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INTRODUCTION
Organization OverviewOrganization Overview
Bank Asia began its journey on the 27th of November 1999 with
the inauguration of the banks Corporate Office at the Rangs
Bhaban. The overwhelming public response has enabled the Bank
to keep up the plan of expanding its network. The opening of the
Principal Office was the big leap forward and successively the
opening of Gulshan and Chittagong Branch expanded the horizon
of Bank Asia to bring its services to the valued clients more
effectively.
Bank Asia conducts all types of commercial banking activities. The
core business of the bank comprises of import, export, working
capital finance and corporate finance. The bank is also rendering
personal credit, services related to local and foreign remittances.
The Personal Credit scheme of the bank, which is designed to
help the fixed income group in raising standard of living is
competitively priced and has been widely appreciated by thecustomers. The banks strategy is to gradually cover the total
arena of banking. The objectives of Bank Asia are to provide high
quality service to its customers, to participate in the growth and
expansion of our national economy, to set high standards of
integrity, to bring total satisfaction to our clients, shareholders
and employees, and to become the most sought after bank in the
country, rendering technology driven innovative services by the
dedicated team of professionals.
Bank Asia came into the headlines and attention of everyone
when it acquired the operation of Bank of Nova Scotia, a Canadian
Bank. This is the first time that a local private bank acquired any
operation of a foreign bank in Bangladesh. The breakthrough was
possible for some visionary decision-makers and also dedicated
team of professionals who are constantly putting all their best
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efforts to establish the bank as one of the leading concern in the
industry.
Origin of the report
Present world is changing rapidly to face the challenge of the
competitive free market economy. To keep pace with the trend
banks need executive with modern knowledge. After complete the
MBA course, I am assigned to write a report (which is known as
internship) on the experience that I gain two months long
orientation in the different departments of khatungonj branch of
Bank Asia Limited.
Background of the study
I have tried to prepare the report in such a way that it reflects
what I learn during the orientation period. I tried to clarify my
experience with practical knowledge on overall banking activities.
ObjectivesObjectives
1. The primary objective in this research paper is to fulfill the
partial requirement in the Masters of Business Administration
(MBA) degree.
2. Besides fulfilling the degree requirement, this internship report
intends to cover a comprehensive analysis of banking activities
of khatungonj Branch of Bank Asia.3. The report is aimed at studying and understanding the various
products offered by the Banks each Department to its clients
as well as the several activities carried out to achieve the
departmental objectives.
4. In addition, the report also studies how Bank Asia, khatungonj
branch is maintaining growth in overall banking activities.
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5. Finally, this internship report also aims to analyze the
performance of the branch as well as Bank Asia Limited as a
whole by analyzing CAMEL rating system.
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Scope of the studyScope of the study
Bank Asia limited is one of the leading banks in Bangladesh. The
scope of the study is limited to the khatungonj Branch only. The
report covers the organizational structure, background, banking
activities, functions and the performance of the branch. I
mentioned about the government rules and regulations on
different banking activities.
MethodologyMethodology
Certain methods and techniques were utilized to collect data forthis report. Both primary and secondary sources were chosen as
effective means of collecting data relevant for this report.
Interview was the basic technique that was employed to collect
primary data from people within the organization. For the
procedure of different banking operations, I had observed the
operations and worked with the officers at the same time. I had
interviewed the Bank Asia Officials for getting more information.
On the other hand, secondary sources were used to collect data
regarding the companys performance since its inception.
Publications and database within the organization helped me to
gather data not only about the organization. In addition, further
more the secondary sources of information are the different
annual report kept in the banks.
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LimitationsLimitations
This report may have some incompleteness due to some of the
limitations I encountered while completing it, that are mentioned
below:
1. One major limitation was the time constraint as every
department has many activities. This report could have been
prepared in a much broader and extensive manner with more
time and space availability.
2. Some essential data could not be gathered because of
confidentiality concerns.
3. I was not able to visit the different branches of Bank Asia Ltd.
and had to depend on the Khatungonj Branch for all the
information regarding overall banking.
4. Another limitation was that the information gathered could not
be verified for accuracy.
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ORGANIZATION BRIEFING
Corporate Information Letter of intent received on 24/02/1999
First meeting of the promoters held on 15/04/1999
Certificate of incorporation received on 28/09/1999
Certificate of commencement of business received on
27/09/1999
First meeting of the board of director held on 01/10/1999
Banking license received on 06/10/1999
Branch license received on 31/10/1999
Inauguration held on 28/11/1999
Authorized capital :800 million
Paid up capital: 218 million
Total number of promoters: 22
Total number of director : 13
Auditor : S.F. Ahmed &Co(SFACO)chartered accountants
Legal advisor: Lee, Khan ,&Associates
Registered office : 113-116 old airport road (8th floor)
Tejgaon Dhaka -1215, Bangladesh
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Organizational hirarchy of Bank Asia Limited
CHAIRMAN
VICE CHAIRMAN
MANAGING DIRECTOR
SENIOR EXECUTIVE VICE PRESIDENT
EXECUTIVE VICE PRESIDENT
SENIOR VICE PRESIDENT
VICE PRESIDENT
FIRST EXECUTIVE VICE PRESIDENT
SENIOR EXECUTIVE OFFICER
EXECUTIVE OFFICER
SENIOR OFFICER
OFFICER
MANAGEMENT TRAINEE OFFICER
JUNIOR OFFICER
ASSISTANT OFFICER
BANKING OFFICER
TELLER
Management hirarchy of Bank Asia Limited Khatungonj
Branch
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SENIOR VICE -PRESIDENT & MANAGER
SENIOR EXECUTIVE OFFICER
EXECUTIVE OFFICER
SENIOR OFFICER
OFFICER
MANAGEMENT TRAINEE OFFICER
ASSISTANT OFFICER
BANKING OFFICER
TELLER
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On 24th September, 2002 Khatungonj branch (17th Branch of Bank
Asia) started their business activities in khatungonj area.
Khatungonj Branch is the chartered member of SWIFT (Society for
Worldwide Inter-bank Financial Telecommunication) among Bank
Asias other branches. SWIFT is widely used for purposes like fund
transfers, L/C and guarantee issuance that can be made instantly.
Khatungonj branch is operated with 20 employees, three of whom
were previously engaged with MCB (Muslim Commercial Bank),
two were previously engaged with FSBL (First Security BankLimited), and rests were brought from different branches of Bank
Asia. Currently, the Khatungonj Branch offers corporate banking,
correspondent banking, and treasury services to its customers
including local corporations, multinational companies,
multinational agencies, domestic missions and other donor
agencies, NGOs, and financial institutions. It also offers a limited
range of retail banking products to provide for individual banking
needs as well.
Mission StatementMission Statement
To assist in bringing high quality service to our customers and to
participate in the growth and expansion of our national economy.
To set high standards of integrity and bring total satisfaction to
our clients, shareholders and employees.
To become the most sought after bank in the country, rendering
technology driven innovative services by our dedicated team of
professionals.
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Corporate ObjectivesCorporate Objectives
Bank Asias objectives are reflected in the following areas.
Highly personalized service.
Customer-driven focus.
Total commitment to quality.
Outstanding products.
Contribute in the economy
Quality of human resources
Commitment to its clients at each level
The company believes that communication with, and feedback
from, its clients help it achieve its goal of providing world-class
products and services. Bank Asia Ltd. regularly conducts client
satisfaction surveys and make immediate accommodations andadjustments where needed. It also constantly monitors its
standards, and strives to meet clients requirements.
Values that are considered to be the guiding factor:
All the activities and decisions of Bank Asia are based on, and
guided by, these values.
1. Placing the interests of clients and customers first.
2. A continuous quest for quality in everything the company does.
3. Treating everyone with respect and dignity.
4. Conduct that reflects the highest standards of integrity.
5. Teamwork from the smallest unit to the enterprise as a whole.
6. Being good citizens in the communities, in which they live andwork.
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A Brief Overview of the Principal Businesses of
Bank Asia, Khatungonj Branch
Trade FinancingTrade Financing
The acquisition of Khatungonj Branch gave Bank Asia new
strength in its trade financing activities. Previously Bank Asia was
not facilitated with SWIFT which is very crucial in efficient
modern banking correspondence. Now the Khatungonj Branch has
correspondence with over 800 financial institutions worldwide.Khatungonj Branch provides L/C payment, L/C advising,
negotiation, reimbursement, shipping guarantee, export bill
collection services to its valued clients. Khatungonj Branch
becomes, in effect, Bank Asias one of the strongest international
banking arms, helping to serve their clients through its global
network.
