering risk is defined as the loss of reputation and expenses incurred as penalty for
being negligent in prevention of money laundering. For mitigating the risks the Bank has a
designated Chief Compliance Officer at Head Office and compliance officers at branches, who
independently review the transactions of the accounts to verify suspicious transactions. Manuals
for prevention of money laundering have been established. Meticulous records of `Know Your
Customer (KYC) & Transaction Profile (TP) are being maintained. Cash Transaction Report
(CTR) and Suspicious Transaction Report (STR) (if any observed) are sent to competent
authority in strict adherence to Central Bank directives. Training has been continuously given to
the category of officers and executives for developing awareness and skills for identifying
suspicious activities.
5.11.2 Bangladesh Initiatives
Page | 55
Enactment of Money Laundering Prevention Act 2002 (Ac No-7, 2002):

A high powered Central Task Force has been formed in Bangladesh Bank. This Task Force
reviews big transactions and gives necessary directives. The deputy Governor of Bangladesh
Bank is the Chairman of this Task force with the members of representatives from home,
commerce, foreign affairs and law. Justice and Parliamentary affairs ministries, Police (Special
Branch), Anti-Corruption Commission (Bank Branch), National Revenue Board (Excise/Income
Tax), Security Exchange Commission and MDs of NCBs including 10 nominated MDs from
Private Banks. Besides, seven regional task forces are formed in seven regional 0ffices of
Bangladesh Bank.
The following 4 statements are to be sent in the Central task force of Bangladesh bank:
Statement 1:
Seized money and gold (equivalent to Tk. 10 lac and above) by DIG (Crime) of Police Head
Quarters and National Revenue Board in every two months.
Statement 2:
Transaction above Tk. 1 crore in 6 months in a particular account by Banks.
Statement 3:
Unusual/suspicious transaction reporting.
Statement 4:
Smuggled goods (equivalent to Tk.10 lac and above by DIG (Crime) and NBR.
Conducting training programs regarding anti-money laundering.
Different Circulars and instructions issued by Bangladesh Bank from time to time and
ensure compliance therewith.
5.11.3 Responsibilities of Bangladesh Bank

Following are the responsibilities as laid down in the Act;
Investigate all money laundering offences.
Supervise and monitor the activities of banks, financial institutions and other institutions
engaged in financial activities.
Call for reports relating to money laundering from banks, financial institutions and other
institutions engaged in financial activities.
Analyze such reports and take appropriate action.
Page | 56
Provide training to the employee of banks, financial institutions and other institutions
engaged in financial activities.
Perform all other acts in attaining the objectives of the Act.
5.11.4 Principal Guidelines

The following policy guidelines shall be maintained and updated with any amendments made in
the Money Laundering Prevention Act, 2000, as well as new/changed guidelines of the
Bangladesh Bank. The bank shall continuously communicate clearly with all employees, through
a circular from Chief Executive Officer, the Banks policies and procedures against money
laundering. The Anti-Money Laundering Unit shall be entrusted with the responsibility to issue
such circular on annual basis. Besides, all other necessary circulars and guidelines relating to anti
money laundering shall be provided by the Unit from time to time.
The executives and 0fficers at every time shall have specific job description within
0rganisational structure relating to their responsibility in anti money laundering
compliance.
The branches shall comply with the norms and procedures in opening accounts of the
customers and collect accurate and complete information and keep records properly.
The branches shall prepare KYC profile for new and already opened accounts and keep
and follow the profile in maintaining accounts.
The branches shall collect probable Transaction Profile from the customers in each
account as per prescribed format.
The branches / Offices shall send a report relating to suspicious transaction following
organizational structure as per prescribed format.
The branches shall preserve records of transactions of the customer as per guidelines.
All the concerned employees of the bank shall be imparted training on anti money
laundering.
The Zonal Offices shall submit a compliance report to Branches Control Division, Head
Office (Central Compliance Unit) annually depending on effectiveness of anti money
laundering measures taken by the branches.
The Branches Control Division shall inspect the branches and monitor the adequacy and
effectiveness of the anti money laundering programs. MD's Squad and Audit Inspection
Division shall also take the similar steps as per management instructions.
Anti Money Laundering Unit of Head Office shall establish annual self assessment
processes that will asses how effectively the bank's anti money laundering procedures are
complied with. The AML unit shall prepare a report and submit to the management for
review.
The branches shall maintain all out precautionary measures so that they are allowed to be
used by the Money Launderers, failing which the concerned persons shall be responsible.
Page | 57
Chapter six Findings and Recommendations

