“Bank” a little word but plays a very significant role in each country for the economic development. Even it is become impossible now a day to think about a country’s economical environment excluding banking system. Whatever the countries are stand-poor, less develop, developing or developed but all the countries should have the banking system. Banking system is the heart of each country’s economic body. Economic, momentary and fiscal all the policy directly or indirectly depends on banking system for its better implementation.
National Bank Limited is a banking company in comported in the People’s Republic of Bangladesh with limited liability. The task of satisfying the export-import group, deposit group and borrower group is the first priority here. It aims at maintaining the high quality of service, has already achieved at the same time being in a sound financial health. Credit risk and quality risk are well under control. The management of National Bank has been focusing on these key issues for ensuring a better base foe their bank to stand on.
The project report consists of analysis of the fund Management and risk management System of National bank Limited. From this analysis of fund management and risk management system, I am tried to find out some recommendation issues that might be an accurate way to overcome the drawbacks of National Bank Limited.
An Overview of National Bank Limited:
National Bank Limited has its prosperous past, glorious present, prospective future and under processing projects and activities. Established as the first private sector Bank fully owned by Bangladeshi entrepreneurs, NBL has been flourishing as the largest private sector Bank with the passage of time after facing many stress and strain. The member of the board of directors is creative businessman and leading industrialist of the country. To keep pace with time and in harmony with national and international economic activities and for rendering all modern services, NBL, as a financial institution automated all its branches with computer network in accordance with the competitive commercial demand of time. Moreover, considering its forth-coming future the infrastructure of the Bank has been rearranging. The expectation of all class businessman, entrepreneurs and general public is much more to NBL. Keeping the target in mind NBL has taken preparation to open new branches by the year 2010.
The President of the People’s Republic of Bangladesh Justice Ahsanuddin Chowdhury inaugurated the bank formally on March 28, 1983 but the first branch at 48, Dilkusha Commercial Area, Dhaka started commercial operation on March 23, 1983. The 2nd Branch was opened on 11th May 1983 at Khatungonj, Chittagong.
At present, NBL has been carrying on business through its 121 branches spread all over the country. Besides, the Bank has drawing arrangement with 415 correspondents in 75 countries of the world as well as with 32 overseas Exchange Companies. NBL was the first domestic bank to establish agency arrangement with the world famous Western Union in order to facilitate quick and safe remittance of the valuable foreign exchanges earned by the expatriate Bangladeshi nationals. NBL was also the first among domestic banks to introduce international Master Card in Bangladesh. In the meantime, NBL has also introduced the Visa Card and Power Card. The Bank has in its use the latest information technology services of SWIFT and REUTERS. NBL has been continuing its small credit programme for disbursement of collateral free agricultural loans among the poor farmers of Barindra area in Rajshahi district for improving their lot. Along side banking activities, NBL is actively involved in sports and games as well as in various Socio-Cultural activities. Up to December 2008, the total number of workforce of NBL stood at 2737.
Since the very beginning, the Bank exerted much emphasis on overseas operation and handled a sizeable quantum of homebound foreign remittance. The Bank established extensive drawing arrangement network with Banks and Exchange Companies located in important countries of the world. Expatriates Bangladeshi wage earners residing in those countries can now easily remit their hard-earned money to the country with confidence, safety and speed.
Now NBL is on line to establish trade and communication with the Prime International banking companies of the world. As a result NBL will be able to build a strong root in international banking horizon. Bank has been drawing arrangement with well conversant money transfer service agency “Western Union”. It has a full time arrangement for speedy transfer of money all over the world.
Inspired by its social obligation and commitment and responsibility, NBL has been running a School and College up to Class XII solely on its own guardianship. From the very inception, this institution has been maintaining a good track record of results at the SSC and HSC Examinations. Conducted by a well-educated and trained team of teachers, reputation of this institution has been increasing day-by-day as a result of their relentless and sincere endeavor.
Transparency and accountability of a financial institution is reflected in its Annual Report containing its Balance Sheet and Profit & Loss Account. In recognition of this, NBL was awarded Crest in 1999 and 2000, and Certificate of Appreciation in 2001 by the Institute of Chartered Accountants of Bangladesh.
A team of highly qualified and experienced professionals headed by the Managing Director of the Bank who has vast banking experience operates bank and at the top there is an efficient Board of Directors for making policies.
Ensuring highest standard of clientele services through best application of latest information technology, making due contribution to the national economy and establishing ourselves firmly at home and abroad as a front ranking bank of the country are our cherished vision.
Efforts for expansion of our activities at home and abroad by adding new dimensions to the banking services are being continued unabated. Alongside, we are also putting highest priority in ensuring transparency, accountability and improved clientele services as well as to our commitment to serve the society, through which we want to get closer and closer to the people of all strata. Winning an everlasting seat in the hearts of the people as a caring companion in uplifting the national economic standard through continuous up gradation and diversification of our clientele services in line with national and international requirements is the desired goal we want to reach.
Back ground information of the project:
National Bank Limited is one of the leading private commercial bank having a spread network of 121 branches across Bangladesh and plans to open few more branches to cover the important commercial areas in Dhaka, Chittagong, Sylhet and other areas in 2010. National Bank Limited has been licensed by the Government of Bangladesh as a Scheduled commercial bank in the private sector in pursuance of the policy of liberalization of banking and financial services and facilities in Bangladesh. In view of the above, the Bank within a period of 26years of its operation achieved a remarkable success and met up capital adequacy requirement of Bangladesh Bank.
In order to complete the Project Work, first the topic “Fund management & risk management practice of National Bank” was chosen. The primary reasons behind choosing this topic are to present an overview of National Bank Limited, to present the principal activities of National Bank Limited in order to manage their fund, to present the principal activities of National Bank Limited in order to minimize risks those are involved in banking business, to identify the problems of National Bank Limited and to suggest remedial measures for the development of National Bank Limited.
Statement of the Problem:
I was very much interested about the fund management system of bank that is practiced in our country. In order to know the activities related with fund management system and documents required to maintain this system, I chose the topic as “Fund Management System and risk management Practice” in a commercial bank of Bangladesh: A Case Study of National Bank Limited.