Corporate BankingCorporate Banking
Bank Asia Ltd. Khatungonj Branchs corporate banking arm
provides a range of products and services that address the
financing needs and transaction structuring requirements of large
and mid-sized corporate customers. Services provided include
loan syndication and asset sales, corporate advisory, tradefinance, and working capital and term financing. Working closely
with the Banks trading professionals; Corporate Banking also
provides a range of foreign exchange, interest rate management
and risk management products.
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Private BankingPrivate Banking
The Private Bank at Bank AsiaLtd. Khatungonj Branch meets client
needs with a line of discretionary portfolio management, custodial
services, foreign exchange, deposit services, credit facilities, and
personal banking services.
Retail BankingRetail Banking
Retail Banking at Bank Asia Ltd, Khatungonj Branch provides all
types of clients with typical banking services such as, savings
accounts, current accounts, call and short-term deposit accounts,fixed deposit accounts, time deposits, foreign currency accounts
and secure locker services.
Treasury ServicesTreasury Services
The treasury department of Bank Asia Ltd, Khatungonj Branch,
equipped with Reuters dealing system, provides the following
services:
Competitive foreign exchange rates in all major
currencies.
Attractive rates for foreign currency deposits.
Forward covers to hedge trade transactions.
Dealing rooms in all major financial centers.
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0 8 5Export 1,75,58,765.00 25,68,675.97 29,29,410.00
From the above data, it observed that Bank Asia Ltd, Khatungonj
Branch try to contribute every month in profit or loss then other
branch. In the month of July, Khatungonj branch earn more profit
then zonal head office as well as rest of other branch in
Chittagong city.
Performance overview of Bank Asia Ltd.
Capital Adequacy
The authorized capital of the Bank is being raised to TK.4.450
million as approved by the regulatory authority, compared to TK
1,200 million at present, the paid up capital from TK.930 million in
2006 t0 TK. 1,116 million in 2007.The Bank ended the year 2007
with a total shareholders equity of TK.1, 949.74 million compared
to TK. 1,566.98 million in the year 2006.The Bank attained capital
adequacy of 11.23% compared to the current regulatory
requirement of 9%.
Capital Composition 2005 2006 2007Paid up Capital 744.00 930.00 1116.00Capital-core (Tier I) 1,183.47 1,473.98 1,949.74
Capital-supplementary (Tier II) 117.62 183.11 273.58Total capital 1,301.09 1,657.09 2,223.32
*Core capital (Tier I) includes paid-up capital, issued bonus
share, share premium account, statutory reserve and
retained earnings.
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**Supplementary capital (Tier II) includes general
provision (on unclassified loans), exchange equalization
account, and asset revaluation reserve.
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2003 2004 2005
Year
2006 2007
Increased Financial Strength
Year on year directors have strived to strengthen financials. In the
year 2007, the financial base of the Bank was further
strengthened .It achieved an operating profit of TK. 1,071.88
million compared to TK.800.72 million in the previous year. An
amount of TK. 491.34 million has been set aside for tax payment
to the National Exchequer. After making necessary and regulatory
provisions net profit stood at TK.475.76 million as of December31,2007.Deposit increased to TK. 25,289.36 million in 2007
compared to TK.18,500.07 million in 2006 and loans and advances
increased to TK.22,255.64 million compared to TK. 17,869.84
million in the previous year.
2003 2004 2005
Year2006 2007
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2003 2004 2005 2006 2007
Year
2003 2004 2005 2006 2007
Year
200 3 2004 200 5 2006 200 7
Year
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Branches
The Bank has spread its network over the country through twenty
eight branches including all the privileges like ATM, Locker &
Foreign Exchange services. It has six rural branches as well.
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Product & Services provided by Bank AsiaProduct & Services provided by Bank Asia
Gradually Bank Asia increases its product list. Every year theyGradually Bank Asia increases its product list. Every year they
launch 2 products. Since establish, our product list is solaunch 2 products. Since establish, our product list is so
healthy and includes most features. Whenever, they launch ahealthy and includes most features. Whenever, they launch a
product, they look deeply in its technical issue. Its mean, howproduct, they look deeply in its technical issue. Its mean, how
the product will be techno based and support online features.the product will be techno based and support online features.
Considering these criteria, they have produced six products.Considering these criteria, they have produced six products.
Each product contains its specific link. However anotherEach product contains its specific link. However another
related service or special features are also displayed here.related service or special features are also displayed here.Products Include
SMS Banking
Mobile Banking
Internet Banking
Customized Loan
Special Features
Real-time Online Banking
Any Branch Banking
Internet Banking
SMS Banking
ATM Service
Loan Syndication
Corporate Banking
Locker Facilities
Bonus Savings Schemes
Poverty Alleviation
ATM Service
Credit Card
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Service
There are mainly three departments in Bank Asia Ltd for providing
service to the clients.
Major Findings and Analysis:
Every organization is composed of some internal strengths and
weaknesses and also has some external opportunities and threats
in its whole life cycle. The following will briefly introduce the
audience to the Bank Asias internal strengths and weaknesses,
and external opportunities and threats as I have explored in the
past ten weeks.
Service of Bank Asia
General Banking Credit/Loan Foreign Exchange
Cash
Personnel Loan
Term Loan
Housing Loan
Auto Loan
Overdraft
Accounts
Remittance
Clearing
Customer service
SOD
Consumer
Durable
Import
Export
Remittance
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StrengthsStrengths
Superior quality
Bank Asia provides its customers excellent and consistent quality
in every service. It is of highest priority that customer is totally
satisfied.
Dynamic
Bank Asia draws its strength from the adaptability and dynamism
it possesses. It has quickly adapted to world class standard in
terms banking services. Bank Asia has also adapted state of theart technology to connect with the world for better communication
to integrate facilities.
Financial strength
Bank Asia is a financially sound company backed by the enormous
resource base of the mother concern RANGS group. As a result
customers feel comfortable in dealing with the company.
Efficient management
All the levels of the management are solely directed to maintain a
culture for the betterment of the quality of the service and
development a corporate brand image in the market through
organization wide team approach and open communication
system.
State of the art technology
Bank Asia utilizes state-of-the-art technology to ensure consistent
quality and operation. The proof of that can be found in one of its
branches, Scotia that is equipped with Reuters and SWIFT. All
these facilities will be introduced in every branch very shortly.
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Expertise
One of the key-contributing factors behind the success of Bank
Asia is its employees who are highly trained and most competent
in their own field. Bank Asia provides their employees training
both in-house and out side job.
In-house utility
Bank Asia is free from dependence from the ever-disruptive power
supply of our public sources. The required power is generated bythe company through generator fed on diesel. Water generation at
present is also done by deep tube wells on site and is abundant in
quantity.
Excellent working environment
Bank Asia provides its workforce an excellent place to work in.
Total complex has been centrally conditioned. The interior
decoration was done exquisitely with the choice of soothing colors
and blend of artiste that is comparable to any multinational bank.
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WeaknessesWeaknesses
Limited workforce
Bank Asia has very limited human resources compared to its
financial activities. There are not many people to perform most of
the tasks. As a result many of the employees are burdened with
extra work loads and works late hours without any overtime
facilities. This might cause high employee turnover that will prove
to be too costly to avoid.
Problem in delivery
Few of the Bank Asias products offered to its clients like Money+
+ and Personal Credit (PC) are lying idle due to proper
marketing initiative from the management. These products can
easily be made available in attractive way to increase its client
base as well as its deposit status.
OpportunitiesOpportunities
Government support
Government of Bangladesh has rendered its full support to the
banking sector for a sound financial status of the country, as it is
becoming one of the vital sources of employment in the country
now. Such government concern will facilitate and support the
long-term vision for Bank Asia.