Findings
In preparing this report I have found some findings regarding risks of AVL. Those are In most of the cases, if a client comes to take loan, the questionnaire form filling becomes
hard for him and takes a lot of time. The banks standard questionnaire form is of 16
pages. So this form should be modified and easy for the person filling it.
Page | 58
Duration of time for preparing appraisal report after submitting and managing all the
documents and papers, the loan operation department takes almost three months and in
some cases, it cross three months and takes 5 or 6 months. The problem is that within this
time period, project that was viable for that time becomes obsolete getting loan and
starting business.
Lack of proper updated technology. This is the age of information technology (IT) all the
activities are computerized. As far as I know only cash section is computerized.
To judge a project accurately, technicians experienced in the particular field should be
there. There are some engineers to judge technical viability but is not sufficient for
varieties of proposed project.
Political violence, it is a crucial limiting factor. Since the Agrani bank is 100%
government body owned, the government body or the political pressure some time make
the department to grant the loan to the project which is not viable and feasible. This
creates a lot of problems to recover the loan and the loan deemed to be bad.
Recruitment, young persons can work with young power, skill and inspiration. New
generation is being developing themselves with latest technology, education and world of
challenge. So new recruitment should be a part of continuous development.
Training, all the employees should be upgraded with latest technological development
with the changing edge.
Lack of business experience of the entrepreneurs.
Major credit risk exposour
Major interest rate risk exposoure
Dependence on imported technology and non-availability of adequate information about
that from local source.
Lack of adequate, updated and accurate information in the country. Both primary and
secondary data are not readily available.
Inadequate attention to social cost and benefits.
Unstable tariff and fiscal policy, political instability of the country, resulting in poor
project appraisal especially from the economic viewpoint.
Sometimes inefficient allocations of resources have created a huge amount of bad debt.
Political interruption in sanctioning loan.
Lack of co-ordination among the various departments.
Lack of motivation and team speed.
Political trade union.
No use of latest technology and permanent IT specialist.
Recommendations
Agrani Bank Ltd is one of the first leading banks in Bangladesh. Its major operations are profit,
growth, development and welfare oriented. Management system of this bank is fully democratic.
It always maintains the rules declared by Bangladesh Bank. Agrani Bank training institute
Page | 59
provides training facilities to its medium & junior level officers of the bank and also provides
executive development & internship programs. My recommendations are below The management functions (from planning to control) are not clearly present in their
various activities. Only the cash section of the branch is computerized. But for reducing
bankruptcy Agrani Bank Ltd should develop immediately Credit & Project Finance
Information System through computer.
Agrani Bank Ltd should introduce the networking system by which all branches of the
bank can be connected easily as a largest commercial bank in Bangladesh. By using
computerized networking system Agrani bank could disbursement of services on ATM,
Debit card, Master card, Q-Cash facilities.
Officers who are working on Credit risk management & Project finance procedure, they
should give attention on timing of sanctioning finance because demand of any kind of
product is being flexible. So if other thing is remaining constant, sanctioning procedure
should not be delayed.
Policy should be distinctive and dynamic which has more acceptability to the borrowers.
Policy should be made at the consideration of regional, financial, continental,
