Internship report of BBA on Stress Testing

Internship Report

On

Prepared by-

Sheikh Salah Uddin

Department of Finance,

Jagannath University.

Date of Submission: 02 July 2015.

Stress Testing of Sonali Bank Limited

1

Sonia Munmun

Lecturer

Department of Finance

Jagannath University, Dhaka

Date of Submission: 02 July 2015.

Submitted to:

Submitted by:

Sheikh Salah Uddin

ID: 115290

BBA 5th Batch


Jagannath University


2

Preface

Anyone can gather theoretical knowledge by learning. But practical knowledge and

theoretical knowledge is fully different. Practical knowledge is required to be achieved to

match theoretical knowledge. In order to gather practical knowledge, all of the Universities

should take effective steps such as internship program for the BBA students.

Internship program is one kind of experience. It is the combined arrangement between the

educational institutions and business organizations operating in the practical field. So the

student of BBA should be pragmatic and should have a firsthand view of the real life business

environment. The objective of the internship program is to produce the learners with

practical organizational environment so that they can tune up themselves for the job in future

and can get an opportunity to reconcile the theoretical knowledge with real life situation. For

this reason, internship program is an indispensable for the BBA program.

As a student of Finance, I was placed in Sonali Bank Limited, Savar Branch, Dhaka. I

decided to write an internship report on “Stress Testing of Sonali Bank Limited” after three

months of internship program.

The best feature of my internship program was the access to a motivated and hard-working

team of highly knowledgeable banking professionals. The most important skill that I learnt

was the ability to work in a team. I also picked up considerable skills in team communication,

communication with the customers, training others, getting trained me, and the ability to

adapt to the ever-changing banking scenario.

In this report, I am extremely grateful to my honorable supervisors, Sonia Munmun, Lecturer

of Jagannath University.

I have tried my best to make this report effective and realistic and my attempt will be fruitful

at that time if anybody is benefited from this one.

Sheikh Salah Uddin

BBA 5th Batch


Jagannath University

25 April 2015; 06:15 AM


3

Acknowledgement

In the name of Almighty Allah, the most Beneficent, the most merciful.

It is indeed a great pleasure and honor on my part to have the opportunity to submit internship

report after three months practical orientation at Sonali Bank Limited, Savar Branch, Dhaka.

First of all thanks to almighty Allah for enabling me to complete internship report with good

and sound health. I am pleased to express my gratitude to placement committee for arranging

such a program from which I have carried a practical experience.

Internship program is one of the important requirements for the completion of four years

BBA program. I have completed my internship in Sonali Bank Limited (Savar Branch). In

this regard I would like to express my heartiest appreciation to my honorable supervisor

Sonia Munmun, Lecturer, Department of Finance, Jagannath Iniversity for his guidance,

care and valuable suggestions to prepare this report. I would also like to pay my gratitude

to another supervisor, Shamim Ara Begum, Senior Faculty Member, Sonali Bank Staff

College, Sonali Bank Limited for her guidance and cooperation.

I am very much grateful to Professor Dr. M. Abu Misir, Chairman, Department of Finance,

Jagannath University and Dr. Sk. Md. Golam Saklayen, Principal (DGM, Feb ’12 -

Present), Sonali Bank Staff College for practicing internship program in their organizations

and creating the opportunity for me to be trained up with the efficient employees of Sonali

Bank Limited.

This report is being prepared with assistance and support from, Md. Mojibur Rahman (Senior

Officer), Rezwana Parvez, (Senior Offiecr), Muhammad Shamim (Officer-Foreign

remittance), Md. Mosharraf Hossain (Officer & Remittance Management In charge), Md.

Abdul Aziz (Officer-Cash), Rabaka Sultana (Officer-trainee) and specially my beloved wife

Sayeda Hosneara Akter (Student of BBS) for giving me support all the moment of my

attachment time and also for make an attractive working environment which I have really

enjoyed very much.

I feel very pleased to thank all my fellow friends for their cordial cooperation in preparing

this report. Then at last I shall be grateful to those persons who read this report and who will

get benefit from this report at present and future.


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Letter of Transmittal

02 June 2015

Sonia Munmun,

Lecturer,


Jagannath University, Dhaka.

Subject: Submission of Internship Report.

With due respect, I would like to state that it is a matter of great pleasure and honor for me

to submit my internship report on “Stress Testing of Sonali Bank Limited” assigned as my

topic of internship report. In preparation of this report I have followed and maintained the

format and rules of a formal internship report. The internship program gave the opportunity

to have an insight on the Banking sector of Bangladesh through Sonali Bank Limited.

The Consignment was of great worth and appeal, as it helped me hone my analytical skills

abilities and practical knowledge in the field of credit management and helped me become

familiarized with the corporate world. I have tried heart and soul to make the report effective

and useful.

The internship program was very much valuable to me as it helped me to gain experience

from the practical field. I am grateful to you for providing me this opportunity of gaining

such practical experiences and to know how theoretical knowledge is applied in the real

world.

I, sincerely hope that you will be satisfied with this report. Please accept my report and I will

be glad to clarify any discrepancy that may arise.

Sincerely Yours

Sheikh Salah Uddin

ID: 115290

Reg. No: 1101335290

BBA 4th Year 2nd Semester


Jagannath University, Dhaka.


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Declaration from the Writer

I, Sheikh Salah Uddin, ID: 115290, Registration No: 1101335290, BBA 4th year 2nd

semester, Department of Finance, Jagannath University, Dhaka hereby declare that this is

the report of internship program titled “Stress Testing of Sonali Bank Limited” is uniquely

prepared by me after the completion of three months’ work hard at Sonali Bank Limited,

Savar Branch, Dhaka. I worked hard and tried my best to make it unique.

I confirm that, the report is only prepared for my academic requirement not for otherwise

purpose. I also assure that this report is not submitted anywhere in the universe before me.

Sheikh Salah Uddin

ID: 115290

BBA 5th Batch

4th year 2nd Semester




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Declaration from the Supervisor

I, Sonia Munmun, hereby very pleased to declare that Sheikh Salah Uddin, ID no.: 115290,

Registration No: 1101335290, 4th year 2nd semester, Department of Finance, Jagannath

University, Dhaka has been given with the topic “Stress Testing of Sonali Bank Limited”

for researching and writing an internship report on the subject. He has reviewed relevant

literatures and has surveyed for three months to collect both of primary and secondary data.

I have supervised him throughout the preparation of the internship paper.

I certify that the internship paper is an original one and has not been submitted elsewhere

previously for publication in any form.

He is wished all the best in his effort.

Sonia Munmun

Lecturer




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Declaration from SBSC Supervisor

I, hereby, declare that Sheikh Salah Uddin, ID no.: 115290, 4th year 2nd semester,

Department of Finance, Jagannath University, Dhaka has been given with the topic “Stress

Testing of Sonali Bank Limited” for researching and writing an internship report on the

subject. He worked in Sonali Bank Limited, Savar Branch, Dhaka and has reviewed relevant

literatures and has surveyed for three months to collect both of primary and secondary data.

I have supervised him throughout the preparation of the internship paper.

I also certify that the internship paper is an original one and so this is really a tremendous

effort from him as a student of BBA.

Shamim Ara Begum

Senior Faculty Member (SEO)

Sonali Bank Staff College

Sonali Bank Limited

Plot-6, Sector-8, Uttara, Dhaka


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Executive Summary

During my stay at the office as an intern, I never felt vague or ambiguous. The environment

of the Sonali Bank Limited is work-friendly. The staffs are specialized in their respective

fields. Each of them works on their own and their id supervised from the top management.

The motivation of the staff, I believe, comes from the very sense of responsibility.

My report is on the basis of the fundamental analysis rather than the general banking. So, I

actually worked there full time, but prepared my report in my room after my work time.

First of all I described all functions and present position of Sonali Bank, then gradually I

entered into the main part of the report through describing the newly invented process of

measuring the financial situation or position of a bank/FI, named Stress Testing.

This report is intended to answer some of the basic questions that may arise as part of the

process of stress testing. The report begins with a discussion of stress testing in a financial

system context, highlighting some of the differences between stress tests of systems and of

individual portfolios and then ends up with the stress test on the basis of financial system of

Sonali Bank Limited. The paper provides an overview of the process itself, from identifying

vulnerabilities, which are called ‘shock’ to constructing scenarios to interpreting the results.

The remaining part consist the analysis (page-56), findings (page-82), recommendations

(page-83) and conclusion (page-86).

I tried to make the report perspicuous and comprehensible for the students and the other

persons who are not related to any part of business and so I used graphical presentation

besides data & calculation tables. As CAR is the main capital risk1 measurable function, all

the risks are converted to CAR (%) to understand the company position if they can recover

that shock using their own capital or not.

I’ve done lots of financial calculations, observed their financial reports & from my working

experience I also gathered knowledge about their administrative processes of managing

different issues. Summarized findings can be found in chapter-6.