Evolution of e-banking
Emergence of e-banking will open more scope for Bank Asia to
reach the clients not only in Bangladesh but also in the global
arena. It will also facilitate wide area network in between the
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buyer and the production unit of Bank Asia to smooth operation to
meet the desired need with least deviation.
ThreatsThreats
Mergers and acquisitions
The worldwide trend of mergers and acquisition in financial
institutions is causing concentration the industry and competitors
are increasing in power in their respective areas.
Poor telecommunication infrastructureAs previously mentioned, the world is advancing towards e-
technology very fast. Though Bank Asia has taken effort to join the
stream, it is not possible to complete the mission due to the poor
technological infrastructure of our country.
Frequent currency devaluation
Frequent Taka Devaluation and foreign exchange rate fluctuations
and particularly South-East Asian currency crisis adversely affects
the business globally.
Emergence of competitors
Due to existence of unserved demand in financial sector, it is
expected that more financial institutions will be introduced in the
industry very shortly. And we have already seen such cases in our
country that lots of new banks are coming in the scenario with
new services. Bank Asia should always be prepared for the
competition in the coming years.
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CAMELS RATING
How to Calculate CAMEL Rating? The criteria for the performance of all the commercial banks
includes capital adequacy, assets quality, management standard,
earning and liquidity maintenance (CAMEL). In some countries it is
called camels, because system and sensibility is also a barometer
to judge a banks success or failure. Every areas of banking may
be good but the system might not be a good bank or a good
financial institution.
In capital adequacy only when a banks risk weighted asset to
capital and reserves is 10 percent and above, it is given the
numbers like.
1. Strong
2. Satisfactory
3. Fair
4. Marginal and
5. Unsatisfactory
The assets quality is judged on the basis of the percentage of
classified loans and advances to total loans and advances and it is
given top rating if the percentage is less than 3.00 percent.
Of the five criteria, management quality is base on the banks
performance in (2 other four critical areas. According to the
CAMEL report, management itself has no rating. It is determined
on the average of ratings attributed to capital, assets quality,
liquidity and earnings. It is based on operating ratio, profit per
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employee, overhead expenses per employee, gross earning assets
to total assets and classified assets to earning assets.
Earning of the banks are judged on the basis of return on assets
(ROA). It is lated on the basis of net profit after taxes (deduction
of shortfall) divided by assets. If the ROA is 1.8 percent and
above, it is given the top ranking. Other being (2) satisfactory
(ROA between 0.60 and 1.80 percent, (3) fair (ROA 0.25 and less
than 0.60 percent), (4) marginal (ROA between 0.01 and less than
0.25 percent) and (5) unsatisfactory (if incurring losses).
The liquidity of a bank is determined on the basis of four
considerations. They are: a) maintenances of cash reserve ratio
(CRR) and statutory reserve ratio (SLR), (b) loan deposit ratio is up
to 80 percent. If exceeds 80 percent, then availability of adequate
resources of fund (net worth, bills payable, provision etc.), (c)
dependence on inter bank deposits/borrowing for maintaining
proper liquidity and (d)profitability.
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Camel Rating Analysis
Global approach:
Due to radical change in the banking sector in the recent days the
central banks of the world have improved their supervision quality
and techniques. In evaluating the function of the bank, many of
the developed countries are now following the Uniform Financial
Rating System (CAMEL RATING) along with other existing
procedures and techniques of supervision. Bangladesh Bank
(Central Bank) is also following the above techniques in evaluating
the function of the banks. Its has also developed the system of itson site supervision.
Under CAMEL RATING ANALYSIS first rating of capital adequacy,
asset quality, management ability, earning capacity and liquidity
position of a bank are to be calculated on the basis of approved
formulas and then on the basis of average of the above ratings.
Composite rating of the bank will be found asses the overall
financial position of a bank. There are five categories of the
composite rating. These are:
RATING COMPOSITE RANGE
DESCRIPTION
1 1.00-1.49 strong
2 1.50-2.49 satisfactory
3 2.50-3.49 fair
4 3.50-4.49 marginal
5 4.50-5.00 unsatisfactory
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Meaning of composite rating under camel rating analysis
1. Composite rating 1: (1.00-1.49) strong
Basically sound in every respect
Findings are of minor nature and can be handled routinely
Resistant to external economic and financial disturbances
No cause for supervisory concern
2. Composite rating 2: (1.50-2.49) satisfactory
Fundamentally sound
Findings are of a minor nature and can be handled routinely
Stable and can withstand business fluctuation well
Supervision concerns are limited to the extent that findings
are corrected
3. Composite rating 3: (3.50-4.49) Fair Financial, operation or compliance weakness ranging from
moderately severe to unsatisfactory.
Vulnerable to the onset of adverse business condition
Easily deteriorate if action are not effective in correcting
weaknesses.
Supervision concern and more than normal supervision to
address deficiencies.
4. Composite rating 4: (3.50-4.49) marginal
Immoderate volume of serious financial weakness.
Unsafe and unsound condition may exist which are not being
satisfactorily addressed.
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Without correction, this condition could develop further and
impair future viability.
High potential for failure
Close supervision surveillance and a definite plan for
correcting deficiencies.
5. Composite rating 5: (4.50-5.00) unsatisfactory
High immediate or near probability failure
Severity of weaknesses so critical that urgent aid from
stockholders or other financial sources is necessary.
Without immediate corrective action, will likely require
liquidation, merger or acquisition.
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Camel Rating Worksheet
Name of the Bank : Bank Asia Ltd
Camel Rating
CAMEL rating is a system that assigns a numerical rating to a
bank or thrift based on examiner judgment regarding its capital
adequacy, asset condition, management quality, earnings record
and liquidity position. Actually, CAMEL rating is a combination of
all five dimensions of performance into one overall numerical
rating.
The letters in CAMEL derived from:
C- Capital adequacy
A- Asset quality
M- Management quality
E- Earnings record
L- Liquidity position
Capital Adequacy
A bank capital adequacy ratio determined by the K/A ratio.
Here, K= Capital
A= Assets
9% and above Strong 1
8% to 8.99% Satisfactory 2
7% to 7.99% Fair 3
6% to 6.99% Marginal 4
5.99% and
lowerUnsatisfactory 5
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Showing Capital Adequacy
According to annual report BANK ASIA capital adequacy ratio is
9.54%, which indicates the bank is staying at strong position with
the ranking of 1. Therefore, banks has more chance to survive in
the market because their loss absorb power is very high.
Assets quality
It is determined by the ratio of total classified loans to total capital
& reserve.
Total Classified Loan / Total Capital & Reserve .
1% to 5% and above Strong 1
5.01% to 10.00% Satisfactory 2
10.01% to 15.01% Fair 3
15.01% to 20.00% Marginal 4
Above 20% Unsatisfactory 5
Showing Asset Quality
Total Classified Loan / Total Capital & Reserve=2200%. This
measure reminds that the bank is in unsatisfactory level with a
ranking of 5.
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Earnings Records
Earning is assessed by ROA of a bank:
Net income at the previous calendar year / Total asset (as per the
same calendar year)
.85% Strong 1
.65% Satisfactory 2
.45% Fair 3
.35% Marginal 4
Net Loss Unsatisfactory 5
Showing Earnings RecordThe calculation shows the result is 1.57% which proves that BANK
ASIA is in strong position by holding rank 1.
Liquidity position
The banks whose are dependent on more outside source, such
banks are more likely to experience a liquidity crisis because they
are forced to borrow excessive amounts of funds from outside
sources. We can measures the liquidity position by the following
two ratios
1) Liquid assets/ total demand and time liabilities
2) Total loans/Total deposits
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For next analysis, we can add the above two ratio and take the
average.
That means, Unsatisfactory =5
Satisfactory =1
Liquidity position= (5+1)/2=3
Finally, we can conclude that the bank liquidity position is in fair
level. It means Bank Asia depends more on internal funds. So,
there is no chance of facing liquidity crisis by Bank Asia.