Objectives of the Study:
The objectives of the study are mentioned below:
1 To know how the fund management system of a bank operates and to know the issues such as liquidity, capital, reserve, deposit, and loan those are required to manage to run the fund management system.
2 To know the sources of fund and the areas in which the fund of a bank are utilized and to identify the problems those are related with the fund management system and provide recommendation to eliminate those problems.
- To know how well a bank manage the risks such as credit risk, market risk,
liquidity risk, money laundering risk, and foreign exchange risk which are
involved in banking business.
Rationale of the Study:
The purpose of this report is to get a gist idea about the fund management system, which is practice in our country. Banking is a vast term and through this report I have tried to analyze some crucial topics regarding fund management system. Without understanding the nerve position, it is very difficult to go deeply a system. To make the banking concept easier to the people, I tried my best to present the crucial topics in a smooth way. If the liquidity position of the bank is not in a suitable position, the bank may face crisis. Although excess of the fund may create problem because it does not bring anything for the bank however it is a financial intermediary. That is why we should know the different issues regarding the fund management system to get a comprehensive idea about bank.
This report basically deals with the risk management and fund management system of National Bank Limited covering the areas like capital management, liquidity management, credit management, reserve management etc.
Methodology of the Project:
Sources of Data Collection:
This paper is fully based on secondary information. Secondary information has been collected from the Annual Reports of National Bank Limited (2007-2008). Some information has also been collected from the daily newspapers and Internet sources such as website of NBL and prospectus of NBL. The data gathered from secondary sources were arranged orderly to get a clear picture of the bank’s fund management system and risk management practice.
The collected information has then been tabulated, analyzed and the findings thereof have laid the basis of research report. Data processing and analysis has been done both manually and by using computer. Tabular method, ratio analysis, and suitable statistical tools and techniques have been used to operationally the research where required. To make the report more understandable and give a nice look, a number of flowcharts, graph, table and different computer software will be used to prepare the report.
Sources of funds and its utilization:
The main sources of fund of National Bank are shareholders’ equity and savings of the public which the bank mobilizes as deposits and deploys as short and long term loans and advances as well as invest in different financial institutions including the Bangladesh Bank to earn profit. Total funds of the bank is controlled by and utilized through the Treasury Division, Loan division and merchant of the bank’s total demand and time liabilities are required to be maintained as:.
Table-1: Sources of funds of NBL at the end of year 2008.
|Sources of funds||Percentage|
|Paid up capital||2.59%|
|Deposit & other accounts||83.36%|
CRR in current account with Bangladesh Bank (on which no interest is received) and the rest 13% are maintained in different approved securities, treasury bills, bonds, debentures and foreign currencies. In utilizing its resources, the bank keeps in view the need for maintaining required liquidity and earning maximum profit through lending and investing.
Table-2: Application of funds
|Application of funds||Percentage|
|Loans and advances||68.78%|
|Cash and bank balance||9.14%|
Function of NBL as collector of bank fund:
Generally National Bank collects funds from three sources.
c) Borrowed fund
Capital is the first source of each bank’s fund. NBL was incorporated under the Registrar of Joint Stock Companies on 15th March, 1983 as the first private sector bank of the country with an authorized capital of Tk.100 million and a paid up capital of Tk. 44 million. With an initial public offering of Tk.36 million, the bank was enlisted with the Dhaka Stock Exchange in 1985.
Stock dividend of 55 percent was declared for the year 2007 which increased the paid up capital of the bank from Tk. 1208.21 million to Tk. 1872.72 million in 2008 while its authorized capital was Tk. 2450 million. Through right share issues on 4(four) occasions and bonus share on 10 (ten) occasions, paid up capital of the bank now stands at Tk.1872.72 million, which we believe to have been playing a significant role in easing the liquidity problem in the capital market.
Table-3: Last five years authorized & paid up capital of NBL.
|Paid up capital|
Deposit is the main source of a bank’s fund. Despite the adverse impact of downturn of world economy and high prices of oil and other essential commodities in the international market, phasing out of the MFA, soaring inflation in the domestic economy and labor and political interest in the country, National Bank Limited has been able to maintain its trend of growth in 2008. Total deposits mobilized by NBL in 2008 stood at Tk. 60,195.25 million, which is higher by Tk. 12,234.03 million or 25.51% than in 2007. This has been possible as a result of expansion of branch network, competitive interest rate, proper directions and guidance of a prudent and farsighted Board of Directors, timely adaptation of appropriate measures under changing condition in the economy, strict observance of risk management principles, close review and analyzing of money and capital market conditions, intensive supervision, strengthening of internal control. In order to keep the growth continues, priority is given to the mobilization of costless and low cost deposits. Deposit resources are raised by undertaking special saving mobilization programmers at different intervals through the year.
Table-4: Last five years deposits (in million) of NBL.
|Deposits(Tk in million)|
Types of deposits:
All the deposits of National Bank Limited may be classified as follow:
1 Current Deposit
2 Saving Deposit
3 Fixed Deposit
4 Term Deposit
5. Bills payable
6. Bearer certificate of deposits
Table-5: Deposit mix of NBL in 2008
|Deposit type||Amount in million Tk|
|Bearer certificate of deposits|
C) Borrowed funds:
Sometimes bank faces liquidity crisis. To handle this type of problem NBL borrows funds from other banks, financial institutions and agents. This type borrowed fund may be short or long term. Long term borrowed fund may use as capital. The amount of borrowing funds stood at Tk. 1256.22 million in 2008 which was Tk. 687.21 million in 2007. The growth was 82.85% in 2008 because borrowing from Bangladesh bank under the head of Export Development Fund (EDF).
Function of NBL as the user of funds:
National Bank limited collects funds through deposit, capital rising and borrowing. These funds are able to earn income. Banks invest these funds after confirming the short term and long term liquidity position. If bank holds its fund idle, it may occur losses. On the other hand, if bank invests all the funds it may cause liquidity crisis. As a good bank, NBL tries to mat6ch its liquidity position and the fund invested. The funds that the bank keeps for maintaining liquidity position may not generate profit. But bankers have to interest on deposit.