1 I expressed capital risk, which means the shortage of existing amount of capital than the

required amount of capital


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Acronyms and Elaboration

Table 1: Abbreviations used in this report

SL. Acronyms Elaborations

01 AGM Assistant General Manager

02 BB Bangladesh Bank

03 BL Bad/Loss

04 BSEC Bangladesh Securities Exchange & Commission

05 CAR Capital Adequacy Ratio

06 CC Cash Credit

07 CIB Credit Information Bureau

08 CRM Credit Risk Management

09 DF Doubtful

10 DFI Development Finance Institution

11 DGM Deputy General Manager

12 EDS Education Deposit Scheme

13 FDIC Federal Deposit Insurance Corporation

14 FDR Fixed Deposit Ratio

15 FI Financial Institution(s)

16 FO Financial Obligation

17 FSI Financial Soundness Indicator(s)

18 FSV Forced Sale Value

19 GAD General Advance Division

20 GAP Gap Analysis Program

21 GBP Great British Pound

22 ICB Investment Corporation of Bangladesh

23 ICD Industrial Credit Division

24 LLC Limited Liability Company

25 LRA Lending Risk Analysis

26 MDS Medical Deposit Scheme


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27 MES Monthly Earning Scheme

28 MSS Monthly Saving Scheme

29 MV Market Value

30 MVA Market Value of Asset

31 MVE Market Value of Equity

32 MVL Market Value of Liability

33 NPL Non-Performing Loan

34 OCC Office of the Comptroller of the Currency

35 OD Overdraft

36 RC Regulatory Capital

37 RWA Risk Weighted Asset

38 SBL Sonali Bank Limited

39 SBSC Sonali Bank Staff College

40 SEO Senior Executive Officer

41 SMA Special Mention Account

42 SS Sub-Standard

43 UAE Unites Arab Emirates

44 US United States

45 USA United States of America

46 USD United States’ Dollar

47 VAR Value At Risks

48 WAD Weighted Average Duration

49 WAy Weighted Average Yield


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Table of Contents

Chapter Contents’ Headings Page

Acknowledgement 4

Letter of Transmittal 5

Declarations 6-8

Executive Summary 9

Acronyms and Elaboration 11

Chapter - 1

Introduction 1.1 Rationale of the study 18

1.2 Initiative 18

1.3 Background of the report 20

1.4 Objective of the report 20

1.5 Scope of the study 21

1.6 Methodology of the study 21

1.7 Sources of Data 23

1.8 Limitations of the study 23

Chapter-2:

Proposition of SBL

2.1 Profile & Status of SBL 25

2.2 Goal of SBL 27

2.3 Background of SBL 27

2.4 Ancillary Services of SBL 28

2.5 Automation status of SBL 30

2.6 Card Facilities of SBL 32

2.7 Foreign Remittance Management 34

2.8 Credit Rating Report of SBL 36

2.9 Islami Banking of SBL 37


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Chapter-3:

Initiative of Stress Testing

3.1 Stress Testing 42

3.2 Bank Stress Testing 42

3.3 Techniques for Stress Testing 44

3.4 Procedure of Stress Testing 45

3.5 Relationship between Stress Test & Regulations 53

3.6 Importance of Stress Testing 53

Chapter-4:

Stress Testing of

Sonali Bank Limited

4.1 Duration & DGAP of Balance Sheet 56

4.2 Calculation of CAR of SBL 60

4.3 Interest Rate Risk of SBL 61

4.4 Exchange Rate Risk 63

4.5 Credit Risk 64

4.6 Equity Price Risk 70

Chapter 5:

Total Shock from

Stress Testing

5.1 Different Shocks from Stress Testing Scenarios 72

5.2 Cumulative Credit Shock Scenarios of SBL 73

5.3 Cumulative Total Shock of SBL 75

5.4 Liquidity Shock of SBL 79

5.5 When NPL Increases up to Total Capital 80

Chapter-6:

Findings and Decisions

6.1 Findings from the Whole Analysis 82

6.2 Recommendations for Applicable Bodies 83

Conclusion 85

Annex I-X 88-99

References 100


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Table of the Tables

Table 1: Abbreviations used in this report ______________________________________ 9

Table 2: Branch Automation with Computers __________________________________ 29

Table 3: ATM & card services of SBL _______________________________________ 30

Table 4: Charges for transaction from other's booth _____________________________ 32

Table 5: Credit limit of credit cards __________________________________________ 33

Table 6: Information of a 2-year semiannual Bond ______________________________ 55

Table 7: Duration calculation of a 2-year semiannual Bond: ______________________ 55

Table 8: Balance Sheet Duration of SBL ______________________________________ 56

Table 9: CAR calculation _________________________________________________ 60

Table 10: Interest Rate Shocks _____________________________________________ 61

Table 11: Exchange Rate Risk – if adverse movement in Exchange Rate ____________ 62

Table 12: Credit Shock – increase in NPLs ____________________________________ 64

Table 13: Credit Risk – Downward shift in NPLs’ Categories _____________________ 65

Table 14: Credit Shock – Fall in the FSV of Mortgaged Collateral _________________ 66

Table 15: Credit Risk – Increase in NPLs’ under B/L category in a sector ___________ 67

Table 16: Credit Shock – Increase in NPLs’ due to Top 8 large loan borrowers’ failure _ 68

Table 17: Equity price Risk – Fall in Stock Prices ______________________________ 69

Table 18: Aggregate of 5 types of Credit Shocks _______________________________ 72

Table 19: Total shock of Sonali Bank Limited _________________________________ 74

Table 20: Liquidity Shock – Fall in Liquid Liabilities ___________________________ 78

Table 21: Shock of NPL increases up to total capital ____________________________ 79

Table 22: Findings from whole analysis ______________________________________ 81


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Table of the Figures

Figure 1: Methodology Framework ..................................................................................... 20

Figure 2: Formation history of Sonali Bank Limited .......................................................... 27

Figure 3: Different SMS Services ........................................................................................ 30

Figure 4: Banner for Islamic Banking of SBL ..................................................................... 39

Figure 5: Procedure of Stress Testing .................................................................................. 44

Figure 6: Parts of Stress Testing .......................................................................................... 45

Figure 7: Credit Risk includes these parts of management ................................................. 46

Figure 9: Relationship between Stress Test & Bank Regulations ....................................... 52

Figure 10: Interest Rate Shock in CAR ............................................................................... 61

Figure 11: Foreign exchange rate shock .............................................................................. 62

Figure 12: Credit Shock – increase in NPLs ........................................................................ 64

Figure 13: Credit shock -downward shift of NPL categories .............................................. 65

Figure 14: Credit Shock – Fall in the FSV of Mortgaged Collateral ................................... 66

Figure 15: Credit Risk – Increase in NPLs’ under B/L category in a sector ....................... 67

Figure 16: Credit Shock – Increase in NPLs’ due to Top 8 loan borrowers’ failure ........... 68

Figure 17: Equity price Shock ............................................................................................. 69

Figure 18: Imagine how stress on your pencil damages what percent of that ..................... 71

Figure 19: Aggregate of 5 types of Credit Shock Scenarios ................................................ 72

Figure 20: Cumulative Credit Shock in Scenario-1 ............................................................. 73



Figure 23: Total shock of Sonali Bank Limited .................................................................. 75

Figure 24: Parts of Cumulative Total Scenario-1 ................................................................ 76

Figure 25: Parts of Cumulative Total Scenario-2 ................................................................ 76

Figure 26: Parts of Cumulative Total SCenario-3 ............................................................... 77


15


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Abstract

Stress testing is one of the effective and popular ways to alert bank management with regard

to adverse unexpected outcomes related to variety of risks and provides an indication how

much capital adequacy ratio (CAR) might be needed to absorb losses if any large shocks

occur. In this paper, Sonali Bank Limited is considered, operates in Bangladesh based on

BB rules. Besides that, several indicators for conducted stress testing of non-performing loan

(NPL), non-performing loan in two major sectors, equity price risk, liquidity shocks and

Interest rate shocks. This study has been used the data for the years of 2013 and 2014 taken

from the annual report of SBL. Finally, this study has some interesting implications that

might help the senior management, policy makers, depositors, owners as well as stakeholders

of the bank.

Key words

Stress Testing, Credit Risk, Non-performing loan, NPL in major sectors, Equity Price Risk,

Liquidity Risk, Interest Rate Risk, Financial soundness, Sonali Bank Limited

1.1 Rationale of the Study:

For the completion of this internship program I have chosen a bank, named “Sonali Bank

Limited” and my internship report is based on “Stress Testing of Sonali Bank Limited”. I

have prepared this report under Sonia Munmun, Lecturer, Department of Finance, Jagannath

University. During the study period, generally students gain theoretical knowledge but now

a days, in the job market there is no substitute of principle work experience. Therefore,

before getting any job, students should have some real world experience in the major field

of study on the career choice so that the employers get interested about the employees. This

report has given me a chance to raise my quality in developing research instrument and its

applications. By doing this I can boost my acceptability in job market and develop my real

life experience.

1.2 Initiative:

Banks play the most important role in the economy. Banks collect money from the

individuals and lend them to others. Now banks offer the widest range of financial services

and perform lots of financial functions. Thus banks have proven that they are the key factor


17

for the business and economy as well. It is of vital importance to understand and appreciate

the risks the banking industry is exposed to so that soundness and sustainability of the

industry can be ensured.

In the regulatory and supervisory sphere, the Central Bank's activities in banking supervision

have often been determined by exogenous elements deriving mainly from the changes in the

structure and scope; activities and risks that the financial sector is facing and the changes in

regulatory standards occurring internationally. The recent financial turmoil in the US

financial system has augmented the importance of establishing more developed risk

management regime in the financial industry. Present risk management culture based on

normal business conditions and historical trends is not enough to cope with the disorders that

have happened in the financial systems globally. This required an appropriate response in

the regulatory and supervisory activities of the Central Bank.

Financial institutions around the world are increasingly employing stress testing to determine

the impact on the financial institution under a set of exceptional, but plausible assumptions

through a series of battery of tests. Bangladesh Bank has designed a stress testing framework

for banks and FIs to proactively manage risks in line with international best practices.

Keeping in view with the divergence of skill levels and available resources among banks

and FIs, a modest beginning focused with simple sensitivity and scenario analysis

considering only credit risk and market risk is suggested in the Stress Testing Guideline

published from BB, eventually to develop into a more comprehensive approach. All banks

and FIs are expected to carry out stress testing on half‐yearly.

Stress Testing has got the impressive attentions in the last few decades as to measure the

level of economic confrontation and to alert bankruptcy hazard caution of the financial

institutions, commercial banks.

The internship report comprises a brief study on the financial system of Sonali Bank Limited

during three months internship. The report is divided in many departments according to

nature and requirement of the topic and according to the instructions of my supervisors.

1.3 Background of the report:

The business world is getting dynamic and competitive. It is hard for an organization to run

& even survive in a fast paced, growing and uncertain world if it cannot keep tracks with the


18

go of business dynamism. Business plays and links important roles in developing the

economy of a country. So, as a business graduate, I think I need to be attached with any

organization to get a handy & versatile experience about the business world before starting

our career. Internship is the arrangement, which makes a bridge between our academic

knowledge and practical world to have an acquaintance with the real business world as well

as to gear me up to lead the future competitive business. I have worked in Different divisions

of SBL, Savar Branch, Dhaka. In this report, I will try to make an overall analysis on the

financial risks of SBL.