Management Quality
Management quality can be determined by the average of the
ratings of above four ratios. Here the regulators verify whether
the management are efficient enough to handle any unfavorable
situations or economic inflation or deflation. We can calculate the
management ratio by the following formula (C+A+E+L)/ 4.
Management Quality = (1+5+1+3)/4
= 2.5
Here we consider the total rating of these four sub-factors. The
ranking of management are as follows
1 to 1.49 Strong 1
1.5 to 2.49 Satisfactory 2
2.5 to 3.49 Fair 33.5 to 4.49 Marginal 4
4.5 to 5 Unsatisfactory 5
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Showing Management Quality
Management administrative skill and ability is average or we can
say good but improvement is required since the relation falls
under the category of fair and can be ranked 3.
Composite rating
It is determined by the average of rating of all five components of
CAMEL as follows:
Composite rating = (C+A+M+E+L)/5
= (1+5+1+3+3)/5= 2.6
Composite rating is classified as bellow:
1 to 1.4 Strong 1
1.5 to 2.4 Satisfactory 2
2.5 to 3.4 Fair 3
3.5 to 4.4 Marginal 4
4.5 to 5 Unsatisfactory 5
Showing the Composite Rating
Thus, BANK ASIA falls under the category of 3 with a fair financialposition and management quality.
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CAMEL Rating:
The regulator of banks and other financial institutions, Bangladesh
Bank in Bangladesh, regularly assess the financial condition of
each bank and specific risks faced via on-site examinations and
periodic reports. According to Bangladesh Bank rules, the
performance of the banking sector is evaluated under CAMEL
framework and all of the schedule banks are rated according to
their performance under CAMEL rating.
CAMEL rating involves analysis and evaluation of the five crucial
dimensions of banking operations. The five indicators used in the
rating system are-
C = Capital adequacy
A = Asset quality
M = Management soundness
E = Earnings and
L = Liquidity.
In this report, I have tried to evaluate the performance of
Bangladesh Banking Sector as well as Bank Asia Ltd. Limited by
analyzing these five dimensions. The measurement procedure of
each indicator is briefly described below.
Capital Adequacy:
Capital Adequacy signals the institutions ability to maintain
capital commensurate with the nature and extent of all types of
risk and the ability of management to identify, measure, monitor,
and control these risks.
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It focuses on the total position of bank capital and protects the
depositors from the potential shocks of losses that a bank might
incur. It helps absorbing major financial risks, like credit risk,
market risk, foreign exchange risk, interest rate risk and risk
involved in off-balance sheet operations.
In my report the Capital Adequacy position of the schedule banks
is calculated by Capital Adequacy Ratio (CAR). The formula of
Capital Adequacy Ratio is-
Capital Adequacy Ratio (CAR) =
edAssetsRiskWeight
alTotalCapit
=
aryCapitalSupplementlCoreCapita +
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a) Total Capital:
According to the current regulation, capital is categorized into two
tiers, Tier I or Core Capital, and, Tier II or Supplementary Capital.
The constituents of each are as follows:
CORE CAPITAL (TIER I) SUPPLEMENTARY CAPITAL
(TIER II)A. Paid-up Capital
B. Non-repayable Share
premium account
C. Statutory Reserve
D. General Reserve
E. Retained Earnings
F. Minority interest in
Subsidiaries
G. Non-Cumulative
irredeemable
Preference Shares
H. Dividend Equalization
Account
A. General provision
(1% of Unclassified loans)
B. Assets Revaluation
Reserves
C. All other Preference Shares
D. Perpetual Subordinated
Debt
E. Exchange Equalization
Account
b) Total Risk Weighted Assets:
Risk weighted assets are the total of risk-adjusted assets where
the risk weights are based on risk classes of assets. The riskweighted assets consist mainly of loans and securities and
exclude cash, plant and equipment and miscellaneous bank
assets.
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Management Soundness
Sound management is the most important pre-requisite for the
strength and growth of any financial institution. It is difficult to
draw any conclusion regarding management soundness on the
basis of monetary indicators, as characteristics of a good
management are rather qualitative in nature. Nevertheless, the
total expenditure to total income, operating expenses to total
expenses, earnings and operating expenses per employee are
generally used to gauge management soundness.
For the convenience of preparing this report, Expenditure to
Income (EI) ratio is considered as a determiner of management
soundness. In particular, a high and increasing Expenditure to
Income Ratio indicates the operating inefficiency that could be
due to flaws in management.
a) Total Expenditure:
The expenses that a bank incurs to run the business are called
expenditure. It includes salary of employees, rent, legal expenses,
directors fee and expenses, auditors fee, etc.
b) Total Income:
Total income of a bank includes interest income, investment
income, commission, and other operating income. Banks
generates revenue from this income.
Expenditure to Income Ratio =eTotalIncom
ditureTotalExpen
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Earnings:
Strong earnings and profitability profile of a bank reflect its ability
to support present and future operations. More specifically, this
determines the capacity to absorb losses by building an adequate
capital base, finance its expansion and pay adequate dividends to
its shareholders. Although there are various measures of earning
and profitability, the best and widely used indicator is return on
assets (ROA), which is supplemented by return on equity (ROE)
and net interest income (NII).
a) Return on Equity (ROE):
ROE measures the percentage return on each Taka of
stockholders equity. It is the aggregate return to stockholdersbefore dividends. The higher the return the better, as banks can
add more to retained earnings and pay more in cash dividends
when profits are higher.
b) Return on Asset (ROA):
ROA measures net income per Taka of average assets owned
during the period. It indicates how capably the management of
the bank has been converting the institutions assets into net
earnings.
c) Net Interest Income (NII):
NII indicates how well management and staff have been able to
keep the growth of revenues, which come primarily from the
banks loans, investments and service fees, ahead of rising costs,
a. ROE =rsEquityStockholde
ofitxNetafterta Pr
b. ROA =TotalAsset
ofitxNetafterta Pr
c. Net Interest Income = Interest Income Interest Expenses
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principally the interest on deposits and money market borrowings
and employees salaries and benefits.
Liquidity:
A bank is considered to be liquid if it has ready access to
immediately spend able funds at reasonable cost at precisely the
time those funds are needed. It is one of the most important tasks
faced by the management of any bank to ensure adequate
liquidity. This suggests that a liquid bank either has the right
amount of immediately spend able funds on hand when they are
required or can quickly raise liquid funds by borrowing or byselling assets.
Commercial banks deposits are at present subject to a Statutory
Liquidity Ratio (SLR) of 18 percent inclusive of average 5 percent
(at least 4 percent) Cash Reserve Requirement (CRR) on bi-weekly
basis. The CRR is to be kept with the Bangladesh Bank and the
remainder as qualifying secure assets under the SLR, either in
cash or in government securities. SLR for the banks operating
under the Islamic Shariah is 10 percent and the Specialized Banks
are exempted from maintaining the SLR. Liquidity indicators,
measured as percentage of demand and time liabilities (excluding
inter-bank items) of the banks, indicate that all the banks had
excess liquidity.
To assess the degree to which a bank might be exposed to
adverse financial market conditions, Bangladesh Bank added a
new characteristic named as Sensitivity to market risk to what
was previously referred to as the CAMEL ratings. In particular,
Bangladesh Bank started placing much emphasis on banks
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sensitivity to interest rate movement through the introduction of
revised CAMELS rating system since July 1, 2006.
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Presently Bangladesh Bank is employing Early Warning System
(EWS) of supervision to address the difficulties faced by the banks
in any of the areas of CAMEL. Any bank found to have faced
difficulty in any areas of operation, is brought under Early Warning
category and monitored very closely to help improve its
performance.
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How to Calculate CAMEL Rating?
The criteria for the performance of all the commercial banks
includes capital adequacy, assets quality, management standard,
earning and liquidity maintenance (CAMEL). In some countries it is
called camels, because system and sensibility is also a barometer
to judge a banks success or failure. Every areas of banking may
be good but the system might not be a good bank or a good
financial institution.
In capital adequacy only when a banks risk weighted asset tocapital and reserves is 10 percent and above, it is given the
numbers like.