Therefore National Bank Limited like other banks do the following functions:
1 Investment function.
2 Lending function.
3 Cash assets function:
4 Cash in vault.
5 Items in the process of collection.
6 Balance with the central bank.
7 Balance with the other bank.
8 Other function.
Liquidity assets of NBL:
Every bank must maintain the liquidity ratio prescribed by the Bangladesh Bank. The liquid assets of NBL to meet the customer demand are given below:
Table-06: Liquid assets of NBL at the end of year 2008
|Particulars||Amount (in million Tk))|
|Cash in hand||1046.28|
|Money at call and short notice||3089.90|
|Balance with Bangladesh Bank & its agent bank||4374.77|
|Balance with other banks and financial institutions||1174.81|
Cash reserve requirement (CRR) and Statutory liquidity ratio (SLR):
The cash reserve requirement (CRR) on the Bank’s time and demand liabilities at the rate of 5% has been calculated and maintained with the Bangladesh bank in current account and 18% statutory liquidity ratio (SLR), including CRR, on the same liabilities has also been maintained in the form of cash held, Bangladesh bank balance, Sonali bank balance (agent bank), TT in transit and unencumbered approved securities. Both the reserves maintained by NBL are in excess of the statutory requirements, as shown below:
a) Cash reserve requirement (CRR):
|Particular||Amount( in million)|
|Average time and demand liabilities|
|Required reserve (5% of avg. time & demand liabilities)|
|Actual average maintained|
b) Statutory liquidity ratio (SLR):
|Particular||Amount( in million)|
|Average time and demand liabilities|
|Required reserve (18% of avg. time & demand liabilities)|
|Actual average maintained (including CRR)|
C) Composition of CRR and SLR maintained by NBL:
|Particular||Amount( in milloin)|
|Balance with Bangladesh bank|
|Balance with Sonali bank|
|Unencumbered approved securities|
Nature of National Bank liquidity:
1 Liquid assets = Liquid liability
2 Holding of easily convertible cash to meet shortage of cash assets.
3. Mitigation of cash shortage by creation of creditors and borrowings
Types of liquidity:
Each bank maintains different types of liquidity according to their business nature. National Bank maintains 6 (six) types of liquidity.
These are mentioned below:
- Immediate Liquidity.
- Short Term Liquidity.
- Long Term Liquidity.
- Contingent Liquidity.
- Seasonal Liquidity.
- Economic Social Liquidity.
Demand and Supply for bank liquidity:
Demand for liquidity means demand of clients, interest person, and group of bank on account of liquidity.
Supply of liquidity means the source of fund from which bank get the supply of fund on demand.
The nature of demand for the liquidity of NBL’s funds and supply of liquidity is given below:
Table-07: Demand and Supply for bank liquidity
|Supply of liquidity assets:||Demand for liquidity assets|
|Increase of deposit||Drawing from deposit|
|Income from services other than deposits||Disbursement of loan installments.|
|Payments on loans, loan installment, interest on loan||Expenses on bank services and disbursement|
|Receipt of sale proceed of bank assets||Payment of borrowing|
|Borrowing from money market||Payment of other short term liability|
|Borrowing from Central Bank||Cash dividends paid to shareholders|
Handling bank liquidity crisis:
Sensitive problems of NBL relating to liquidity are mentioned below:
- Short term funds are used in long term investment.
- Large proportion of liabilities is paid in that time period.
- Over sensitiveness of interest rate.
- Indifferences and lack of close observation of the deposit and loan behavior of the prime customers and industrial customers.
- Inefficient customer services.
- Maintain linkage with the bank rating agencies.
- Increase influence in the money market.
- Enhancing the skill of loan recovery and loan sanction.
Liquidity Management strategy for bank:
Assets conversion strategies-
1 Treasury bills.
2 Collection of government fund through other organization.
4 Deposit with other bank.
5 Bond and notes issued by local government.
6 Debenture of government organization.
7 Resale of banker acceptances in local secondary market.
8 Short term commercial debenture.
Liquidity management strategies-
1 Fund of Central Bank, payable on demand to institution.
2 Easily salable less risk debentures repurchase under agreement.
3 Large certificates of deposits belong to the government and NGOs.
4 Borrowing from reserves on government debenture discounted Central Bank fund.
Balance liquidity management strategies-
Balance liquidity management strategies means adjustment of assets conversion strategy and liquidity strategy.
Management of day to day cash in bank:
Like other banks, NBL is a business concern which deals with cash. Owners of the bank are not the owners of the cash because the most of the amount of cash fund comes from the depositors. Generally the capital of the bank owners is not higher than 4% of the total fund. Deposit of the other depositors is the principle instrument of the bank business. So the bank fund must be properly utilized for running the bank business well.
Functions of day to day management of cash of NBL are as follows:
- Inflow of cash in a planning way.
- Outflow of cash payment in due time without giving advances.
- Cash balance maintains in an equilibrium position.
- Filling up the lacking of the cash balance for the primary and secondary reserve.
- Excess reserve must invest in profitable sector for better return.
Basic assets accounts for cash management:
- Currency and coin in the bank vault.
- Due from the Central Bank.
- Due from other commercial bank.
- Cash items in the process of collection.
Meaning of deposit management:
Deposits are the main part of a bank fund. It is almost impossible to think a bank without deposit. So every bank try to maximize its profit, try to secure it and try to maintain an easy flow deposit. Money market and capital market transactions make deposit collection process for bank.
These deposits have an impact on the banks investment and lending policy. So, banks try to increase their deposits by offering attractive package to the depositors. Depositors have their own choice that is changing with time. With this change the banks introduce new deposit collection policy. These activities of bank related with deposit are known as deposit management.
Objectives of bank deposit:
National Bank Limited mainly collects deposits for increasing its fund. Other than increasing it deposits, NBL has some other objectives.
- Collect bank fund.
- Ensure productive investment of the savings of the clients,
- Extend the scope of the loan.
- Fulfill the excess need of money.
- Participation in maintaining social responsibility.
Factors on which the level of NBL’s deposit depend:
- Rate of interest.
- Physical feature of the branch.
- Use of modern and electronic technology.
- Skill of bank executive.
- Innovation of new services.