1.4 Objectives of the study:

The objective of the study is to gather practice of all knowledge regarding financial sector

and operations. Theory classes of B.B.A provide us theories regarding financial sector and

practical orientation gives us the opportunity to feel those systems and their operations. More

precisely these objectives can be identified:

1.4.1 Major objective:

Gathering and analyzing the data in a view to testing the stress of SBL.

1.4.2 Minor objectives:

To gather the practical experience based on the theoretical knowledge.

To be habituated with the corporate environment and culture.

To fulfill the internship program.

To maintain the overall banker-customer relationship.

To evaluate the financial performance of Sonali Bank Limited.

To understand and analyze the financial strength of SBL through Stress Testing.

To point out the major findings of the report & provide some valuable

recommendations based on them.


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1.5 Scope of the Study:

As I was an intern, my scope was limited and restricted for some purpose. I had maintained

some official formality for the collection of data of my report. This study will give a clear

idea about the financial performance of Sonali Bank Limited as well as the risks and stresses

faced by Sonali Bank Limited. In addition, you can know the financial position of the bank

in the banking industry based on its last year’s performance. These are the major scopes of

this report:

Understand the present position of SBL

Know about the new idea of Stress Testing

Know the stress levels of SBL

Apply these data into your investment portfolios in bank industry

Follow the recommendations to improve the financial system.

1.6 Methodology of the Report:

Method of my report is designed in such a way so that it correspondent to achieve the

objectives of the study.

Type: As I am going to test the stress of Sonali Bank Limited to manage its risks, so I have

to describe its whole management process of stresses over risk by analyzing some financial

and statistical data.

So, from my point of view, it is an analytical report.

Data collection and analysis were made during the Internship period at Sonali Bank Limited.

The methodology framework is likely as the flowchart shown below-


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Figure 1: Methodology Framework

In order to analyze collected data, I have used statistical software that can run different

statistical test. Also I have used MS-Excel to calculate and generate charts and graph of

different analysis. The data has been presented through graphs for better visual

understanding.

Methodology Framework

Primary Data Secondary Data

Research at Bank & Home

Reporting the Findings &

Recommendations

Internship at SBLInternship under

Supervisors


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1.7 Sources of Data:

For smooth and accurate study everyone has to follow some rules and regulations in order

to collect right data for the right process. I had collected data from both the primary source

and secondary source. These sources are:

1.7.1 Primary Sources:

Practical desk work.

Face to face dialogue with officers.

Face to face conversation with the Sonali Bank Staff College Supervisor.

Facing some practical situation related with the day to day banking activities.

1.7.2 Secondary Sources:

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

Website of SBL.

Brochures.

Other business websites.

Papers & journals about the Central bank CMS requirement.

Text books

1.8 Limitations of the Study:

Any research work needs high degree of involvement regarding collection of information,

creation of data base, literature review and analysis of data. While doing so, many limitations

arise even though I always tried my best to avoid these limitations. In conducting the present

study, the following limitation has been faced:

The main constrain of the study was insufficiency of information. The personnel of

the organization did not want to disclose the classified information to maintain bank

restrictions.

I have faced major limitation in the financial projection as my estimate was rather

informative base than of actual one.

As I worked full time during the internship period, time is another hindrance to make

an in depth study on such a critical issue

I had to attend the final examination of 4th year 2nd semester during the internship

period and so it was not possible to prepare report or collect data during these weeks.


22

Primary data is always hard to work on because of authenticity.

Due to time limitation many of the aspects could not be discussed in the present

report. Learning all the functions within just 90 days is really tough.

Since the bank personnel were very busy, they could not provide enough time to me,

lack of opportunity to visit more than one branch.

The functions and activities of Sonali Bank Limited are too vast, so fully classified

information could not be collected without being the head accountant or DGM. As a

result I can’t collect updated or very recent information & strategy.

As I had to consult with my supervisors in two different places and though I am

capable of visiting those places, in spite of my home is in savar, there was a huge

time-waste while visiting those places twice or more times during the preparation of

report.


23


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2.1 Corporate Profile and Status:

Sonali Bank Limited is the largest state bank of Bangladesh. Sonali bank Limited follows

the rules and regulation prescribed by the Bangladesh bank. The functions cover a wide

range of banking and functional activities to individual, firms, corporate bodies,

multinational agencies and the rural area. Here is the present status of Sonali Bank Limited:

Name of the Company : Sonali Bank Limited

Chairman : Fazle Kabir

CEO and Managing Director : Pradip Kumar Dutta

Company Secretary : A.K.M Sajedur Rahman Khan

Legal Status : Public Limited Company

Genesis : Emarged as Nationalised Commercial Bank in 1972,

following the Bangladesh Bank (Nationlisation) Order No.

1972(PO No.26 of 1972)

Date of Incorporation : 03 June, 2007

Date of Vendor's Agreement : 15 November, 2007

Registered Office : 35-42&44, Motijheel Commercial Area, Dhaka,

Bangladesh

Authorised Capital : Taka 6,000.00 core

Paid-up Capital : Taka 3,120.00 core*

Number of Employee : 22,052* (Decreased 1061 in this year)

As in SBL Monthly ‘At-a-Glance’ of February 2015.


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a) Officers : 19,199* (Decreased 693 in this year)

b) Staffs : 2,853* (Decreased 368 in this year)

Number of Branches : 1204*

a) Foreign Branches : 02*

b) Local Branches : 1202

i. Rural : 860*

ii. Urban : 342*

Treasury Branches : 594*

Authorized Dealers : 45*

Exchange Houses : 58* (increased 2 in this year)

Regional Offices : 19*

Principal Offices : 42*

General Managers’ Offices : 11* (increased 1 in this year)

Representative Offices : 3*

Contact:

Phone-PABX : 9550426-31, 33, 34, 9552924

FAX : 88-02-9561410, 9552007

SWIFT : BSONBDDH

Website : www.sonalibank.com.bd

E-mail : [email protected]

As in SBL Monthly ‘At-a-Glance’ of February 2015.

http://www.sonalibank.com.bd/

mailto:[email protected]


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2.2 Goal of SBL:

There are three levels of goal of Sonali Bank Limited. Such as-

2.2.1 Vision:

Socially committed leading banking institution with global presence.

2.2.2 Mission:

Dedicated to extend a whole range of quality products that support divergent needs of people

aiming at enriching their lives, creating value for the stakeholders and contributing towards

socio-economic development of the country.

2.2.3 Slogan:

Your trusted partner in innovating banking.

2.3 Background of Sonali Bank Limited:

Soon after independence of the country Sonali Bank emerged as the largest and leading

nationalized commercial bank by proclamation of the Bank’s Nationalization Order 1972

(Presidential order- 26 ) liquidating the then National Bank of Pakistan, Premier Bank and

Bank of Bhawalpur. As a fully state owned institution, the bank had been discharging its

nation- building responsibilities by undertaking government entrusted different

socioeconomic schemes as well as money market activities of its own volition, covering all

spheres of the economy.

The bank has been converted to a Public Limited Company with 100% ownership of the

government and started functioning as Sonali Bank Limited from November 15, 2007 taking

over all assets, liabilities and business of Sonali Bank. After corporatization, the

management of the bank has been given repaired autonomy to make the bank competitive&

to run its business effectively.

Sonali bank limited is governed by a Board of Directors consisting of 13 (thirteen) members.

The Bank is headed by the Chief Executive Officer & Managing Director, who is a well-

known Banker and a reputed professional. The corporate head quarter of the bank is located

at Motijheel, Dhaka, Bangladesh and the main commercial center of the capital.


27

Figure 2: Formation history of Sonali Bank Limited

2.4 Ancillary Services:

Sonali Bank Limited offers multiple special services with its network of branches throughout

the country in addition to its normal banking operations.

2.4.1 Collection:

o Gas bills.

o Electricity bills.

o Telephone bills.

o Water/Sewerage bills.

o Municipal holding Tax.

o Passport fees, visa fees and Travel tax.

o Customs & Excise duties.

o Source tax and VAT.

o Jakat fund.

o Hajj deposit.

o Land development tax

1972

National Bank

of Pakistan1949

The Bank of Bahwalpur

Limited

The Premier

Bank Limited


28

2.4.2 Payment:

o Pension of employees of Government and other Corporate Bodies.

o Bangladesh Bank employees’ pension.

o Army pension.

o British pension.

o Students' stipend/scholarship.

o Govt. & Non-Govt. Teachers' salary.

o Food procurement bill on behalf of the Govt.

2.4.3 Social Services:

o Old age allowances.

o Widows, divorcees and destitute women allowances.

o Freedom Fighters' allowances.

o Maternal allowances for poor women.

o Disability allowances.

2.4.4 Sale & Encashment/Purchase:

o Savings Certificates.

o ICB Unit Certificates.

o Prize Bonds.

o Wage Earner's Development Bonds.

o US Dollar Premium & Investment Bond.

o Lottery tickets of different Semi-Govt. and Autonomous Bodies.

o Sanchaypatra.

o Public Service Commission's application form.

o Judicial Service Commission's application form.

o Exchange of soiled / torn notes.


29

2.4.5 Misc. Services:

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

Local Governance Support Project.

Enlist of Non-Government Insurance Company.

2.5 Automation status:

2.5.1 Branch Computerization:

1148 branches are. Out of 1194 branches at home, 1179 branches have already been entered

in the automation network.

Table 2: Branch Automation with Computers

Status title Number of branch

On live Operation 1193 (increased 1 in this year)*

Under Process 7

ABB 1184 (increased 3 in this year) 2

2.5.2 Foreign Remittance:

Bank's own in-house software "Remittance Management System" (RMS+), having, among

others, the feature of paying foreign remittance instantly over the counter is being

implemented at all branches. This web based software provides digital services to the

expatriates through its unique advantage of sending confirmation message to the mobile

phone of the remitter/beneficiary.

2.5.3 ATM:

Sonali Bank Limited is a member of Q-Cash ATM network. At present the bank has 53 ATM

booths. Sonali Bank's ATM cardholders enjoy the access to the ATMs and POS of Dutch

*2 As in SBL Monthly ‘At-a-Glance’ of February 2015.


30

Bangla Bank Ltd. and Brac Bank Ltd. besides those of Q-Cash consortium. Sonali Bank

recently launched Credit Card.