1. Strong
2. Satisfactory
3. Fair
4. Marginal and
5. Unsatisfactory
The assets quality is judged on the basis of the percentage of
classified loans and advances to total loans and advances and it is
given top rating if the percentage is less than 3.00 percent.
Of the five criteria, management quality is base on the banks
performance in (2 other four critical areas. According to the
CAMEL report, management itself has no rating. It is determined
on the average of ratings attributed to capital, assets quality,
liquidity and earnings. It is based on operating ratio, profit per
employee, overhead expenses per employee, gross earning assets
to total assets and classified assets to earning assets.
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Earning of the banks are judged on the basis of return on assets
(ROA). It is lated on the basis of net profit after taxes (deduction
of shortfall) divided by assets. If the ROA is 1.8 percent and
above, it is given the top ranking. Other being (2) satisfactory
(ROA between 0.60 and 1.80 percent, (3) fair (ROA 0.25 and less
than 0.60 percent), (4) marginal (ROA between 0.01 and less than
0.25 percent) and (5) unsatisfactory (if incurring losses).
The liquidity of a bank is determined on the basis of fourconsiderations. They are: a) maintenances of cash reserve ratio
(CRR) and statutory reserve ratio (SLR), (b) loan deposit ratio is up
to 80 percent. If exceeds 80 percent, then availability of adequate
resources of fund (net worth, bills payable, provision etc.), (c)
dependence on inter bank deposits/borrowing for maintaining
proper liquidity and (d)profitability.
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Camel Rating Analysis
Global approach:
Due to radical change in the banking sector in the recent days the
central banks of the world have improved their supervision quality
and techniques. In evaluating the function of the bank, many of
the developed countries are now following the Uniform Financial
Rating System (CAMEL RATING) along with other existing
procedures and techniques of supervision. Bangladesh Bank
(Central Bank) is also following the above techniques in evaluating
the function of the banks. Its has also developed the system of itson site supervision.
Under CAMEL RATING ANALYSIS first rating of capital adequacy,
asset quality, management ability, earning capacity and liquidity
position of a bank are to be calculated on the basis of approved
formulas and then on the basis of average of the above ratings.
Composite rating of the bank will be found asses the overall
financial position of a bank. There are five categories of the
composite rating. These are:
RATING COMPOSITE RANGE
DESCRIPTION
1 1.00-1.49 strong
2 1.50-2.49 satisfactory
3 2.50-3.49 fair
4 3.50-4.49 marginal
5 4.50-5.00
unsatisfactory
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Meaning of composite rating under camel rating analysis
1. Composite rating 1: (1.00-1.49) strong
Basically sound in every respect
Findings are of minor nature and can be handled routinely
Resistant to external economic and financial disturbances
No cause for supervisory concern
2. Composite rating 2: (1.50-2.49) satisfactory
Fundamentally sound
Findings are of a minor nature and can be handled routinely
Stable and can withstand business fluctuation well
Supervision concerns are limited to the extent that findings
are corrected
3. Composite rating 3: (3.50-4.49) Fair
Financial, operation or compliance weakness ranging from
moderately severe to unsatisfactory.
Vulnerable to the onset of adverse business condition
Easily deteriorate if action are not effective in correcting
weaknesses.
Supervision concern and more than normal supervision to
address deficiencies.
4. Composite rating 4: (3.50-4.49) marginal
Immoderate volume of serious financial weakness.
Unsafe and unsound condition may exist which are not being
satisfactorily addressed.
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Without correction, this condition could develop further and
impair future viability.
High potential for failure
Close supervision surveillance and a definite plan for
correcting deficiencies.
5. Composite rating 5: (4.50-5.00) unsatisfactory
High immediate or near probability failure
Severity of weaknesses so critical that urgent aid from
stockholders or other financial sources is necessary.
Without immediate corrective action, will likely require
liquidation, merger or acquisition.
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Camel Rating Worksheet
Name of the Bank : Bank Asia Ltd
Camel Rating
CAMEL rating is a system that assigns a numerical rating to a
bank or thrift based on examiner judgment regarding its capital
adequacy, asset condition, management quality, earnings record
and liquidity position. Actually, CAMEL rating is a combination of
all five dimensions of performance into one overall numerical
rating.
The letters in CAMEL derived from:
C- Capital adequacy
A- Asset quality
M- Management quality
E- Earnings record
L- Liquidity position
Capital Adequacy
A bank capital adequacy ratio determined by the K/A ratio.
Here, K= Capital
A= Assets
9% and above Strong 1
8% to 8.99% Satisfactory 2
7% to 7.99% Fair 3
6% to 6.99% Marginal 4
5.99% and
lowerUnsatisfactory 5
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Showing Capital Adequacy
According to annual report BANK ASIA capital adequacy ratio is
9.54%, which indicates the bank is staying at strong position with
the ranking of 1. Therefore, banks has more chance to survive in
the market because their loss absorb power is very high.
Assets quality
It is determined by the ratio of total classified loans to total capital
& reserve.
Total Classified Loan / Total Capital & Reserve .
1% to 5% and above Strong 1
5.01% to 10.00% Satisfactory 2
10.01% to 15.01% Fair 3
15.01% to 20.00% Marginal 4
Above 20% Unsatisfactory 5
Showing Asset Quality
Total Classified Loan / Total Capital & Reserve=2200%. This
measure reminds that the bank is in unsatisfactory level with a
ranking of 5.
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Earnings Records
Earning is assessed by ROA of a bank:
Net income at the previous calendar year / Total asset (as per the
same calendar year)
.85% Strong 1
.65% Satisfactory 2
.45% Fair 3
.35% Marginal 4
Net Loss Unsatisfactory 5
Showing Earnings RecordThe calculation shows the result is 1.57% which proves that BANK
ASIA is in strong position by holding rank 1.
Liquidity position
The banks whose are dependent on more outside source, such
banks are more likely to experience a liquidity crisis because they
are forced to borrow excessive amounts of funds from outside
sources. We can measures the liquidity position by the following
two ratios
3) Liquid assets/ total demand and time liabilities
4) Total loans/Total deposits
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1) In case of first one
1 to 1.4 Strong 1
1.5 to 2.4 Satisfactory 2
2.5 to 3.4 Fair 33.5 to 4.4 Marginal 4
4.5 to 5 Unsatisfactory 5
Showing Liquidity position (1)
In case of first one, the ratio is 12.6% percent, which indicates the
BANK ASIA is staying at marginal position with a rating of 2.
2) In case of second ratio
60% Strong 1
80% Satisfactory 2
85% Fair 3
90% Marginal 4
91% Unsatisfactory 5
Showing Liquidity position (2)
In case of second ratio, the BANK ASIA ratio is 20% percent, which
reveals that it is in strong position( 1).
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For next analysis, we can add the above two ratio and take the
average.
That means, Unsatisfactory =5
Satisfactory =1
Liquidity position= (5+1)/2=3
Finally, we can conclude that the bank liquidity position is in fair
level. It means Bank Asia depends more on internal funds. So,
there is no chance of facing liquidity crisis by Bank Asia.
Management Quality
Management quality can be determined by the average of the
ratings of above four ratios. Here the regulators verify whether
the management are efficient enough to handle any unfavorable
situations or economic inflation or deflation. We can calculate the
management ratio by the following formula (C+A+E+L)/ 4.
Management Quality = (1+5+1+3)/4
= 2.5
Here we consider the total rating of these four sub-factors. The
ranking of management are as follows
1 to 1.49 Strong 1
1.5 to 2.49 Satisfactory 2
2.5 to 3.49 Fair 33.5 to 4.49 Marginal 4
4.5 to 5 Unsatisfactory 5
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Showing Management Quality
Management administrative skill and ability is average or we can
say good but improvement is required since the relation falls
under the category of fair and can be ranked 3.
Composite rating
It is determined by the average of rating of all five components of
CAMEL as follows:
Composite rating = (C+A+M+E+L)/5
= (1+5+1+3+3)/5= 2.6
Composite rating is classified as bellow:
1 to 1.4 Strong 1
1.5 to 2.4 Satisfactory 2
2.5 to 3.4 Fair 3
3.5 to 4.4 Marginal 4
4.5 to 5 Unsatisfactory 5
Showing the Composite Rating
Thus, BANK ASIA falls under the category of 3 with a fair financial
position and management quality.