- Attractive loan and investment scheme policy.
- Suitable location of the branches.
- Advantage of early stage in a specific location.
- Economic condition.
Deposit processing start from account opening section. and with the transaction in account section. Notice that every activities of the accountholder have an impact on the books of account of the bank.
The steps of deposit processing are given below:
1. Account opening section gives suggestions to the customer about the suitable accounts that the bank have for their clients.
2. Acceptance of necessary application, photograph and documents.
3. Checking department scrutiny that customers submitted with application.
4. After scrutiny bank manager gives permission to open a new account.
5. Then customer has to deposit required money as initial deposit.
6. In computerized banking system new account is initiated and account holders profile entered into the database.
7. Delivered checkbook, passbook and deposit receipt to the account holder.
8. In manual banking system, a ledger folio is specified for book keeping of the new account.
9. After a specific period account statement sent to the account holder.
10. Banks review the accounts and verified the correction of the balance of the account.
11. Banks also try to influence the potential depositors to open account with them.
Meaning of capital:
The term bank capital refers principally to funds contributed by the bank’s owner, consisting of stock reserves and those earning that are retained in the bank.
Types of capital:
Like all other banks, National Bank has two types of capital. These are:
(A) Primary capital and instrument of primary capital:
- Ordinary share.
- Perpetual preferred share.
- Share premium.
- Undistributed profit.
- Mandatory convertible instrument
- Loan reserve.
(B) Secondary capital and instrument of secondary capital:
- Limited life stock share.
- Subordinated notes and debentures.
- Mandatory convertible instruments not eligible for primary capital.
Instrument of raising bank capital:
At national bank, there are two types of documents.These are:
- Equity based instruments.
- Debenture based instruments
Table-08: List of capital instruments
|Equity based instruments||Debenture based instruments|
|1. Common stock.||1. Rest of distribution but undermanned claim.|
|2. Preferred stock convertible.||2. Dividend at a specific rate.|
|3. Adjustable rate preferred stock.||3. Convertible into ordinary share.|
|4. Employee stock option plan.||4. Rate adjusted dividend.|
|5. Employee stock opinion trust||5. Annual general dividend.|
|6. Preferred stock.||6. Annual general dividend for the welfare of the employee.|
Importance of bank capital:
Like any other bank, National Bank requires capital for the following reason:
- For building public confidence.
- To provide the normal hazard and unforeseen contingencies.
- To act as a cushion in times of restricted monetary policy.
- To raise awareness that bank owners have state along with the depositors in the supply loan able fund.
- To obtain permission for opening new branches.
- To avoid punitive measures for reason of capital adequacy.
Function of bank capital:
The functions of capital in the National Bank are given below:
- Acquire the physical plant and basic necessities needed to render banking services.
- Act as one of the source s of funds for loan and investment.
- Protect the uninsured depositors in the events of insolvency and liquidation.
- Act as an unanticipated loss restraint.
- Serve as a regulatory restraint.
Capital planning process of NBL:
Capital planning is the part of bank assets and liabilities management. Bank fix up the further targeted profit by considering the interest and other income and expenses of last year. National Bank follows the following three steps in capital planning:
1. Generate preformed balance sheets and income statements for the bank.
2. Assume / select a dividend layout.
3. Analyze the cost and benefit of alternative source of external capital.
Measures of capital adequacy of National bank:
Adequacy is a relative term. Adequacy of capital is not same for all banks. It differs from bank to bank. Capital adequacy of a National Bank depended on the following subjects:
1 The quality of bank management.
2 The liquidity of bank assets.
3 The history of earning and retention there of.
4 The liquidity and character of ownership.
5 The burden of meeting occupancy expenses.
6 The potential volatility of deposit structure.
7 The quality of operating procedures.
. Definition of loan policy:
“A loan policy indicates the use of the fund collected from the bank shareholders and the depositors.”
Loan policy is essential for the bank in order to attain its objectives and to serve the people.
Awareness before lending:
Responsibility of preparing loan policy
The board of directors set up the policy of loan. This policy may be changed according to the demand of customers or may be made suitable for the changing environment.
Written/ unwritten policy:
Maximum policies are written which help both the parties to avoid any kind of misunderstanding.
Loans and advances:
National bank limited designed appropriate credit risk management criteria and strategies for balanced lending mix commensurate with sound capacity to finance in the short and the long term credit. NBL succeeded to increase it’s loans and advances despite the current wave of global recession registering a growth of 36.16 % with a total loans and advances portfolio of Tk. 49665.1 million in 2008 compared to Tk. 36475.7 million of 2007. The growth was due to injecting significant amount of fund in new ventures of syndicated loan, project loan, lease finance, sme, agricultural loan, etc. and usual growth in foreign trade.
Table-13 Last five years’ loans & advances (Tk.in million) provided by NBL.
|Loans & advances|
Weakness of loan Administration:
Loan management is one of the important functions of the bank. Loan recovery largely depends on good loan administration .The following weaknesses of NBL is responsible for creating problem in loan administration:
1 Sometimes the officers disburse loan beyond its policy.
2 The unclear and flexible terms and conditions of loan sanctioned.
3 Loans are centralized to the extreme limited area.
4 Inability of the officer to identify the fund flow and
5 Cash follow of the borrower.
Steps in Loan Operation:
The NBL follows the following steps in order to sanction a loan to customer and recover it. Step-1: Collect loan application.
Step-2: Collect necessary information.
Step-3: Analyze the loan.
Step-4: Take final decision to sanction the loan.
Step-5: Prepare necessary documents.
Step-6: Complete the loan agreement.
Step-7: Maintenance of accounting system of loan
Step-8: Observe the implementation of loan agreement.
Step-9: Recovery of loan.
Steps in loan analysis:
NBL follows the following steps in the case of loan analysis
Officers consider the following factors before sectioning loan to any party:
1 Background of the applicant regarding loan and financial performance.
2 Ability of using the loan and also the character of the applicant.
3 Ability of the applicant to return the loan.
4 If the applicant faces any problem during the planning, evaluate the performance of his existing capital.
5 National and international factors that have influence on the applicant on his ability to return at present and planning situation.