Table 3: ATM & card services of SBL

ATM Status title Number

ATM facilities 64

Debit card issued 54442 (increased 1525 in 2015)3

Credit card issued 969 (increased 23 in 2015) 4

2.5.4 Online and SMS Banking: At present109 branches of Sonali Banks are included

in the Online Any Branch Banking (ABB) network. SMS Banking service is running in 73

branches. The bank is seriously working on connecting all branches in the Real-time Online

Banking network gradually. Branches having ABB facility are also rendering SMS banking

services.

Figure 3: Different SMS Services

3 As in SBL Monthly ‘At-a-Glance’ of February 2015.

4 As in SBL Monthly ‘At-a-Glance’ of February 2015.


31

2.6 Card Facilities of Sonali Bank Limited:

2.6.1 Debit Card Facilities:

Sonali Bank Limited is one of the member bank of Q-Cash Consortium. Card holder of

Sonali Bank Limited can use ATMs of consortium member banks, Dutch-Bangla bank and

BRAC bank limited. Member Banks of Q-Cash Consortium:

Sonali Bank Limited Eastern Bank Limited

Basic Bank Limited Jamuna Bank Limited

IFIC Bank Limited Markentile Bank Limited

Janata Bank Limited NCC Bank Limited

National Bank Limited Shahjalal Islamic Bank Limited

Pubali Bank Limited The City Bank Limited

Trust Bank Limited Standard Bank Limited

ICB Islamic Bank Limited Uttara Bank Limited

Social Islamic Bank Limited Bank Asia Limited

Bangladesh Commerce Bank

Limited

Mutual Trust Bank Limited

State Bank of India

Debit and Credit card holder of Sonali Bank Limited can use under mentioned ATM Booth

and shopping center and Point of Sale (POS):


32

Table 4: Charges for transaction from other's booth

Other Bank Transaction Charges per Transaction including VAT:

22 Q-Cash Member Banks

Omnibus Network (Brac Bank)

Dutch Bangla Bank

Tk 11.50

Tk 17.25

Tk 34.50

Other Information:

Yearly charge for Debit Card is = Tk 345.00 (Including VAT)

Duplicate Card issue is case of lost = Tk 200.00

Card Division Address:

Card Division ,

Sonali Bank Limited,

Head Office (4th floor),

Dhaka - 1000.

Contact no: 9560366, 01755583687

Emali Address: [email protected]

2.6.2 Credit Card Facilities:

Sonali Bank Limited has introduced proprietary credit card. At present officers of the bank

are entitled to enjoy credit card facility. Other than this, officer of Government, Semi-

Government, Autonomous organizations, Teachers and Officers of the Government

Universities are also entitled for Sonali Credit card whose salary is disbursed from issuing

branches of Sonali Bank Limited.

mailto:[email protected]


33

Table 5: Credit limit of credit cards

Credit Limit

Equivalent to 3 (Three) Months Basic Salary for Officers of Government, Semi-

Government, Autonomous organizations or other customers.

I. General Manager and Above

II. Deputy General Manager & Assistant

General Manager

III. SEO

IV. Executive Officer

V. Senior Officer & Officer

Tk. 3,00,000.00

Tk. 2,00,000.00

Tk. 1,50,000.00

Tk. 1,00,000.00

Tk. 75,000.00

Conditions:

Yearly charge for Credit Card (Customer) Tk = 575.00 (Including VAT)

Yearly charge for Credit Card (Bank Employee) Tk = 345.00 (Including VAT)

Only TIN holder is eligible for Credit card facility.

Credit card holder can enjoys 100% of loan limit either from ATM or POS.

Rate of interest is 1.50% on daily product & monthly basis.

Charge will be applicable for remote on-us transactions.

In case of POS no interest will be charged if outstanding liabilities are paid within

the stipulated time. This time is 50 days from date of statement.

2.7 Foreign Remittance Management:

Here is the list of the name of exchange houses / banks

Bahrain Financing Company

Zenj Exchange Co. W.L.L.

Nationa Finance Exchange Co,

Bahrain

Hamdan Exchange Canada

Al Rajhi Commercial Foreign

Exchange

Al Amoudi Exchange Company


34

National Commercial Bank

Al Mulla International Exchange

Co.W.L.L.

Al Muzaini Exchange Co. K.S.C.C.

Al Moosa Exchange Company

W.L.L.

Bahrain Exchange Company W.L.L

City international exchange co.

W.L.L.

Dollarco Exchange co. Ltd.

Kuwait Bahrain International Ex.

Co. W.L.L.

National money exchange co.

W.L.L.

Oman exchange company ltd.,

kuwait

U.A.E. Exchange centre W.L.L.

May Bank, Malaysia 26 IME (M)

SDN.BHD

Bank Muscat S.A.O.G.

Gulf overseas exchange co. L.L.C.

National Bank Of Oman

Oman International Exchange

L.L.C., oman

Oman & Uae Exchange Centre & co.

L.L.C.

Eastern Exchange Eastablishment

Trust exchange company W.L.L.

Al Dar For Exchange Works, Qatar

Balaka Exchange Pte Ltd

Eastern union remittance &

exchange ltd., U.K.

British Arab Commercial Bank

Habib exchange co. L.L.C.

Mashreq Bank Psc

Al Rostamani International

Exchange Company

U.A.E. Exchange centre L.L.C.

Wall street exchange centre L.L.C.

Ridha Al Ansari Exchange

Establishment

Al Ahalia Money Exchange Bureau

Lari Exchange Establishment

Global Exchange Italia Srl, Italy,

USA

Trans-fast remittance L.L.C., france

Western Union

Dalil Exchange

NBL SDN Malaysia

Al-Rajhi Bank

Arab National Bank

Arabian Exchange

Bank Al Bilad, K.S.A.

Al. Jamil Exchange Co.

Daulat enterprise inc.

Indian Bank, Singapore

Al Ansari Exchange

Al falah exchange, U.A.E.

Al Ghurair Exchange, Italy

Bank Al-Jazira ,K.S.A.

Total no. of exchange houses/banks = 54, (bank = 12 and Exchange house = 42)


35

2.8 Credit Rating Report of Sonali Bank Limited:

The credit rating report of Sonali Bank Limited is published by the head office of the

organization. The report is very simple to understand and very significant for the investors.

So, the report is given below without any changes made, same to the real report published

or announced from the head office of the organization.

As per Bangladesh Bank’s mandatory requirement vide BRPD circular number-06, dated: 5

July 2006, credit rating of Sonali Bank Limited was done by the Alpha Credit Rating Limited

on the audited balance sheet as on 31/12/2013 and other related information, given below:

Head Office,

Sonali Bank Limited.


36

2.9 Islami Banking of Sonali Bank Limited:

Sonali Bank limited has started Islamic Banking activities in consideration with the

increasing demand & expectation of religious Muslims. It is completely based on Islamic

Shariah. A high profiled Shariah supervisory committee consists of reputed Islamic scholars,

Economists & Bankers, has been working for proper & fair Islamic Banking activities.

2.9.1 Establishment of Islamic Windows in Sonali Bank Limited:

Sonali Bank Limited as the largest state owned commercial bank has commenced its Islamic

Banking operation since 29 June 2010 at the following five branches with separate window.

Fakirapool branch,Dhaka

Agrabad corporate branch, Chittagong

Khulna corporate branch, Khulna

Bogra corporate branch, Bogra

Dargagate corporate branch, Sylhet

2.9.2 Aims & Objectives:

The aims and objectives of Islamic Banking are-

To facilitate the online Shariah based banking at the door step of the religious

Muslims

To establish an excellent Islamic Banking System by direct participation in sincere

& public welfare Banking, ensuring a proper & developed financial Management,

based on Islamic Shariah.

To bring dynamism in Islamic banking by utilizing the well versed experience &

good will of Sonali Bank Limited.

To encourage the savings, following direct Investment.

To create more employment facilities by inspiring project Investment.


37

2.9.3 Functions of Islamic Banking:

The Islamic Banking windows are performing the following banking activities through on-

line banking-

1. Collection of Deposits

2. Investment Assistance

2.9.3.1. Deposit Collection Activities:

The windows are taking deposit through different types of accounts. There are mainly two

types of deposit accounts:

a) Al-Wadeeah A/C

b) Mudaraba A/C

2.9.3.1.a. Al-Wadeeah Current A/C :

Islamic Banking Windows operates Al- Wadeeah current A/C, based on Al- Wadeeah policy

of Islamic Shariah. In this policy bank undertake to make payment of A/C holders money on

demand & A/C holders permits the bank to utilize his/her money. A/C holders can make

transactions randomly No profit given by the bank & no loss beared by the A/C holder.

2.9.3.1.b. Mudaraba A/C:

As per Mudaraba policy of Islamic Shariah the following A/Cs are being maintained.

i. Mudaraba Savings Deposits

ii. Mudaraba Special Notice Deposit

iii. Mudaraba Term Deposit

iv. Mudaraba Hajj Savings

v. Mudaraba Sonali Monthly Deposit Scheme(SMDS)

vi. Mudaraba Monthly Profit Scheme(MMPS)


38

In these accounts ‘Bank’ is treated as ‘Mudarib’ and client is treated as ‘Sahib Al Mal’. Bank

receives deposit from the depositors and invest it as per Shariah Law and distribute

(minimum 65%) profit earned for the Mudaraba fund as weigtage basis at the end of the

year.

2.9.3.1.b.iv. Mudaraba Haj Savings A/C :

This type of A/C is an opportunity to those Muslims who are interested to perform holy Haj

(Pilgrim) but unable to manage the required fund at a time, by savings fixed monthly

installment for the particular period of time from 1 year to 20 year, the person concerned can

build the fund.

2.9.3.2. Investment Activities:

In Islamic Banking System the following types of investment are being done -

A. Trading:

i. Bi-Murabaha

ii. Bi-Muazzal

iii. Bi-Salam

iv. Bi-Istisna

B. Partnered ownership or Hire Purchase under Shirkatul Milk (HPSM)

2.9.3.2.A.i. Bai-Murabaha (Sale in profit as per contact):

Sale in profit on purchased value in consent of both Bank & Client, Called Bi- Murabaha.

2.9.3.2.A.iii. Bi-Salam(Advanced purchase):

The business contract in which bank made advanced payment against the supply of

commodities in a future stipulated period of time is called Bi- Salam. On taking delivery of

the commodities on the specified time the bank can sale these to other party.