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Camel Rating Guideline
Periodically the CAMEL Rating System to respond of the
continuing economic and regulatory changes in the lending
industry. This revision is particularly timely and prompted, in large
part, by implementation of the risk focused examination process.
Camel Background
The CAMEL Rating System was adopted by many more days ago
by the WORLD BANK .Its purpose is to provide an accurate and
consistent assessment of a credit agencies financial condition andoperation in the areas of capital adequacy, asset quality,
management standard, earnings and asset/liability management.
It is not internal to be used as a report card but as an internal tool
to measure risk and allocate resources for supervision purposes.
Significant changes
This revision to the CAMEL rating System incorporate the principal
of the risk focused examination program recently implemented. A
risk focused examination is intended to focus an examiner time on
activities and areas posing the highest risk. It is m a forward
looking approach that evaluates a credit agency current and
potential risk
Financial indicators, while useful, often represent lagging
indicators of changing risk. The key to effective risk management
is effectiveness in a credit agency overall management.
Management impacts all seven risks found in credit operations
credit, interest rate, liquidity, transaction, compliance, strategic
and reputation. An examiner overall assessment of the credit
agency is based on numerous rather than just on the credit
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agencys current financial condition. Both the composite and
management ratings are determined by several selective factors
and not based solely on a numerical average of the other
component ratings.
This revision also eliminates the separate list of key and
supplemental ratios along with their related formulas. Credit
agencies and examiners are directed to the Financial
Performance Report and users guide for Banks Financial
Performance Report to find calculate ratios and correspondingformulas. This change ensures consistency in the calculation of
ratios by providing a single reference.
Examination Guidelines
The CAMEL rating is not automatically determined by matrix ratios
alone. The matrix ratios for the capital, asset quality, and earnings
components provide minimal guidance for the examiners final
assessment of the individual component rating. For the risk
focused examination to be effective the examiner must look
behind the numbers to determine the significance of supporting
ratios, trends, projection and the interrelationships with the seven
risk categories. Likewise, when evaluating the CAMEL
components. Examiner will consider both the quantitative
measurements as well as the qualitative considerations outlined in
the enclosure before a final rating is determined. To ensure
objectivity and the uniqueness of individual credit agency during
the examination process, examiners do have the discretion to
increase or decrease any rating if in their professional judgment a
change in rating is justified.
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Camel Rating System
The camel rating system is based upon an evaluation of five
critical element of a credit agencys operation: capital adequacy,
asset quality, management, and earning and asset/liability
management. This rating system is significant financial operation
and management factors examiners asses in their evaluation of
credit agencys performance and risk profile. Examiner rate credit
agencies using a combination of financial ratios (quantitative
factors) and examiner judgment (qualitative factor).
Since the composite CAMEL rating is an indicator of the viability of
a credit agency, it is important that examiner rate credit agencies
based on their performance in absolute term rather than against
peer average or predetermined benchmarks. Peer averages or
benchmarks do not necessarily reflect that credit agencies are
operated in a safe and sound manner. The CAMEL rating should
accurately reflect the condition of the credit agency regardless of
peer performance.
Examiner use the financial ratio and trend displayed on the
Financial Performance Report and other calculated ratio to guide
them in assigning appropriate ratings Examiner are also expected
to use their professional judgment and consider both qualitative
and quantitative factors when analyzing a credit agencys
performance. Since number are often lagging indicators of a credit
agencys condition the examiner must also conduct and projected
operations when assigning g CAMEL ratings. Part of the examiner
qualitative analysis includes an assessment of the credit agencys
risk management program. Examiner assesses the amount and
direction of risk exposure in seven categories: Credit, Interest
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rate, Liquidity, Transaction, Compliance, and Reputation &
strategic and determine how the nature and extent of these risks
affect one or more CAMEL component.
Although the CAMEL composite rating should normally bear a
close relationship to the component ratings the examiner should
not derive the composite rating solely by computing an arithmetic
average of the component ratings. General definitions the
examiner utilizes for assigning the credit agencys CAMEL
composite rating follow:
Rating-1 or strong
Indicates strong performance and risk management practices that
consistently provide for safe and sound operations. Management
clearly identifies all risk and employs compensating factors
mitigation concerns. The historical trend and projection for key
performances measure are consistently positive. Credit agencies
in this group resist external economic and financial disturbances
and withstand the unexpected action of business condition more
ably than credit agencies with a lower composite rating. Any
weaknesses are minor and can be handled in a routine manner by
the board of directors and management. These credit agencies
are in substantial compliance with laws and regulations .Such
institution gives no concern for supervisory concern.
Rating-2 or Satisfactory
Reflects satisfactory performance and risk management practices
that consistently provide for safe and sound operations.
Management identifies most risk and compensates accordingly.
Both historical and projected key performance measures should
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generally be positive with any exception being those that do not
directly affect safe and sound operations. Banks in this group are
stable and able to withstand business fluctuations quite well;
however minor areas of weakness may be present which could
develop into conditions of great concern. These weaknesses are
well within the board of direction and managements capacities
and willingness to correct. These banks are in substantial
compliance with laws and regulations. The supervisory response is
limited to the extent that minor adjustments are resolved in the
normal course of business and that operations continue to besatisfactory.
Rating-3 or Fair
Represent performance that is flawed to some degree and is of
supervisory concern. Risk management practices may be less
than satisfactory relative to the bank size complexity, and risk
profile. Management may not identify and provide mitigation of
significant risk. Both historical and projected key performance e
measures may generally be flat or negative to the extent that safe
and sound operation may adversely affected. Banks in this are not
nominally resistant to the onset of adverse business condition and
could easily deteriorate if concerted action is not effective in
correcting certain identifiable areas of weakness. Overall strength
and financial capacity is present so as to make failure only a
remote probability. These banks may be in significant non-
compliance with laws and regulations. Management may lack the
ability or willingness to effectively address weakness within
appropriate time frames. Such banks require more than normal
supervisory attention to address deficiencies
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Rating-4 or Marginal
Refers to poor performance that is of serious supervisory concern.
Risk management practices are generally unacceptable relative to
the banks size; complexity and risk profile. Key performance
measures are likely to be negative. Such performance, if left
unchecked, would be expected to lead to condition that could
threaten the viability of the bank. There may be significant non
compliance with laws and regulation. The board director and
management are not satisfactorily resolving the weakness and
problem. A high potential for failure is present but is not yet Iimminent or pronounced. Lending agencies in this group require
close supervisory attention.
Rating-5 or unsatisfactory
Consider unsatisfactory performance that is critically deficient and
in need of immediate remedial attention. Such performance by
itself or in combination with other weakness, directly threaten the
viability of the bank. The volume and severity of problems are
beyond managements ability or willingness to control or correct.
Credit in this group have a high probability of failure and will likely
require liquidation and the payoff of shareholders or some other
form of emergency assistance,merger,or acquisition longstanding
policy to disclose CAMEL composite and component rating only to
the officials of the banks being rated will remain unchanged.
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Capital
Capital provides a cushion to fluctuation in earning so that can
continue to operate in period of loss or negligible earnings. It also
provides a measure of reassurance to the member that the
organization will continue to provide financial services. Likewise
capital serves to support growth as a free source of funds and
provides protection against insolvency. While meeting statutory
capital requirements is a key factor in determination capital
adequacy the banks operation may warrant additional capital
beyond the statutory requirements. Maintain an adequate level ofcapital is a critical element.
The statutory net worth categories and risk based net worth
requirements for federally insured banks. There are five net worth
categories which are :well capitalize, adequately capitalized,
undercapitalized, significantly undercapitalized, and
critically undercapitalized.