6 Elements of special risk- that may influence to recover the loan
Documents of loan:
NBL maintains the following documents in sectioning a loan to a party
1. Principal loan agreement.
2. Application of loan.
3. Financial statement of the loan applicants.
4. Statement of loan analysis.
5. Certificates of the securities.
6. Power of attorney and his signature on behalf of the borrower.
7. Decision of the board of directors on behalf of the borrowing firm.
8. Assurance certificate of the competent authority.
9. Financial agreement of the guarantor.
10. Copy of mortgage and contract agreement.
11. Certificates of the mortgage property.
Problems in loan management:
Like all other banks, NBL provides loans to different parties for different purpose. The recovery of all these loans is not certain. The loan which recovery is questionable is the main problem in loan management. But it is possible for the bankers to prevent their loan program from bad ones by detecting the risk elements with them and taking measures in time. For this purpose, first of all, the authorized officer in loan section checks the loan application properly in order to choose the right person for providing the loan. He considers two factors to determine whether the loan is good or bad loan.
Handing loan management problems:
NBL takes the following steps to recovery the problem loan
Empirical analysis of fund management system:
To analyze the fund management I have analyzed of a bank’s Net Interest Income, Liquidity Ratio (loan-deposit ratio), Return on Loans (ROL) and tried to compare with bank’s profitability to find that whether there have any relations or not.
Net interest income (NII):
We know: Net interest income (NII) = Interest income – Interest Expense
Table16: Net Interest Income (Taka in Million)
|Year||Interest Income||(-)Interest Expense||NII|
(Sources: Annual Report of NBL)
Fund management and its impact on profitability:
It is already mentioned that effective fund management depends on less cost and less volatile fund. It also depends on the effective utilization of the collected funds. From the analysis, it is already clear that current deposit is the least costly source of deposited funds whereas fixed deposit is the most costly source of deposited funds. But current deposit is the most volatile sources in nature and fixed deposit is the stable nature. Term deposit is consists of savings and fixed deposit. So, for getting an appropriate source of fund structure, bank management must make a balance between current and term deposit.
It can also use money market borrowing because it is less costly and flexible compared to deposit. A bank can also rely on various off-balance sheet items for funding to its needs.
Fund management also depends on the effective use of the collected funds. Improper use makes the collected funds burden for the bank. In this part, various ratios are analyzed both in the context of interest cost of the funds and their effective utilization.
Table-19: profitability ratios of NBL.
|Return on Assets (ROA)||.48%||.74%||1.19%||2.40%||2.36%|
|Return on Equity (ROE)||18.26%||11.82%||16.89%||31.57%||28.38%|
|Earnings per Shares (tk)||27.44||43.85||63.01||66.11||81.03|
The value of ROA and ROE depends on the volume of net income after tax. So, if banks use heavily deposits, especially term deposits as sources of fund then ultimately the interest cost will be increased. As a result values of the mentioned ratios will be decreased.
The value of ROA has increasing trend. The ROA of National Bank Ltd. is growing over the last five years. It indicates that the management is somehow able to achieve consistent growth in the bank’s spread through close control over the bank’s earning assets and the pursuit of the cheapest sources of funding.
Indicators of a successful bank:
It is important to identify a successful bank for banking. Successful bank means those banks that have a low loan risk, good profitability and sound liquidity position. For understanding whether a bank is successful or not, bank’s one year performance is compared with previous year performance. This process is generally known as ratio analysis. Some of these ratios and present condition of NBL in these cases are given in the next page:
Table-20: Indicators of a successful bank:
|Higher ratio indicating successful bank||2006||2007||2008|
|Ratio of net interest income and total assets||2.61%||2.57%||3.04%|
|Ratio of total investment and total assets||12.24%||13.73%||14.07%|
|Ratio of earning assets and total assets||95.60%||96.73%||97.80%|
|Ratio of current deposit and liability||7.90%||7.67%||6.91%|
|Employees average salaries||360585(Tk)||442008(Tk)||439420(Tk)|
|Lower ratio indicating successful bank|
|Ratio of interest expenses and total assets||5.23%||5.01%||4.98%|
|Ratio of expenses other than interest and total assets||4.6%||3.79%||3.03%|
|Ratio of provision for loan and total assets||2.48%||2.59%||2.64%|
|Ratio of loan losses and total loan||5.45%||4.17%||4.33%|
Trend analysis of deposits of NBL:
A time series is a collection of data recorded over a period of time- weekly, monthly, quarterly, or yearly. A time series can be used by management to make current decisions and plans based on long-term forecasting. We usually assume past patterns will continue in to the future.
As the deposit of NBL was increased by increasing amount, I used nonlinear or logarithmic trend equation for forecasting deposits. The general equation for the logarithmic trend equation is:
log Y = log a + log b (t)
Y is the projected value of deposits for a selected value of t.
a is the Y-intercept, it is the estimated value of deposits when t=0.
b is the slope of the line, or the average change in Y for each increase of one
unit in t.
t is any value of time that is selected.
By using Microsoft excel program we can find out the value of log a and log b and by using these values we can find out the solution of logarithmic trend equation of deposits which is mentioned below:
Log Y = 4.346 + .086t
By putting the value of t we can find out the amount of deposits for that particular year. For example, we can forecast the amount of deposits for year 2010, by putting the value of t=7 in above equation.
Here, I forecasted next five years deposits of NBL by using data of last five years which was mentioned earlier.
Table 21: Forecasted amount of deposits of NBL for next four years.
|Year||Forecasted deposits (Tk in million)|
Here we see that the forecasted amount of deposits of NBL will increase at an increasing rate if internal and external factors remain constant. In order to maintain this future growth NBL’s management should take proper actions from now.
Relationship between deposits and loans & advances:
In order to measure the strength of the relationship between deposits and loans & advances, we have to determine the coefficient of correlation (r). By using Microsoft excel program we can easily find out the value of coefficient of correlation. In this case we fond the value of coefficient of correlation, r = 0.99 which indicate that there is a strong positive relationship between deposits and loans & advances.