demographical, economical, psycho graphical.
Political power should not be considered to maintain credit management module and
project finance procedure. In our Bangladesh most of the cases procedure is too weak for
financing so, ultimate result is being bankrupted.
Conclusion:
The risks of Agrani Bank Limited have been defined as the possibility of losses, financial or
otherwise. The Risk Management of the Bank covers 6 (six) Core Risk Areas of banking i.e.
Credit Risk Management, Foreign Exchange Risk Management, Asset Liability Management,
Prevention of Money Laundering, establishment of Internal Control & Compliance and
Information & Communication Technology (ICT) risk. The prime objective of the risk
management is that the Bank takes well calculative business risks while safeguarding the Bank's
capital, its financial resources and profitability from various risks. In this context, the Bank has
implemented various steps as per the guidelines of Bangladesh Bank.
Credit Risk is one of the prime risks of the Bank. It indicates the potential loss arising from
contractual failure of the borrower with the Bank. The failure may be resulted from
unwillingness of the borrower to repay or due to decline of the financial conditions. Therefore,
Bank's Credit Risk Management activities have been designed to address all these issues. On the
basis of Bangladesh Bank's Credit Risk Management (CRM) policies, Agrani Bank Limited has
formulated a Manual of Credit Risk Management Policies which has been approved by Bank's
Page | 60
Board of Directors, already in force. These help to bring the credit operation of the Bank to the
level of international standard.
The risk of foreign exchange transactions has been streamlined to earn a potential gain through
the Treasury Department. i.e. Fund Management Division which is run by a group of structured
manpower. Although the global economic scenario was very much alarming because of the crisis
in all economic phenomena, still the Bank has faced it prudently leading to higher profit
compared with the previous record of the Bank. It has become possible by Treasury Department
through optimum use of open position limit fixed by Bangladesh Bank with a view to generating
maximum revenue.
Asset and Liability Management is one of the key essentials of managing a Banks balance sheet
efficiently. In line with the ongoing reform and modernization program, Agrani Bank Limited
has retooled its ALM to deliver modern, dynamic, vibrant & futuristic process through the
adaptation of international best recognized practice.
Operational loss may arise from error and fraud due to lack of internal control and compliance.
Management, through Internal Control and Compliance Division, controls operational procedure
of the Bank. According to the Bangladesh Bank guidelines, Agrani Bank Ltd. has introduced
three Units under Internal Control and Compliance (ICC). The three units are: Compliance,
Monitoring and Audit and Inspection.
Use of ICT in Agrani Bank Limited is increasing tremendously with the increased use of ICT. It
become necessary to be more careful to address the risk associated to ICT security. Bank has
formulated well defined ICT policy in line with the international best practices and prudential
guidelines of Bangladesh Bank on ICT security. Besides the policy bank also prepared
implementation manual for user at all level in conformity with the ICT policy. An ICT Audit
manual has been prepared and is in use for auditing ICT activities of the bank to assure that the
policy and the procedure are meticulously followed while using ICT by the user at any level.
Page | 61
Appendix A
Figure 1: objective criteria for loan classification and provisioning
Figure 2: Credit functional chart
Page | 62
Figure 3: Branch Inspection Report format
Figure 4: operations report certification of ABL
Page | 63
Figure 5: Branch inspection report by ICT of ABL
Page | 64
Figure 6: Folowup process flowchart of ABL
Page | 65
Figure 7: Loan documentation checklist of ABL
Page | 66
Figure 8: Asset liability activity of ABL
Figure 9: ICC functional chart of ABL