Banks that are less than adequately capitalized must operate
under an approved net worth restoration plan. Examiners evaluate
capital adequacy by assessing progress toward goals set forth in
the plan. Determining the adequacy of a banks capital begins with
a qualitative evaluation of critical variables that directly bear on
the institutions overall financial condition. Include in the
assessment of capital is the examiner opinion of the strength of
the banks capital position over the next year or several years
based on its plan and underlying assumptions. Capital is a critical
element in the banks risk management program. The examiner
assesses the degree to which credit interest rate, liquidity,
transaction, compliance, strategic and reputation risks may
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impact on the banks current and future capital position. The
examiner also considers the interrelationship with other areas:
1. Capital level and trend analysis
2. Compliance with risk based net worth requirements
3. Composition of capital
4. Interest and dividend policies and practices
5. Adequacy of the allowance for loan and lease losses account
6. Quality, type, liquidity and diversification of assets with
particular reference to classified assets7. Loan and investment concentration
8. Growth plans
9. Volume and risk characteristics of new business initiatives
10. Ability of management to control and monitor risk including
credit and interest rate risk
11. Earning good historical and current earning performance
enables a credit union to fund its growth remain competitive
and maintain a strong capital position.
12. Liquiduty and funds management
13. Extent of contingent liabilities and existences of pending
litigation
14. Field of membership and
15. Economic environment
Ratings
Banks that maintain a level of capital fully commensurate with
their current and expected risk profiles and can absorb any
present or anticipated losses are accorded a rating of 1 or strong
for capital. Such banks generally maintain capital, levels at least
at the statutory net worth requirements to be classified as well
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capitalized and meet their risk based net worth requirement.
Further there should be no significant asset quality problems
earnings deficiencies or exposure to credit or interest rate risk
that could negatively affect capital.
A capital adequacy rating of 2 or satisfactory is accorded to a
bank that also maintains a level of capital fully commensurate
with its risk profile both now and in the future and can absorb any
present or anticipated losses. However its capital position with not
be as strong overall as those of I rated banks. Also there shouldbe no significant asset quality problems, earnings deficiencies, or
exposure to interest rated risk that could affect the banks ability
to maintain capital levels at the adequately capitalized net
worth category. Banks in this category should meet their risk
based net worth requirements.
A capital adequacy rating of 3 or fair reflect a level of capital
that is at least at the undercapitalized net worth category. Such
banks normally exhibit more than ordinary level of risk in some
significant segments of their operation. There may be asset
quality problems, earnings deficiencies, or exposure to credit or
interest rate risk that could affect the banks ability to maintain the
minimum capital levels. Banks in this category may fail to meet
their risk based worth requirements.
A capital adequacy rating of 4 or Marginal is appropriate if the is
significantly undercapitalized but asset quality, earnings, credit
or interest rate problems will not cause the banks to become
critically undercapitalized in the next 12 months. A 4 rating may
be appropriate for a bank that does not have sufficient capital
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based on its capital level compared with the risks present in its
operations.
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A 5 or unsatisfactory rating is given to a bank if it is critically
undercapitalized or has significant asset quality problem, negative
earnings trends, or high credit or interest risk exposure is
expected to cause the banks to become critically
undercapitalized in the next 12 months. Such banks are exposed
to level of risk sufficient to jeopardize their solvency.
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Asset Quality
Asset quality is rated in relation to:
1. The quality of loan underwriting, policies, procedures and
practices.
2. The internal controls and due diligence procedures in place
to review new loan programs, high concentration and
change in underwriting procedures and practices of existing
programs.
3. The level distribution and severity of classified assets.
4 The level and composition of non accrual and restructuredassets.
5. The ability of management to properly administers its assets
including the timely identification and collection of problem
assets.
6. The existence of significant growth trends indicating erosion
or improvement in asset quality.
7. The existence of high loan concentration that present undue
risk to the bank.
8. The appropriateness of investment policies and practices.
9. The investment risk factor when compared to capital and
earnings structure and
10. The effect of fair (market) value of investments vs. book of
investments. The asset quality rating is a function of present
conditions and the likelihood of future deterioration or
improvement based on economic conditions, current
practices and trends. The examiner assesses banks
management of credit risk to determine an appropriate
component rating for asset quality.
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underwriting, documentation, collection practices and high risk
investments. Rating 5 indicates that the banks viability has
deteriorated due to the corrosive affect of its asset problems on
its earning and level of capital.
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Management
Management is the most forward looking indicator of condition
and a key determinant of whether a bank possesses the ability to
correctly diagnose and a key respond to financial stress. The
management component provide examiner with objective and not
purely subjective indicators. An assessment of management is a
not solely dependent on the current financial condition of the bank
and will not be an average of the other component rating.
Reflect in this component rating is both the board of directors andmanagements ability to identify,measure,monitor,and control the
risk of the banks activities ,ensure its safe and sound operations
and ensure compliance with applicable laws and regulations.
Management practices should address some or all of the following
risks: credit, interest rate, liquidity, transaction, compliance,
reputation, strategic, and other risks.
The management rating is based on the following areas, as well as
other factor as discussed below.
1. Businness strategy/Financial performance
2. Internal controls
A) Information system
B) Segregation of duties
C) Audit program
D) Record keeping
E) Protection of physical assets
F) Education of staff
G) Succession planning
3. Other management issues
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A) Adequacy of the policies and procedures covering each
area of the bank operation
B) Budget performance compared against actual
performance
C) Effectiveness of the system that measure and monitor
risk
D) Responsiveness to examination and suggestion,
recommendation or regulation
E) Compliance with laws and regulation
F) Loan to share trends and historyG) Market penetration
H) Rate structure
I) Cost benefit analysis of major products.
Ratings
A management rating of 1 or strong indicates that management
and directors are fully effective. They are responsive to changing
economic condition and other concern and are able to cope with
existing and foreseeable problems that may arise in the conduct
of the banks operation.
For a management rating of 2 or satisfactory, minor
deficiencies are noted, but management produces a satisfactory
record of performance in light of the institutions particular
circumstances.
A3 or fair rating in management indicates that either operating
performance is lacking in some other condition exist such as
inadequate strategic planning or inadequate response to
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supervision. Management is either characterized by modest talent
or is distinctly below average for the type and size of the bank.
A management rating of 4 or marginal indicates that serious
deficiencies are noted in management ability or willingness to
meet its responsibilities. Either management is considered
generally unable to manage the bank is safe and sound manner or
conflict of interest situations exist that suggest that management
is not properly performing its fiduciary responsibilities.
A management rating of 5 or unsatisfactory is applicable tothose instances where incompetence or self dealing has been
clearly demonstrated. In these cases, problems resulting from
management weakness are of such severity that some type of
administrative action may need to be intiated, including the
replacement of management in order to restore safe and sound
operation.
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Earnings
To continue viability of a bank depends on its ability to earn an
appropriate return on its assets which enables the institution to
fund expansion, remain competitive and replenish and or increase
capital. Key factor to consider when assessing the banks earning
are:
1. Level, growth trends and stability of earning, particularly
return on average assets
2. Quality and composition of earnings3. Adequacy of valuation allowances and their affect on
earning.
4. Future earning process under a variety of economic
condition
5. Net interest margin
6. Quality and composition of earning
7. Net worth level
8. Sufficiency of earning for necessary capital formation.
Ratings
Earning rated 1 or strong are currently and are projected to be
sufficient to fully provide for loss absorption and capital formation
with due considerations to asset quality ,growth and trends in
earning .
An institution with earning that is positive and relatively stable
may receive a 2or satisfactory rating provided its level of
earnings is adequate in view of asset quality and operating risks.
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A 3 or fair rating should be accorded if current and projected
earnings are not fully sufficient to provide for capital to meet and
maintain compliance with regulatory requirements.
Earning rated 4 or marginal may be characterized by erratic
fluctuation in net income, the development of sever downward
trend in income or substantial drop in earnings from the previous
period and a drop in projected earnings is anticipated.
A 5 or unsatisfactory rating would normally be assigned tobanks that are unprofitable to the point that capital will be
depleted within twelve months.
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Asset /Liability management
Asset /liability management is the process of evelauting,
monitoring and controlling balance sheet risk (interest rate risk
and liquidity risk). A sound asset/liability process integrates
strategic, profitability and net worth planning with risk
management.
a) Interest rate risk:
The risk of adverse changes to earnings and capital due to
changing levels of interest rates. Interest rate risk is evaluatedprincipally in term of sensitivity and exposure of the value of the
banks investment and loan portfolios to changes in interest rates.