2.9.3.2.A.iv. Bi-Istisna:

A contract between seller & Buyer under which seller/supplier undertake to supply on

manufacturing the particular goods to the buyer/receiver is called Bi-Istina. The details of


39

contract i,e, value, nature, pattern, class, Amount, Place, Time & mode of payment, carrying

cost etc must be mentioned in the contract.

2.9.3.2.B. Hire-Purchase under Shirkatul Milk:

The contract made by bank & Clients jointly to purchase vehicle, Machineries & Equipments

, building , Apartment etc.wherein client utilize the same rental basis & made the payment

of Bank portion on installment & acquire the ownership proportionately, is called Hire

Purchase under shirkatul –Milk. The actual value, monthly rent, Value of bank’s portion,

payment schedule, securities etc. is settled before the purchase agreement made.

The following Services are being provided by the Islamic windows:

On-line Real Time Banking facilities.

Payment order issue.

Remittance facilities through DD/TT etc.

People can contact to have any information or discussion/suggestion at any time to our

nearby window or Islami Banking Department.

Tel: 88-02-9556608,

website: www.sonalibank.com.bd

Figure 4: Banner for Islamic Banking of SBL

http://www.sonalibank.com.bd/


40


41

3.1 Definition of Stress Testing:

Stress testing is a simulation technique, which are used to determine the reactions of different

financial institutions under a set of exceptional, but plausible assumptions through a series

of battery of tests. At institutional level, stress testing techniques provide a way to quantify

the impact of changes in a number of risk factors on the assets and liabilities portfolio of the

institution. For instance, a portfolio Stress Testing makes a rough estimate of the value of

portfolio using a set of exceptional but plausible events in abnormal markets.

At the system level, stress tests are primarily designed to quantify the impact of possible

changes in economic environment on the financial system. The system level stress tests also

complement the institutional level stress testing by providing information about the

sensitivity of the overall financial system to a number of risk factors. These tests help the

regulators to identify structural vulnerabilities and the overall risk exposure that could cause

disruption of financial markets. Its prominence is on potential externalities and market

failures.

However, one of the limitations of this technique is that stress tests do not account for the

probability of occurrence of these exceptional events. For this purpose, other techniques, for

example VAR (value at risks) models etc. are used to supplement the stress tests. These tests

help in managing risk within a financial institution to ensure optimum allocation of capital

across its risk profile.

3.2 Definition of Bank Stress Testing:

An analysis conducted under unfavorable economic scenarios which are designed to

determine whether a bank has enough capital to withstand the impact of adverse

developments. Stress tests can either be carried out internally by banks as part of their own

risk management, or by supervisory authorities as part of their regulatory oversight of the

banking sector. These tests are meant to detect weak spots in the banking system at an early

stage, so that preventive action can be taken by the banks and regulators.

In depth, Stress tests focus on a few key risks – such as credit risk, market risk, and liquidity

risk – to banks' financial health in crisis situations. The results of stress tests depend on the

assumptions made in various economic scenarios, which are described by the International

Monetary Fund as "unlikely but plausible." Bank stress tests attracted a great deal of


42

attention in 2009, as the worst global financial crisis since the Great Depression left many

banks and financial institutions severely under-capitalized.

Large international banks began using internal stress tests in the early 1990s. In 1996, the

Basel Capital Accord was amended to require banks and investment firms to conduct stress

tests to determine their ability to respond to market events.

However, up until 2007, stress tests were typically performed only by the banks themselves,

for internal self-assessment. Beginning in 2007, governmental regulatory bodies became

interested in conducting their own stress tests to insure the effective operation of financial

institutions. Since then, stress tests have been routinely performed by financial regulators in

different countries or regions, to insure that the banks under their authority are engaging in

practices likely to avoid negative outcomes. In India, legislation was enacted in 2007

requiring banks to undergo regular stress tests. In October 2012, U.S. regulators unveiled

new rules expanding this practice by requiring the largest American banks to undergo stress

tests twice per year, once internally and once conducted by the regulators. Starting in 2014,

midsized firms are also being required to conduct Dodd-Frank Act Stress Testing. In 2012,

federal regulators also began recommending portfolio stress testing as a sound risk

management practice for community banks or institutions that were too small to fall under

Dodd-Frank's requirements. The Office of the Comptroller of the Currency (OCC) in an

October 18, 2012, Bulletin recommends stress testing as means to identify and quantify loan

portfolio risk. The FDIC made similar recommendations for community banks.

Extreme market movements or crises in the past reveal the inadequacy of managing risks

based only on normal business conditions and historical trends Current financial turmoil

have augmented the importance of better understanding of potential vulnerabilities in the

financial system and the measures to assess these vulnerabilities for both the regulators and

the bankers. The regulators and managers of the financial system around the globe have

developed a number of quantitative techniques to assess the potential risks to the individual

institutions as well as financial system. A range of quantitative techniques that could serve

the purpose is widely known as ‘stress testing’. IMF and Basel Committee on banking

supervision have also suggested for conducting stress tests on the financial sector.


43

3.3 Techniques for Stress Testing:

3.3.1 Simple Sensitivity Analysis:

Simple Sensitivity Analysis (single factor tests) measures the change in the value of portfolio

for shocks of various degrees to different independent risk factors while the underlying

relationships among the risk factors are not considered. For example, the shock might be the

adverse movement of interest rate by 100 basis points and 200 basis points.

Its impact will be measured only on the dependent variable i.e. capital in this case, while the

impact of this change in interest rate on NPLs or exchange rate or any other risk factor is not

considered.

3.3.2 Scenario Analysis:

Scenario Analysis encompasses the situation where a change in one risk factor affects a

number of other risk factors or there is a simultaneous move in a group of risk factors.

Scenarios can be designed to encompass both movements in a group of risk factors and the

changes in the underlying relationships between these variables (for example correlations

and volatilities). Stress testing can be based on the historical scenarios, a backward looking

approach, or the hypothetical scenario, a forward‐looking approach.

3.3.3 Maximum Shock Scenario:

Extreme Value or Maximum Shock Scenario measures the change in the risk factor in the

worst‐case scenario, i.e. the level of shock which entirely wipes out the capital.

3.3.3.i. Assumptions behind each Scenario:

The Stress Testing at this stage is only a single factor sensitivity analysis. Each of the five

risk factors has been given shocks of three different levels. The magnitude of shock has been

defined separately for each risk factor for all the three levels of shocks.


44

3.4 Procedure of Stress Testing:

The process of calculating Stress Testing contains some components which are measured

from the company’s financial data. This specific procedure is guided by the central bank of

Bangladesh, BB. These components are:

a) Measuring Credit Risk

b) Interest Rate Risk

c) Exchange Rate Risk

d) Equity Price Risk and

e) Liquidity Risk

So, we can see the Procedure of Stress Testing through this relation figure:-

Figure 5: Procedure of Stress Testing

So, there are main four work-steps to complete Stress Testing, best seen as a process: part

investigative, part diagnostic, part numerical, and part interpretive. Ideally, this process

begins with the identification of specific vulnerabilities or areas of concern, followed by the

construction of a scenario in the context of a consistent macroeconomic framework. The

next step is to map the outputs of the scenario into a form that is usable for an analysis of

financial institutions’ balance sheets and income statements, then performing the numerical

Credit Risk

Interest Rate Risk

Exchange Rate Risk

Equity Price Risk

Liquidity Risk

BS Positions

DGAP

MVE

Increase in the NPLs

Shift in the NPLs

Fall in FSV

Some Extreme Events


45

analysis, considering any second round effects, and finally summarizing and interpreting the

results. We can see these steps as following figure:

Figure 6: Parts of Stress Testing

3.4.1 Credit Risk:

Credit risk refers to the risk that a borrower will default on any type of debt by failing to

make required payments. The risk is primarily that of the lender and includes lost principal

and interest, disruption to cash flows, and increased collection costs. The loss may be

complete or partial and can arise in a number of circumstances.

The Stress Testing for credit risk assesses the impact of increase in the level of

nonperforming loans of the bank/FI. This involves six types of shocks:

The first deals with the increase in the Non-Performing Loans and the respective

provisioning. The three scenarios shall explain the impact of 1%, 2% and 3% of the total

performing loans directly downgraded to bad/loss category having 100% provisioning

requirement.

The second deals with the negative shift in the NPLs categories and hence the increase in

respective provisioning. The three scenarios shall explain the impact of 50%, 80% and

100% downward shift in the NPLs categories. For example, for the first level of shock

50% of the SMA shall be categorized under substandard, 50% of the substandard shall be

categorized under doubtful and 50% of the doubtful shall be added to the bad/loss

category.

Investigation Diagnostics

Interpretion Analytics


46

The third deals with the fall in the forced sale value (FSV) of mortgaged collateral. The

forced sale values of the collateral shall be given shocks of 10%, 20% and 40% decline

in the forced sale value of mortgaged collateral for all the three scenarios respectively.

The fourth deals with the increase of the NPLs in particular 1 or 2 sector i.e. garments &

Textiles and the respective provisioning. The three scenarios shall explain the impact of

5%, 7.5% and 10% performing loans of particular 1 or 2 sectors directly downgraded to

bad/loss category having 100% provisioning requirement.

The fifth deals with the increase of the NPLs due to default of Top 10 large borrowers

and the respective provisioning. The three scenarios shall explain the impact of 5%, 7.5%

and 10% performing loans of Top 10 large borrowers directly downgraded to bad/loss

category having 100% provisioning requirement.

The sixth deals with extreme events in which due to increase in the certain percentage of

NPLs, the whole capital position of a bank will be wiped out to offset the increased

amount of provision due to cover respective loan losses. The forced sale value of the

collaterals and tax‐adjusted impact of the additional required provision (if any) will be

calibrated in the CAR for the each scenario under all categories.