Forecasted loans& advance based on forecasted deposits:
Here we consider deposits as an independent variable and loans & advance as a dependent variable. Now we develop an equation to express the linear relationship between deposits and loans & advance. In addition we able to estimate the value of the dependent variable Y (loans & advance) based on a selected value of the independent variable X (deposits). The technique used to develop the equation and provide the estimates is called regression analysis. The general form of linear regression equation is:
Y = a + bX
Y is the predicted amount of loans & advance for a selected X (deposits) value.
a is the Y-intercept, it is the estimated amount of loans & advance when X=0.
b is the slope of the line, or the average change in Y for each increase of one
unit in the independent variable X (deposits).
Here we used last five years data for regression analysis which are mentioned below:
|Year||Deposits in million||loans & advance in million|
By using Microsoft excel program we can find out the value of a & b and by using these values we can express the linear regression equation as:
Y = -667.10 + .818X
The above equation indicates that if we increase deposit by 1 unit loans and advance will increase by .818 units.
By putting the value of independent variable X (forecasted deposits) we can determine the value of the dependent variable Y (forecasted loans & advance).
Table-23: Forecasted loans & advance of NBL for next four years with forecasted deposit:
|Year||Forecasted deposits in million||Forecasted loans & advance in million|
Relationship between deposits and net profit:
In order to measure the strength of the relationship between deposits and net profit, we have to determine the coefficient of correlation (r). By using Microsoft excel program we can easily find out the value of coefficient of correlation. In this case we fond the value of coefficient of correlation, r = .99 which indicate that there is a strong positive relationship between deposits and net profit.
Forecasted net profit based on forecasted deposits:
Here we consider deposits as an independent variable and net profit as a dependent variable. Now we develop an equation to express the linear relationship between deposits and loans & advance. In addition we able to estimate the value of the dependent variable Y (net profit) based on a selected value of the independent variable X (deposits). The technique used to develop the equation and provide the estimates is called regression analysis. The general form of linear regression equation is:
Y = a + bX
Y is the predicted amount of net profit for a selected X (deposits) value.
a is the Y-intercept, it is the estimated amount of net profit when X=0.
b is the slope of the line, or the average change in Y for each increase of one
unit in the independent variable X (deposits).
Here we used last five years data for regression analysis which are mentioned below:
|year||Deposits in million||Net profit in million|
By using Microsoft excel program we can find out the value of a & b and by using these values we can express the linear regression equation as:
Y = -1332 + .049X
The above equation indicates that if we increase deposit by 1 unit net profit will increase by .049 units.
By putting the value of independent variable X (forecasted deposits) we can determine the value of the dependent variable Y (forecasted net profit).
Table-24: Forecasted net profit of NBL for next four years with forecasted deposit:
|Year||Forecasted deposits in million||Forecasted net profit in million|
For the purpose of these guidelines financial risk in banking organization is possibility that the outcome of an action or event could bring up adverse impacts. Such outcomes could either result in a direct loss of earnings / capital or may result in imposition of constraints on bank’s ability to meet its business objectives. Such constraints pose a risk as these could hinder a bank’s ability to conduct its ongoing business or to take benefit of opportunities to enhance its business.
Risks are usually defined by the adverse impact on profitability of several distinct sources of uncertainty. While the types and degree of risks an organization may be exposed to depend upon a number of factors such as its size, complexity business activities, volume etc, it is believed that generally the banks face Credit, Market, Liquidity, Operational, Compliance / legal / regulatory and reputation risks.
Risk Management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. It involves identification, measurement, monitoring and controlling risks to ensure that
a) The individuals who take or manage risks clearly understand it.
b) The organization’s Risk exposure is within the limits established by Board of Directors.
c) Risk taking Decisions are in line with the business strategy and objectives set by BOD.
d) The expected payoffs compensate for the risks taken
e) Risk taking decisions are explicit and clear.
f) Sufficient capital as a buffer is available to take risk
In every financial institution, risk management activities broadly take place simultaneously at following different hierarchy levels.
a) Strategic level: It encompasses risk management functions performed by senior management and BOD. For instance definition of risks, ascertaining institutions risk appetite, formulating strategy and policies for managing risks and establish adequate systems and controls to ensure that overall risk remain within acceptable level and the reward compensate for the risk taken.
b) Macro Level: It encompasses risk management within a business area or across business lines. Generally the risk management activities performed by middle management or units devoted to risk reviews fall into this category.
c) Micro Level: It involves ‘On-the-line’ risk management where risks are actually created. This is the risk management activities performed by individuals who take risk on organization’s behalf such as front office and loan origination functions. The risk management in those areas is confined to following operational procedures and guidelines set by management.
Risk Management framework:
A risk management framework encompasses the scope of risks to be managed, the process/systems and procedures to manage risk and the roles and responsibilities of individuals involved in risk management. The framework should be comprehensive enough to capture all risks a bank is exposed to and have flexibility to accommodate any change in business activities. An effective risk management framework includes:
a) Clearly defined risk management policies and procedures covering risk identification, acceptance, measurement, monitoring, reporting and control.
b) A well constituted organizational structure defining clearly roles and responsibilities of individuals involved in risk taking as well as managing it. Banks, in addition to risk management functions for various risk categories may institute a setup that supervises overall risk management at the bank. Such a setup could be in the form of a separate department or bank’s Risk Management Committee (RMC) could perform such function. The structure should be such that ensures effective monitoring and control over risks being taken. The individuals responsible for review function (Risk review, internal audit, compliance etc) should be independent from risk taking units and report directly to board or senior management who are also not involved in risk taking.
c) There should be an effective management information system that ensures flow of information from operational level to top management and a system to address any exceptions observed. There should be an explicit procedure regarding measures to be taken to address such deviations.
d) The framework should have a mechanism to ensure an ongoing review of systems, policies and procedures for risk management and procedure to adopt changes.
The Board and its committees of NBL formulate policies to safeguard and mitigate different risks in line with the organizational pattern and the guidelines of Bangladesh Bank which are implemented and monitored by the ALCO, MANCOM, Credit committee and ICCD of the bank.