Key factor to consider in evaluating sensitivity to interest:
1. Interest rate risk at the instrument, portfolio and balance sheet
levels.
2. Integration of risk management with planning and decision
making.
3. Balance sheet structure.
4. Liquidity management.
5. Prudence of policies and risk limits.
6. Business plan, budgets and projection.
b) Liquidity risk:
Liquidity is evaluated on the basis of the credit unions ability to
meet its present and anticipated cash flow needs such as funding
loan demand, share withdrawals, and the payment of liabilities
and expenses. Liquidity risk also encompasses poor management
of excess funds.
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Key factor to consider in evaluating liquidity management
include:
1. Balance sheet structure
2. Contingency planning to meet unanticipated events
3. Contingency planning to handle period of excess liquidity.
4. Cash flow budget and projection
5. Integration of liquidity management with planning and
decision making.
RatingsA rating of 1 or strong indicates that the exhibit only modest
exposures to balance sheet risk.Management has demonstrated it
has the necessary controls, procedures and resource to effectively
manage risks. Interest rate risk and liquidity risk management are
integrated into the banks organization and planning to promote
sound decisions.
A rating of 2 or satisfactory indicates that the banks risk
exposure is reasonable managements ability to
identify,measure,monitor,control and report risk is sufficient and
it appear to be meet its reasonably anticipated needs.
A rating of 3 or fair indicates that the risk exposure of the bank
is substantial and managements ability to manage and control
risk requires improvement. Liquidity may be insufficient to meet
anticipated operational needs, necessitating unplanned
borrowing. Improvements are needed to strength policies,
procedure, or the organization understanding of balance sheet
risks.
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Ratings of 4 or marginal and 5 or unsatisfactory indicates
that the bank exhibit an unacceptably high exposure of risk.
Management does not demonstrate an acceptable capacity to
measure and manage interest rate risk or the bank has an
acceptable liquidity position. Rating of 4 or 5 may also indicate
level of liquidity such that the bank cannot adequately meet
demands for funds.
A rating of 5 would be appropriate for a bank with an extreme or
liquidity position so critical as to constitute an imminent threat tothe banks continued viability.
Conclusion
Analysts have raised a number of questions about bank ratings,
focusing in particular on their ability to measure bank financial
health relative to alternative systems. For example, Federal
Reserve economists found that CAMELS rating were better able to
forecast bank distress than statistical monitoring regimes, but
only when the CAMELS rating were fresh (assigned within the
last six months).
Notice that these rating are not release to the public but only to
the top management of the banking company. This is to prevent a
bank which has a bad CAMELS rating.
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FOREIGN EXCHANGE MECHANISM
Foreign Exchange Department is international department of
Bank. It deals globally. It facilitates international trade through its
various modes of services. It bridges between imports and
exports. If the branch is authorized dealer in foreign exchange
market, it can remit foreign exchange from local country to
foreign country. This department mainly deals in foreign currency.
This is why this department is called foreign exchange
department.
Some national and international laws regulate functions of this
department. Among these, Foreign Exchange Act, 1947 is for
dealing in foreign exchange business, and import and export
control act, 1950 is for Documentary Credits (UCPDC 1993
revision & international Chamber of Commerce Publication no-
500) is also an important law for settlement of terms and
conditions between exporter and importer and export operation
for banks.
Foreign trade department plays an important role for bank Asia as
well as it contributes in the growth of our national economy. Like
other departments of Bank Asia Limited also gives emphasis on
smooth and quick service for this particular department.
The Meaning of Foreign Exchange
Foreign Exchange means foreign currency. It includes all deposits,
credits and balances payable in foreign currency as well as foreign
instrument such as drafts bill of exchange, promissory note in any
foreign currency.
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According to Foreign Exchange Regulation Act 1947, Any thing
that conveys a right to wealth in another country is foreign
exchange.
Foreign exchange department plays significant roles through
providing different services for the customer. Facilitating the trade
with foreign country is the most important among those services
the key instrument which facilitates this trade is L/C (Letter of
Credit).
Objective of foreign exchange
To settle the transaction related in export and import.
To help the own people in abroad to send their money.
Encourage foreign investment in the home country.
To enhance the foreign investment.
To help the own people to go in abroad.
To facilitate the foreigner to visit in our country.
To help the people to remit money who are working in
abroad or the foreigner who are working in the home
country.
To maintain the international trade.
Our study on foreign exchange mechanism covers, Export, Import
and remittance business, which are sequentially discussed
hereafter.
Foreign Exchange Department of Bank Asia, KhatungonjForeign Exchange Department of Bank Asia, Khatungonj
BranchBranch
Correspondent Banking is one of the major banking activities of
The Khatungonj branch of Bank Asia.
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Khatungonj Branch is expected to be the leader in Correspondent
Banking among Bank Asias other branches. Khatungonj Branch
provides trade finance related and international payment products
to valued clients through its international network, and as a
provider of international payment services, it allows its clients to
leverage the most advanced payment services offered today and
provide the highest quality services to the clients.
The Trade Finance Department of Khatungonj Branch is well
equipped with senior level officers with blend of both young andold and matured with years of experience in this area. They serve
the needs of the client banks and also the corporate clients and
try their best to maintain and enhance the relationships with
them.
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SubmitD
oc uments
MakesPaymen
t
Applicationfor
Openingl/C
Applicationfor
Openingl/C
PresentDoc
ument
MakesPa
ymentagainst
Document
Issue L/C
Forward Document
Makes Payment
InstructiontoPayorReimbur se
PaysorReimbu
rses
PaysorReimbu
rses
Foreign Exchange Mechanism
Foreign Exchange Department
BUYER/
IMPORTER
INDENTORSELLER
EXPORTER
BENEFICIARY
ISSUING BANK
ADVISING
BANK/
NEGOTIATING
BANK.
Advisesand/o
rconfirmsl/c
OR
REIMBURSINGBANK
FIG: FOREIGN EXCHANGE MECHANISM
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Import Department
Understanding:
Imports are foreign goods and services purchased by consumers,
firms, & Governments in Bangladesh. The importers are asked by
their exporters to open letter of credits so that their payment
against goods is ensured.
Import Procedure:
To import through Bank, a customer requires-
(i) Bank account
(ii) Import Registration Certificate (IRC)
(iii) Tax Paying Identification Number
(iv) Proforma Invoice Indent
(v) Membership Certificate
(vi) LCA (Letter of Credit Authorization) form duly attested
(vii) One set of IMP Form
(viii) Insurance Cover note with money receipt
Other import procedure can be shown by the following flow chart,
Import mechanism
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To import, a person should be competent to be Importer.
According to Import and Export Control Act, 1950, the Office Of
Chief Controller Of Import and Export provides the registration
(IRC) to the importer. After obtaining this person has to secure a
letter of credit authorization (LCA) from Bangladesh Bank. And
then a person becomes a qualified importer. He is the person who
requests or instructs the opening bank to open an L/C. He is also
called opener or applicant of the credit.
Things which are done here
The following things are done in this department:
Total supervision of Import Department (Cash/Back to Back
L/C).
Foreign Correspondence related to above.
Payment of Back-to-Back L/C and endorsement of
Export L/C against payment.
Follow-up of Back-to-Back overdue bills.
Correspondence regarding Back-to-Back L/C and Cash L/C.
Maintenance of Due Date Diary.
Maintenance & record of related L/C Documents.
Audit Compliance.
Matching of Bill of Entry with IMP, follow-up of pendingBill of Entry Quarterly Statement.
Batch Checking.
L/C opening/ Amendment (Back to Back L/C).
Endorsement of Export L/C when opening.
Batch checking.
Balancing of L/C Contingent Liability 9Back to Back L/C).
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Follow-up of Sub-judice bills and maintaining liaison
with Head Office and Foreign Correspondent.
All correspondence related to Back-to-Back L/C with
Head Office and Foreign Correspondent.
Supervision of checking, Lodgment and retirement of
Import documents under Back-to-Back L/C.
Issuance of Certificate and attestation of
papers/documents of garments clients as required by BGME,
EPB & oth
Recommended