Figure 7: Credit Risk includes these parts of management


47

3.4.2 Interest Rate Risk:

The assessment of interest rate risk is a very large topic at banks, thrifts, saving and loans,

credit unions, and other finance companies, and among their regulators. The widely deployed

CAMELS rating system assesses a financial institution's: Capital adequacy, Assets,

Management Capability, Earnings, Liquidity, and Sensitivity to market risk. A large portion

of the Sensitivity in CAMELS is interest rate risk. Much of what is known about assessing

interest rate risk has been developed by the interaction of financial institutions with their

regulators since the 1990s. Interest rate risk is unquestionably the largest part of the

Sensitivity analysis in the CAMELS system for most banking institutions. When a bank

receives a bad CAMELS rating equity holders, bond holders and creditors are at risk of loss,

senior managers can lose their jobs and the firms are put on the FDIC problem bank list.

Interest rate risk is the potential that the value of the on‐balance sheet and the off-balance

sheet positions of the bank/DFI would be negatively affected with the change in the interest

rates. The vulnerability of an institution towards the adverse movements of the interest rate

can be gauged by using duration GAP analysis.

The banks and FIs shall follow the following steps in carrying out the interest rate stress

tests:

Estimate the market value of all on‐balance sheet rate sensitive assets and liabilities

of the bank/DFI to arrive at market value of equity

Calculate the durations of each class of asset and the liability of the on‐balance sheet

portfolio Arrive at the aggregate weighted average duration of assets and liabilities

Calculate the duration GAP by subtracting aggregate duration of liabilities from that

of assets.

Estimate the changes in the economic value of equity due to change in interest rates

on on‐balance sheet positions along the three interest rate changes.

Calculate surplus/(deficit) on off‐balance sheet items under the assumption of three

different interest rate changes i.e. 1%, 2%, and 3%

Estimate the impact of the net change (both for on‐balance sheet and off‐balance

sheet) in the market value of equity on the capital adequacy ratio (CAR).


48

Market value of the asset or liability shall be assessed by calculating its present value

discounted at the prevailing interest rate. The outstanding balances of the assets and

liabilities should be taken along with their respective maturity or re-pricing period,

whichever is earlier.

3.4.3 Duration GAP Analysis:

Duration is the measure of a portfolio’s price sensitivity to changes in interest rates. Longer

the duration, larger the changes in the price for a given change in the interest rates. Larger

the coupon, lower would be the duration and smaller would be the change in the price for a

given change in the interest rates. The duration is measured as:

D = ∑

t × CFt

(1 + YTM)tnt=1

∑CFt

(1 + YTM)tnt=1

Where,

CFt = cash flow at time t,

t = the number of periods of time until the cash flow payment,

YTM = the yield to maturity1 of the security generating the cash flow, and

n = the number of cash flows.

The duration GAP indicates how the market value of equity (MVE) of a bank/FI will change

with a certain change in interest rates. If the weighted average duration of assets exceeds the

weighted average duration of liabilities (leverage‐adjusted), the duration GAP is said to be

positive.

A positive duration gap signifies that the assets are relatively more interest rate sensitive

than liabilities. Hence if the interest rates rise, the value of assets will fall proportionately

more than the value of liabilities and the market value of equity will fall accordingly and

vice versa.


49

The duration GAP is measured by comparing the weighted average duration of assets with

the weighted average duration of liabilities (leverage‐adjusted, this takes into account the

existence of equity as a means of financing assets).

The weighted average duration of assets and liabilities is calculated as follows:

Weighted Average Duration of Assets (DA) = ∑ 𝑊𝑎𝐷𝑎na

Weighted Average Duration of Liabilities (DL) = ∑ 𝑊𝑙𝐷𝑙ml

Where,

𝑊𝑎 = market value of the asset “a” divided by the market value of all the assets

𝑊𝑙 = market value of the liability “l” divided by the market value of all the liabilities

𝐷𝑎 = duration of the asset “a”

𝐷𝑙 = duration of the liability “l”

n = total number of assets

m = total number of liabilities

Duration Gap will be calculated as under:

DGAP = DA − MVL

MVA× DL

The change in market value of equity shall be calculated as:

∆MVE ≅ (−DGAP) × ∆i

(1 + y) × TA

∆𝑖 = The change in the interest rate

y = The weighted average yield to maturity of all the effective assets.

The impact of interest rate change on interest bearing off‐balance sheet contracts shall be

separately calculated. As a first step, the actual market price of each contract shall be

determined which should represent the actual price of the contract if sold immediately.

The second step involves calculating the market price again by marking to market each

contract separately assuming a change in interest rate. The difference between the two

market prices would determine the amount of revaluation surplus or deficit. The revaluation


50

surplus would arise if the actual market price of the contract is less than the price calculated

after assuming a change in the interest rate and revaluation deficit would result in, if

otherwise. The revaluation surplus/deficit arising due to the change in the interest rates of

the off‐balance sheet contracts should be subtracted/ added to the fall in market value of

equity derived by the DGAP approach to arrive at the net change in the market value of

equity.

The impact of this net change in the market value of equity will then be calibrated in the

CAR. The tax‐adjusted impact of this net fall (if any) in the MVE shall be adjusted from the

regulatory capital and the risk‐weighted assets and the revised CAR shall be calculated under

each of the above scenarios.

3.4.4 Exchange Rate Risk :

Exchange Rate Risk (also known as FX Risk, Foreign Exchange Risk or Currency Risk) is

a financial risk that exists when a financial transaction is denominated in a currency other

than that of the base currency of the company. Foreign exchange risk also exists when the

foreign subsidiary of a firm maintains financial statements in a currency other than the

reporting currency of the consolidated entity. The risk is that there may be an adverse

movement in the exchange rate of the denomination currency in relation to the base currency

before the date when the transaction is completed. Investors and businesses exporting or

importing goods and services or making foreign investments have an exchange rate risk

which can have severe financial consequences; but steps can be taken to manage the risk.

The Stress Testing for exchange rate assesses the impact of change in exchange rate on the

value of equity. To assess foreign exchange risk the overall net open position of the bank/FI

including the on‐balance sheet and off‐balance sheet exposures shall be charged by the

weightage of 5%, 10% and 15% for minor, moderate and major levels respectively. The

overall net open position is measured by aggregating the sum of net short positions or the

sum of net long positions; whichever is greater. The impact of the respective shocks will

have to be calibrated in terms of the CAR. The tax‐adjusted loss if any arising from the

shocked position will be adjusted from the capital. The revised CAR will then be calculated

after adjusting total loss from the risk‐weighted assets of the bank/FI.


51

3.4.5 Equity Price Risk :

Equity risk is the financial risk involved in holding equity in a particular investment. Equity

risk often refers to equity in companies through the purchase of stocks, and does not

commonly refer to the risk in paying into real estate or building equity in properties.

The measure of risk used in the equity markets is typically the standard deviation of a

security's price over a number of periods. The standard deviation will delineate the normal

fluctuations one can expect in that particular security above and below the mean, or average.

However, since most investors would not consider fluctuations above the average return as

risk, some economists prefer other means of measuring it.

The Stress Testing for equity price risk assesses the impact of the fall in the stock market

index. Appropriate shocks will have to be absorbed to the respective securities if the current

market value of all the on balance sheet and off balance sheet securities listed on the stock

exchanges including shares, NIT units, mutual funds etc. falls at the rate of 10%, 20% and

40% respectively. The impact of resultant loss will be calibrated in the CAR.

3.4.6 Liquidity Risk :

Liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the

market to prevent a loss. Liquidity risk arises from situations in which a party interested in

trading an asset cannot do it because nobody in the market wants to trade for that asset.

Liquidity risk becomes particularly important to parties who are about to hold or currently

hold an asset, since it affects their ability to trade.

The Stress Testing for liquidity risk evaluates the resilience of the banks towards the fall in

liquid liabilities. The ratio “liquid assets to liquid liabilities” shall be calculated before and

after the application of shocks by dividing the liquid assets with liquid liabilities. Liquid

assets are the assets that are easily turned into cash without the threat of loss. They include

cash, balances with Bangladesh Bank and balances with banks, call money lending, lending

under repo and investment in government securities. Liquid liabilities include the deposits

and the borrowings. Appropriate shocks will have to be absorbed to the liquid liabilities if

the current liquidity position falls at the rate of 10%, 20% and 30% respectively. The ratio

of liquid assets to liquid liabilities shall be re‐calculated under each scenario.


52

3.5 Relationship between Stress Test and the Banking Regulations:

Financial Institutions need to take a broad and integrated view of regulatory capital. Here is

the core relationship between Stress Testing and the banking regulations:

I.

3.6 Importance of Stress Testing:

Stress Testing is becoming an important tool to assess potential vulnerabilities in a financial

system. Stress Testing is a way of revaluing a portfolio using a different set of assumptions.

The object of a Stress Testing is to understand the sensitivity of the portfolio to changes in

various risk factors. The assumed changes in risk factors are usually made large enough to

impose some “stress” on the portfolio.

Stress tests can be applied to both the asset and liability sides of a portfolio. They can be

used to assess a variety of risks, including market risk (the possibility of losses from changes

in prices or yields), credit risk (potential for losses from borrower defaults or

nonperformance on a contract), and liquidity risk (the possibility of depositor runs or losses

from assets becoming illiquid). For example, instead of valuing a portfolio using current

market values for interest rates, foreign exchange rates, and equity prices, a Stress Testing

could involve valuing the same balance sheet using a different set of market prices.

Regulatory Capital

Stress Testing

Enhanced Prudential

Supervision

Early remediation

framework is based

on capital ratio

thresholds

Projected capital

ratios are a key

component of

stress test results

Figure 8: Relationship between Stress Test & Bank Regulations


53

More complex stress tests involving multiple risk scenarios or changes in the

macroeconomic environment still amount to the same thing: revaluing a portfolio under a

different set of assumptions.

All banks and FIs are expected to carry out stress testing on half‐yearly basis. Many training

programs are being arranged by different organizations and institutions.

Stress tests can involve changes in almost any aspect of a portfolio, including the prices used

to calculate market values; as well as the duration, liquidity, default rates, and recovery rates

assumed for the portfolio. Stress tests can also be used to examine the impact of changes in

the operating environment beyond changes in these parameters. For example, stress tests can

be employed to assess the impact of changes in prudential regulations, stricter enforcement

of provisioning rules, or a different accounting treatment of allowable capital.

Stress tests usually produce a numerical estimate of the change in value of the portfolio. This

change in value is often expressed in terms of the impact on some measure of capital, to

understand the sensitivity of the net worth of the institution to the risk being considered.