Integration of Risk Management:
Risks must not be viewed and assessed in isolation, not only because a single transaction might have a number of risks but also one type of risk can trigger other risks. Since interaction of various risks could result in diminution or increase in risk, the risk management process should recognize and reflect risk interactions in all business activities as appropriate. While assessing and managing risk the management should have an overall view of risks the institution is exposed to. This requires having a structure in place to look at risk interrelationships across the organization.
Until and unless risks are not assessed and measured it will not be possible to control risks. Further a true assessment of risk gives management a clear view of institution’s standing and helps in deciding future action plan. To adequately capture institutions risk exposure, risk measurement should represent aggregate exposure of institution both risk type and business line and encompass short run as well as long run impact on institution. To the maximum possible extent institutions should establish systems / models that quantify their risk profile, however, in some risk categories such as operational risk, quantification is quite difficult and complex. Wherever it is not possible to quantify risks, qualitative measures should be adopted to capture those risks.
Whilst quantitative measurement systems support effective decision-making, better measurement does not obviate the need for well-informed, qualitative judgment. Consequently the importance of staff having relevant knowledge and expertise cannot be undermined. Finally any risk measurement framework, especially those which employ quantitative techniques/model, is only as good as its underlying assumptions, the rigor and robustness of its analytical methodologies, the controls surrounding data inputs and its appropriate application
Institutions should have a mechanism to identify stress situations ahead of time and plans to deal with such unusual situations in a timely and effective manner. Stress situations to which this principle applies include all risks of all types. For instance contingency planning activities include disaster recovery planning, public relations damage control, litigation strategy, responding to regulatory criticism etc. Contingency plans should be reviewed regularly to ensure they encompass reasonably probable events that could impact the organization. Plans should be tested as to the appropriateness of responses, escalation and communication channels and the impact on other parts of the institution.
Principles of Risk management of NBL:
The primary objective of risk management is the protection of a bank’s financial strength. Risk management is based on the following principles:
1. Protecting the bank’s financial strength: NBL controls risks in order to limit the impact of potential adverse events, both on its capital and on its financial results. The risk appetite must be proportional to the available capital.
2. Protecting the NBL’s reputation: reputation is essential for the proper performance of a banker’s profession and needs to be diligently preserved.
3. Risk transparency: for a good insight into NBL’s positions, it is vital to identify all risks. Risks must always be considered as accurately as possible in order to be able to make sound commercial decision
4. Management responsibility: NBL’s business entities are individually responsible for their results as well as for their risks associated with their operations. A balance must be found between risk and return, while of course duly observing the relevant risk limits.
5. Independent risk control: this is the structured process of ensure integrity, the risk control departments operate independently of the commercial activities. In the normal course of business NBL is exposed to various risks, in relation to the asset and liability portfolio of the bank.
Managing credit Risk:
Credit risk is defined as potential loss arising from the failure of a counter party to meet financial obligations as per contractual agreement with the bank. For maintaining steady growth of the bank and for economic development of the country, NBL manages credit risk meticulously. National bank extends credit facilities to different clients in different sectors after doing due diligence and mitigating risk factors properly as per guidelines set by Bangladesh bank, Executive committee of the Board of directors and Management credit committee of the bank.
The bank has segregated duties of the officers/executives involved in credit related activities. A separate marketing division has been formed at head office which is entrusted with the duties of maintaining effective relationship with the customer, marketing of credit products, exploring new business opportunities etc. Moreover, credit approval, administration, monitoring and recovery functions have been segregated. For this purpose, three separate units have been formed namely credit operation division, credit administration division, law and recovery division. Credit operation division is entrusted with the duties of maintaining asset quality, assessing risk involved in lending, sanctioning credit, formulating policy for lending operation. Credit risk grading (CRG) is also made for individual borrowers. A separate desk has been created in law and recovery division to handle top 10 defaulters.
Managing Market Risk
Market risk management:
Market risk may be defined as the possibility of loss to a bank caused by changes in the market variables such as interest rate, foreign exchange rates and market value of equities. Market risks are broken down into various risk factors namely, foreign exchange risk, interest rate risk and equity risk. Treasury division manages the market risk and the asset liability committee (ALCO) monitors the activities of treasury division in managing the risk.
Market risk occurs due to changes:
# in the market level of interest rates,
# prices of securities,
# Foreign exchange and equities,
# the volatilities of those changes.
Financial institutions may be exposed to Market Risk in variety of ways. Market risk exposure may be explicit in portfolios of securities / equities and instruments that are actively traded. Conversely it may be implicit such as interest rate risk due to mismatch of loans and deposits. Besides, market risk may also arise from activities categorized as off-balance sheet item. Therefore market risk is potential for loss resulting from adverse movement in market risk factors such as interest rates, forex rates, and equity and commodity prices. The risk rising from these factors have been discussed on following pages.
Interest rate risk:
Interest rate risk means that the bank’s financial result and/or economic value-given its balance sheet structure- may decline as a result of unfavorable developments in the money and capital markets.
This interest rate risk results mainly from mismatches between maturities of loans and funds attracted. If interest rates increase, the rate for the liabilities, such as deposits, will be adjusted immediately, whereas the interest rate for the greater part of the assets cannot be adjusted until later.
In addition, client behavior affects the interest rate exposure. For example, clients may repay their loans before legal maturity or withdraw their savings earlier than expected.
Each month, NBL performs complementary scenario analysis to assess the impact of changes in customer behavior and the economic environment. This is a method based on long term developments to mirror interest movements and client behavior.
Sources of interest rate risks:
Interest rate risk occurs due to (1) differences between the timing of rate changes and the timing of cash flows (re-pricing risk); (2) changing rate relationships among different yield curves effecting bank activities (basis risk); 3) changing rate relationships across the range of maturities (yield curve risk); and (4)interest-related options embedded in bank products (options risk).
Foreign exchange risk:
It is the current or prospective risk to earnings and capital arising from adverse movements in currency exchange rates. It refers to the impact of adverse movement in currency exchange rates on the value of open foreign currency position. The banks are also exposed to interest rate risk, which arises from the maturity mismatching of foreign currency positions. Even in cases where spot and forward positions in individual currencies are balanced, the maturity pattern of forward transactions may produce mismatches. As a result, banks may suffer losses due to changes in discounts of the currencies concerned. In the foreign exchange business, banks also face the risk of default of the counter parties or settlement risk. While such type of risk crystallization does not cause principal loss, banks may have to undertake fresh transactions in the cash/spot market for replacing the failed transactions. Thus, banks may incur replacement cost, which depends upon the currency rate movements. Banks also face another risk called time-zone risk, which arises out of time lags in settlement of one currency in one center and the settlement of another currency in another time zone. The forex transactions with counter parties situated outside Bangladesh also involve sovereign or country risk.