Page | 67
Figure 10: Credit process flow of ABL
Page | 68
Figure 11: ALM management functional chart of ABL
Page | 69
Figure 12: Department control function checklist of ABL
Page | 70
Appendix B
Assets
cash
2011
2010
18,919,479,891.0
0
13,016,651,219.00
3,612,914,097.00
3,004,978,834.00
balance with other banks

money at call and short notice
1,000,000,000.00
investments
85,331,252,876.0
0
43,916,295,003.00
194,085,656,173.
00
163,256,184,445.00
11,226,649,745.0
0
5,435,899,358.00
34,644,756,063.0
0
36,222,018,059.00
348,820,708,84
5.00
264,852,026,918.0
0
25,758,153,981.0
0
6,216,816,056.00
252,208,360,096.
00
206,326,011,342.00
44,911,570,722.0
0
36,591,914,752.00
322,878,084,79
9.00
249,134,742,150.0
0
9,011,764,000.00
5,465,240,000.00
Loans and Advances
Fixed Asset
Other Assets
Total Assets
Liabilities and Equity

Borrowing from other banks, FI and
agents
Deposit and other Accounts
Other Liabilities
Total Liabilities
Paid up capital
Reserve
Page | 71
Revaluation and Amortization

Reserve
Retained Surplus
11,683,235,877.0
0
4,855,652,360.00
269,357,597.00
902,502,801.00
4,978,266,572.00
4,493,889,607.00
25,942,624,046.
00
15,717,284,768.00
348,820,708,84
5.00
264,852,026,918.0
0
Total Shareholders Equity
Total Liabilities and Equity
Table 1: Balance sheet of ABL
Page | 72
Table 2: Duration analysis
References
Saunders, A. (1997), Financial Institutions Management: A Modern Perspective, Richard D.
Irwin, Inc., Second Edition, Burr Ridge, IL.
Bessis, J. (2010), Risk Management in Banking, Wiley, Third edition
Greuning, H. V. & Bratanovic, S. B. (2003), Analyzing Banking Risk: A Framework for
Assessing Corporate Governance and Risk Management, World Bank Publications.
Jorion, P. (1997), Value at Risk, Richard D. Irwin Inc., Burr Rudge, IL.
Basel Committee on Banking Supervision (1999), Principles for the Management of Credit
risk, Bank for International Settlements, Basel.
Basel Committee on Banking Supervision (2001), Principles for the Management and
Supervision of Interest Rate Risk, Bank for International Settlements, Basel.
Basel Committee on Banking Supervision (2003), Sound Practices for the Management and
Supervision of Operational Risk, Bank for International Settlements, Basel.
Basel Committee on Banking Supervision (2008), Principles for Sound Liquidity Risk
Management and Supervision, Bank for International Settlements, Basel.
Berger, A. N. & Udell, G. F. (1995), "Relationship Lending and Lines of Credit in Small Firm
Finance," Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
Page | 73
Froot, K. A., Scharfstein, D. S., & Stein, J. C. (1994), A Framework for Risk Management ,
Harvard Business Review, 76(6), pp. 91-102.
Houpt J. V. & Embersit J. A. (1991), "A method for evaluating interest rate risk in U.S.
commercial banks," Federal Reserve Bulletin, August Issue, pages 625-637.
Jim Rich & Curtis Tange (2003), Credit Risk Measurement - A Portfolio View, ERisk.
Oldfield, G. & Santomero A. M. (1995), The Place of Risk Management in Financial
Institutions, Wharton Financial Institutions Center, University of Pennsylvania.
Pyle, D. H. (1997) "Bank Risk Management: Theory," Institute of Business and Economic
Research, University of California, Finance Working Paper No. RPF-272, July 1997.
Santomero, A.M. (1995) Financial Risk Management: The Whys and Hows, Financial
Markets, Institutions and Instruments.
Page | 74

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A report

Date of submisssion: 22 May, 2014.

Section: B (16th Batch)

Experience at back desk:............................................................................. 11

Chapter three Company Profile..............................................................................12

5.4 Foreign Exchange Risk Management...............................................................42

Chapter six Findings and Recommendations.........................................................58

Chapter one introduction

1.3 Objective of the study

1.4 Rationale of the study

1.5 Research Question

Chapter two Internship Experience

Experience at front Desk

2.1 Experience at front Desk:

2.2 Experience at back desk:

Chapter three Company Profile

Activities of Agrani bank

3.1 Background of the company

3.2 Objectives of Agrani Bank:

3.3 Activities of Agrani bank Ltd.

3.3.1 General banking activities:

3.3.2 Credit activities:

3.4 Departments maintained by ABL

Branch & Subsidiaries / Unit Control Division

3.5 Organizational structure

3.6 Management and Human Resource:

Chapter four Literature review

4.2 Definition of Risk

4.3 Risk Management in Banking

4.4 Categories of Risk Management

4.5 Major Types of Risks Faced By Banks

4.5.1 Credit Risk

4.5.2 Market Risks

4.5.3 Liquidity Risk

Chapter five Risk Management

Interest Rate Risk

5.2 Risk appetite

Risk management principles

Placing emphasis on the diversity, quality and stability of earnings,

Strategies, Policies and Limits

Measurement, Monitoring, and Reporting

5.4 Risk Management Culture

5.2 Interest rate risk (IRR) Management

5.5.1 Types of interest rate risk:

Yield curve risk

5.5.2 Interest rate risk in the banking book (IRRBB) of ABL:

Sources of Interest Rate Risk are the regulatory environment

5.5.4 Stress Testing

5.5.5 Application of duration principle in Agrani bank Ltd:

In the case of zero coupon bonds:

In this case of coupon bond A, which is

Table-3: duration gap calculation

Figure-1: Duration gap in zero coupon bond.

In the case of coupon bonds:

In the case of coupon bond, T bond B, changes

Table -6: duration gap calculation

Figure-1: Duration gap in coupon bond.

5.3 Credit Risk Management

5.6.2 Organizational structure of ABL for Credit Risk Management:

Table 14: Z calculation

Liabilities and Equity

Table 15: Balance sheet of an average customer

Table 16: Inc ome statementof an average customer

Table 17: Components of Z score.