Each stage of the process is important to understanding the sensitivity of a financial system

to a particular shock or vulnerability. These stages are not necessarily sequential, as some

modification or review of each component of the process may be desirable as work

progresses.

As a starting point the scope of the Stress Testing is limited to simple sensitivity analysis.

Five different risk factors namely; interest rate, forced sale value of collateral, non‐

performing loans (NPLs), stock prices and foreign exchange rate have been identified and

used for the stress testing. Moreover, the liquidity position of the institutions has also been

stressed separately. Though the decision of creating different scenarios for stress testing is a

difficult one, however, to start with, certain levels of shocks to the individual risk

components have been specified considering the historical as well as hypothetical movement

in the risk factors.


54


55

4.1 Duration & DGAP of Balance Sheet:

To measure the interest rate risk of an organization, one has to analyze the Duration GAP &

Price Sensitivity of the organization. Then calculate the weighted average yield and then the

change in MVE of the organization.

4.1.1 Duration:

Suppose, we are calculating this type of bond, semiannual, maturity of two years:

Table 6: Information of a 2-year semiannual Bond

FV ৳ 1,41,75,29,060.00

Coupon 10%

yield 11.40%

n 2

m 2

MV ৳ 1,38,29,08,324.52

The D (Duration) will be calculated in the following way:

Table 7: Duration calculation of a 2-year semiannual Bond:

P t CF PV of CF PVCF*t

1 0.5 ৳ 7,08,76,453.00 ৳ 6,70,54,354.78 ৳ 3,35,27,177.39

2 1 ৳ 7,08,76,453.00 ৳ 6,34,38,367.81 ৳ 6,34,38,367.81

3 1.5 ৳ 7,08,76,453.00 ৳ 6,00,17,377.31 ৳ 9,00,26,065.96

4 2 ৳ 7,08,76,453.00 ৳ 5,67,80,867.84 ৳ 11,35,61,735.68

4 2 ৳ 1,41,75,29,060.00 ৳ 1,13,56,17,356.78 ৳ 2,27,12,34,713.56

৳ 1,38,29,08,324.52 ৳ 2,57,17,88,060.40

So, Duration will be: (PVCF*t)/PVofCF:

D = 1.859695263

4.1.2 Duration GAP of Sonali Bank Limited:

To calculate the Duration GAP of Sonali Bank Limited, at first it is needed to calculate the

average asset and liabilities and the market values. Interest rate risk shall be assessed using

simple duration analysis. Duration for all the assets and liabilities shall be calculated using

the formula already described. Given below is the table showing the duration of the balance

sheet:


56

Stress Testing

Name of the Bank: Sonali Bank Limited

For the year ended on 31 December 2014

Balance Sheet Duration Table 8: Balance Sheet Duration of SBL

Property and Assets Book Value Coupon Repricing

Period

Yield to

Maturity

Market Value Janu-

2015 Duration WAD WAy

Cash ৳ 53,38,20,74,145.00 ৳ 53,38,20,74,145.00

Balance with Others ৳ 39,83,83,84,042.00 ৳ 39,83,83,84,042.00

Money at call and short notice ৳ 9,22,55,82,000.00 ৳ 9,22,55,82,000.00

Investment

Held to maturity (HTM):

2 Years BGTB ৳ 10,59,79,23,601.00 8.00% 2 8.40% ৳ 10,52,13,46,167.06 1.8871 0.0009 0.10%

5 Years BGTB ৳ 18,45,53,75,734.00 10.00% 5 9.40% ৳ 18,88,91,95,908.91 4.0665 0.0825 0.19%

10 Years BGTB ৳ 29,03,79,02,292.00 10.00% 10 10.72% ৳ 27,77,40,11,917.05 6.4590 0.1926 0.33%

15 Years BGTB ৳ 9,25,99,44,430.00 10.00% 15 11.40% ৳ 8,33,83,25,107.03 7.7079 0.0690 0.11%

20 Years BGTB ৳ 8,46,77,39,398.00 10.00% 20 11.97% ৳ 7,21,03,93,269.48 8.2155 0.0636 0.11%

Held for Trading (HFT)

2 Years BGTB ৳ 8,24,19,11,345.00 8.00% 2 8.40% ৳ 8,18,23,57,752.68 1.8871 0.0166 0.07%

5 Years BGTB ৳ 35,21,19,80,099.00 10.00% 5 9.40% ৳ 36,03,96,88,382.25 4.0665 0.1573 0.35%

10 Years BGTB ৳ 16,70,75,05,624.00 10.00% 10 10.72% ৳ 15,98,03,02,421.26 6.4590 0.1108 0.19%

15 Years BGTB ৳ 1,41,75,29,060.00 10.00% 15 11.40% ৳ 1,27,64,45,905.30 7.7079 0.0106 0.02%


57

Property and Assets Book Value Coupon Repricing

Period

Yield to

Maturity

Market Value Janu-


20 Years BGTB ৳ 91,37,42,958.00 10.00% 20 11.97% ৳ 77,80,64,340.99 8.2155 0.0069 0.01%

Other Investments ৳ 1,84,41,53,72,210.00 ৳ 1,84,71,18,90,632.00

Loans and advances:

Cash Credit hypo ৳ 37,03,16,03,404.00 15% 1 15% ৳ 37,03,16,03,404.00 1.0000 0.0398 0.57%

Personal Loan ৳ 6,22,99,30,616.00 16% 4 16% ৳ 6,22,99,30,616.00 2.7663 0.0185 0.10%

Bittahin MCD ৳ 10,14,75,786.00 11% 2 11% ৳ 10,14,75,786.00 1.9009 0.0002 0.00%

BRB Crop Loan ৳ 8,66,69,08,085.00 10% 2 10% ৳ 8,66,69,08,085.00 1.9091 0.0178 0.09%

Special Small Loan ৳ 63,55,29,829.00 12% 3 12% ৳ 63,55,29,829.00 2.6901 0.0018 0.01%

Small Loan ৳ 41,81,83,459.00 14% 1 14% ৳ 41,81,83,459.00 1.0000 0.0004 0.01%

Staff Loan ৳ 48,21,78,72,881.00 5% 10 5% ৳ 48,21,78,72,881.00 8.1078 0.4197 0.26%

Swanirvor Loan ৳ 2,98,88,982.00 11% 1 11% ৳ 2,98,88,982.00 1.0000 0.0000 0.00%

Falaz/Banaz Nursery ৳ 34,92,08,01,471.00 10% 3 10% ৳ 34,92,08,01,471.00 2.6257 0.0984 0.37%

Other Loans & Advances ৳ 2,01,30,22,38,630.00 ৳ 2,01,30,22,38,630.00

Fixed asset ৳ 32,76,75,68,369.00 ৳ 32,76,75,68,369.00

Other asset ৳ 1,39,09,73,46,696.00 ৳ 1,39,09,73,46,696.00

Total Asset ৳ 9,34,59,23,15,146.00 _ 10.88% ৳ 9,31,56,74,10,199.01 4.1932 1.3073 2.90%

(For detailed maturity calculation, please see Annex-I) P.T.O.

Property and Labilities Book Value Coupon Repricing

Period

Yield to

Maturity

Market Value Janu-



58

Borrowing from bank/FI ৳ 88,17,09,418.00 ৳ 88,17,09,418.00

Deposit and other accounts

Current & Other a/c ৳ 1,62,52,93,78,799.00 ৳ 1,62,52,93,78,799.00

Bills Payables: ৳ 12,67,63,41,550.00 ৳ 12,67,63,41,550.00

Savings Bank Deposits ৳ 1,89,69,60,05,800.00 5% 0.25 5% ৳ 1,89,69,60,05,800.00 0.2500 0.0542 0.0108

Fixed Deposits

On Demand ৳ 43,88,48,92,958.67 ৳ 43,88,48,92,958.67

1 Month ৳ 37,04,59,04,197.30 ৳ 37,04,59,04,197.30

6 Months ৳ 43,08,62,21,793.78 0.50 ৳ 43,08,62,21,793.78 0.5000 0.0246 0.0000

1 Year ৳ 41,23,04,43,442.97 8.50% 0.50 8.50% ৳ 41,23,04,43,442.97 0.5000 0.0236 0.0040

5 Years ৳ 92,77,37,32,024.90 10% 0.50 10% ৳ 92,77,37,32,024.90 0.5000 0.0530 0.0106

10 Years ৳ 1,55,11,97,67,734.38 12% 0.50 12% ৳ 1,55,11,97,67,734.38 0.5000 0.0886 0.0213

Subordinated Loans (if any)

Liabilities against Assets subje

ct to Finance lease (if any)

Other Liabilities ৳ 96,08,88,73,462.00 ৳ 96,08,88,73,462.00

Total Liabilities ৳ 8,75,01,32,71,181.00 8.88% ৳ 8,75,01,32,71,181.00 0.45 0.2440 4.67%

Equity ৳ 59,57,90,43,966.00 Off-Balance Sheet ৳ 2,29,92,97,38,014.00 Total liability and Equity ৳ 9,34,59,23,15,147.00 (Contingent Liability)


59

Now, return to the equations applied here:

Weighted Average Duration of Assets (DA) = ∑ 𝑊𝑎𝐷𝑎na

= 1.3073

Weighted Average Duration of Liabilities (DL) = ∑ 𝑊𝑙𝐷𝑙ml

= 0.2440

So, the most desired Duration GAP,

DGAP = DA − MVL

MVA× DL

= 1.078080941

Here, the duration of assets exceeds the duration of liabilities, which signifies that assets are

more price sensitive than that of liabilities and certain rise in interest rate would cause greater

decrease in the value of assets leading to decrease in the market value of equity.

4.2 Calculation of CAR of SBL:

CAR is the well-known term for any manager of an organization. This is not a four-wheeler

vehicle. The full version is- Capital Adequacy Ratio, also known as Capital to Risk

(Weighted) Assets Ratio (CRAR). CAR is the ratio of a bank's capital to its risk. It is

expressed as a percentage of a bank's risk weighted credit exposures. This ratio is used to

protect depositors and promote the stability and efficiency of financial systems around the

world.

Two types of capital are measured: Tier-One capital, which can absorb losses without a bank

being required to cease trading, and Tier-Two capital, which can absorb losses in the event

of a winding-up and so provides a lesser degree of protection to depositors.