Foreign exchange risk of the bank is minimal as all the transactions are carried out on behalf of the customers against underlying L/C commitments and other remittance requirements. Treasury department independently conducts the transactions and the back office of treasury is responsible for verification of the deals and passing of their entries in the books of account. All foreign exchange transactions are revalued at market to market rate at the month-end. All nostro accounts are reconciled on monthly basis and outstanding entries are reviewed by the management for its settlement on regular basis.
Equity risk is defined as loss due to change in market price of equity held. To measure and identify the risk, mark to market valuations of the share investment portfolios are done. Mark to market valuations is done against a predetermined cut loss limit. Investment account (margin account) where margin loan is allowed is monitored very closely against predetermined margin requirement and margin ratio. Diversification is enforced as per bank’s own policy. At the time of providing margin loan following factors are taken in to consideration:
1. Security of investment
2. Fundamentals of the securities
3. Liquidity of the securities
4. Reliability of earnings
5. Capital appreciation
6. Risk factors
7. Implication of tax
Managing operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and system or from external events.
Operational risk is associated with human error, system failures and inadequate procedures and controls. It is the risk of loss arising from the potential that inadequate information system; technology failures, breaches in internal controls, fraud, unforeseen catastrophes, or other operational problems may result in unexpected losses or reputation problems. Operational risk exists in all products and business activities.
Operational risk event types that have the potential to result in substantial losses includes Internal fraud, External fraud, employment practices and workplace safety, clients, products and business practices, business disruption and system failures, damage to physical assets, and finally execution, delivery and process management.
The objective of operational risk management is the same as for credit, market and liquidity risks that is to find out the extent of the financial institution’s operational risk exposure; to understand what drives it, to allocate capital against it and identify trends internally and externally that would help predicting it. The management of specific operational risks is not a new practice; it has always been important for banks to try to prevent fraud, maintain the integrity of internal controls, and reduce errors in transactions processing, and so on. However, what is relatively new is the view of operational risk management as a comprehensive practice comparable to the management of credit and market risks in principles. Failure to understand and manage operational risk, which is present in virtually all banking transactions and activities, may greatly increase the likelihood that some risks will go unrecognized and uncontrolled.
Findings of the Report:
After analyzing the annual report and other papers, the evolution of performance analysis and on the basis of my study I have got some findings about the National Bank Limited. These are mentioned below:
1 NBL is the pioneer of private sector banking business in Bangladesh. . As a result it has a huge branch operation with 121 branches and 2373 manpower causing large employment opportunity.
2 The fund management system is very effective. For keeping this system effective, necessary changes in credit policy, loan and advance policy, and provision for provision are made continuously.
3 The Officers engaged in loan management is very much aware in choosing right person to provide loan to ensure its recovery.
4 The top management is more conscious about the liquidity of bank.
5 The strength of the Bank lies on the top management of the company and the financial soundness of the sponsors, as they are all well reputed personalities in the Bangladesh. This impressive lay of National Bank Ltd. helps to have a good image.
6 The top management gives its highest attention in the operation of fund management.
7 Remittances, both local and foreign are effective manner of customers.
8 Special schemes like consumer credit scheme, monthly saving scheme, insurance schemes etc. are very popular
9 Lack of professional data entry operators.
10 Lack of proper coordination among different departments.
11 The management of NBL maintained over all risks of the bank at a low level.
I would like to focus some of the points which will help the bank to improve the efficiency as well as the quality of work. The points are as follows:
1 Management should set proper planning for its operations of each and every work for the whole bank as well as all branches of NBL.
2 Management must design the jobs on priority basis.
3 As NBL is a service providing organization, it should introduce new and dynamic services to serve the people and capture the target market
4 It is necessary to assign required qualified manpower for every job.
5 The proper managerial observation and cooperation are required.
6 All branches should properly maintain all documents on daily basis.
7 It must avoid the duplication of work through better communication.
8 It also tries to avoid duplication in any case through accuracy and efficiency.
9 It is required to develop some effective motivational programs.
10 Top management must ensure the proper implication of IT in all branches.
11 NBL should minimize their bad loan and cost of fund and for getting an appropriate source of fund structure, bank management must make a balance between current and term deposit.
12 NBL should maintain this type of risk management over the year and tries to improve it in the future year.
Now a day banking sector is more competitive. To achieve a proper reward about performance, it is essential to satisfy its customer by providing them different valuable and dynamic services. Because satisfied customers statement is more effective than a thousand of commercial advertisement. Therefore, the importance to satisfy customer is increasing day by day in the private commercial sector especially in the private banks
As all the activities those are required to provide valuable services to its customers to make them satisfy, are related with the fund management system, NBL is so much careful about its fund management system. NBL always gives its highest attention in monitoring and managing the bank fund, which is consists of fund, capital, reserve, deposit, loan and advance. At present NBL is successful in effectively and efficiently managing these vital issues. In spite of that, in order to keep its success continue and reach at the pinnacle of success it, its managers, board of directors and employee must have the comprehensive and clear idea about the reserve, fund, loan, capital, deposit and liquidity regarding the smooth control of bank and continue its vital operation toward country’s economic development.
Risk management is very important in banking sector. Because risk management of the bank and profitability of the bank are related. If risk is very high then the profitability is lower, but if risk management is good enough to manage the risks then profitability increases. At present risk management in National Bank Ltd is well enough, at last although they have some problem to create awareness among the entire concerned officer about these risks, but they are good enough to manage the risk. They manage the credit risk and other core risk topics and minimize their risk lower level, which give them profitability in consecutively year-to-year. National Bank Ltd should go on this risk management process and try to improve it to become the first ever O (zero) risk level in all core risk areas in banking sectors in Bangladesh.