The formula for CAR is like this:

CAR = (T1 + T2)

RWA

T1=Tier-1, T2=Tier-2 and RWA=Risk Weighted Asset.


60

Table 9: CAR calculation

Dec-14 Dec-13

Regulatory Capital

Tire-1 ৳ 31,21,12,73,048.00 ৳ 14,14,08,32,808.00

Tire-2 ৳ 18,37,45,97,380.00 ৳ 14,14,08,32,808.00

Total ৳ 49,58,58,70,428.00 ৳ 28,28,16,65,616.00

RWA ৳ 4,05,26,43,00,000.00 ৳ 3,72,39,09,00,000.00

CAR (%) 12.24% 7.59%

Required CAR (%) 12.00% 10.00%

CAR Surplus (-Deficit) 0.24% -2.41%

4.3 Interest Rate Shock:

Now, the change in MVE can be calibrated into this CAR. Return to the equation of change

in MVE,

∆MVE ≅ (−DGAP) × ∆i

(1 + y) × TA

y is calculated for assets thus- (for calculating WAy of liabilities, just use ‘l’ rather than ‘a’

and ‘TL’ in place of ‘TA’)

𝑊𝐴𝑦 = ∑(𝑦 × 𝑎)

𝑇𝐴

Where,

WAy = Weighted Average of yield

y = yield (percent point)

a = related asset amount

TA = Total Asset

This is the main part of the calculation. Now calculate surplus/(deficit) on off‐balance sheet

items under the assumption of three different interest rate changes i.e. 1%, 2%, and 3%. The

impact of the net change (both for on‐balance sheet and off‐balance sheet) in the market

value of equity on the capital adequacy ratio (CAR) should be estimated in the next step.

And now, the impact shall be calibrated in CAR as follows:


61

Table 10: Interest Rate Shocks

Magnitude of Shock Scenario-1 Scenario-2 Scenario-3

1% increase 2% increase 3% increase

Weighted Average yield

on asset 2.90% 2.90% 2.90%

Total Asset ৳9,31,56,74,10,199 ৳9,31,56,74,10,199 ৳9,31,56,74,10,199

Duration Gap 1.078080941 1.078080941 1.078080941

Fall in MVE (on-

Balance sheet) ৳ 9,75,97,83,589 ৳ 19,51,95,67,179 ৳ 29,27,93,50,768

Fall in MVE (on & off

balance sheet) ৳ 11,61,49,71,482 ৳ 23,22,99,42,964 ৳ 34,84,49,14,446

Tax adjusted loss ৳ 6,67,86,08,602 ৳ 13,35,72,17,204 ৳ 20,03,58,25,807

Revised CAR (%) 10.76% 9.24% 7.67%

Fall in CAR (% points) 1.47% 2.99% 4.56%

(For detailed calculation, please see Annex-II)

For simplicity, this shock represents a parallel upward shift in the yield curve. Here we can

see that up to 4.56% fall in the CAR happens for the worst case scenario of interest rate

shock. The related graph is shown below.

Figure 9: Interest Rate Shock in CAR

12% 12.24%

10.76%

9.24%

7.67%

0%

2%

4%

6%

8%

10%

12%

14%

Required Current 1% change 2% change 3% change

CA

R (

%)

increase in interest rates

Interest Rate Shock

Required

Current

1% change

2% change

3% change


62

4.4 Exchange Rate Shock

The impact of change in the exchange rate on CAR is like below:

Table 11: Exchange Rate Risk – if adverse movement in Exchange Rate


5% increase 10% increase 15% increase

Net Exposure in FX ৳ 11,17,45,47,154 ৳ 11,17,45,47,154 ৳ 11,17,45,47,154

Loss on Exchange Rate Change ৳ 55,87,27,358 ৳ 1,11,74,54,715 ৳ 1,67,61,82,073

Tax adjusted loss ৳ 32,12,68,231 ৳ 64,25,36,461 ৳ 96,38,04,692

Revised CAR (%) 12.17% 12.10% 12.03%

Fall in CAR 0.07% 0.14% 0.21%

(For detailed calculation, please see Annex-III)

It is easy to see that up to 0.21% fall in the CAR happens for the worst case scenario of

foreign exchange rate shock. The related graph is shown below.

Figure 10: Foreign exchange rate shock

12.24%

12.1658%

12.0961%

12.0262%

11.90%

11.95%

12.00%

12.05%

12.10%

12.15%

12.20%

12.25%

12.30%

Current 5% change 10% change 15% change

CA

R (

%)

increase in exchange rates

Foreign Exchange Rate Shock

Current

5% change

10% change

15% change


63

4.5 Credit Shock:

There are 6 (Six) kind of shocks in credit risk, those are-

i. Increase in NPLs

ii. Shift in NPLs categories

iii. Fall in FSV of Mortgaged Collateral

iv. Increase of NPLs in particular 1 or 2 sectors

v. Increase of NPLs due to default of Top loan borrowers and

vi. Increase in NPLs up to that position in which whole capital will be wiped out.

In those shocks, last most shock should not be calculated with other shocks because that one

removes all capital and shows CAR as 0.00%. So, in the cumulative shock scenarios, credit

shock number-vi should be avoided.

4.5.1 Increase in NPLs

In this type of scenarios, performing loan directly downgraded to bad/loss category, 1%, 2%

or may be 3%.

The amounts of classified mortgaged collateral can be found by using the base of provision

for every class of NPL and the percentage of provision in the annual financial report of

Sonali Bank Limited.

So, that calculation is like the equation below:

𝑀𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝑐𝑜𝑙𝑙𝑎𝑡𝑒𝑟𝑎𝑙𝑆𝑆 = 𝐵𝑎𝑠𝑒 𝑜𝑓 𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛𝑆𝑆 − 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑁𝑃𝐿𝑆𝑆

So, the other two types are very easy, just use the values of ‘DF’ and ‘B/L’ in the place of

‘SS’.


64

The impact on CAR is like below-

Table 12: Credit Shock – increase in NPLs


1% 2% 3%

NPLs to Loans (%) 25.42% 25.42% 25.42%

Increase in NPL ৳ 86,43,66,400 ৳ 1,72,87,32,800 ৳ 2,59,30,99,200

Increase in Provisions (after ad

justment of eligible securities) ৳ 86,43,66,400 ৳ 1,72,87,32,800 ৳ 2,59,30,99,200

Tax adjusted provision (not yet a

pplicable for credit risk) ৳ 86,43,66,400 ৳ 1,72,87,32,800 ৳ 2,59,30,99,200

Revised CAR (%) 12.05% 11.86% 11.67%

Revised NPLs to loan 25.67% 25.93% 26.18%

Fall in CAR (%) 0.19% 0.38% 0.57%

Increase in NPL to Loan (%) 0.25% 0.51% 0.76%

(For detailed calculation, please see Annex-IV)

Here, up to 0.57% fall in the CAR happens for the worst case scenario of credit shock. The

related graph is shown below.

Figure 11: Credit Shock – increase in NPLs

12.24% 12.05% 11.86% 11.67%

0.25% 0.51% 0.76%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Current 1% increase 2% increase 3% increase

CA

R (

%)

increase B/L in NPLs

Shock of increase in NPLs

Revised CAR (%)

Increase in NPL to Loan (%)

Expon. (Increase in NPL to

Loan (%))


65

4.5.2 Downward shift in NPLs categories:

The impact of shift in NPLs to next categories with no change in total NPLs shall be

accounted for as follows:

Table 13: Credit Risk – Downward shift in NPLs’ Categories


50% shift 80% shift 100% shift

Weighted Amount of

provision ৳ 51,93,14,95,000 ৳ 51,33,53,40,000 ৳ 51,33,53,40,000

WA Provision after shift in

categories ৳ 80,67,45,93,338 ৳ 83,36,55,59,922 ৳ 85,15,95,37,645

Increase in Provision ৳ 28,74,30,98,338 ৳ 28,74,30,98,338 ৳ 33,82,41,97,645

Revised CAR (%) 5.54% 4.70% 4.24%

Fall in CAR (% point) 6.70% 7.53% 7.99%

(For detailed calculation, please see Annex-V)

So, up to 7.99% fall in the CAR happens for the worst case scenario of NPL shock. The

related graph is shown below.

Figure 12: Credit shock -downward shift of NPL categories

12.24%

5.54%4.70% 4.24%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Current 50% Shift 80% Shift 100% Shift

CA

R (

%)

Shift into next catagory of NPLs

NPL Shock as downward shift of categories

Current

50% Shift

80% Shift

100% Shift


66

4.5.3 Fall in FSV of Mortgaged Collateral

The impact of fall in FSV of mortgaged collateral is calculated below-

Table 14: Credit Shock – fall in the FSV of Mortgaged Collateral


10% fall 20% fall 40% fall

Weighted Forced Sale

Value of Collateral ৳ 24,25,81,54,032 ৳ 24,25,81,54,032 ৳ 24,25,81,54,032

Increase in Provision ৳ 2,42,58,15,403 ৳ 4,85,16,30,806 ৳ 9,70,32,61,613

Revised CAR (%) 11.71% 11.17% 10.08%


(For detailed calculation, please see Annex-VI)

Weighted Forced Sale Value of Collateral =

(𝐹𝑆𝑉𝑆𝑆 × %𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛𝑆𝑆) + (𝐹𝑆𝑉𝐷𝐹 × %𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛𝐷𝐹) + (𝐹𝑆𝑉𝐵/𝐿 × %𝑝𝑟𝑜𝑣𝑖𝑠𝑖𝑜𝑛𝐵/𝐿)

Highest 2.15% fall in the CAR happens for the worst case scenario of FSV shock. The

related graph is shown below-

Figure 13: Credit Shock – fall in the FSV of Mortgaged Collateral

12.24%11.71%

11.17%

10.08%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Current 10% Fall 20% Fall 40% Fall

CA

R (

%)

Fall in the FSV of collateral

Shock while Collateral value Falling

Current

10% Fall

20% Fall

40% Fall


67

4.5.4 Increase of NPLs in a particular sector

In this particular shock, the impact of performing loan of Industry sector directly

downgraded to bad/loss category is shown:

Table 15: Credit Risk – increase in NPLs’ under B/L category in a sector

Magnitude of Shock

Scenario-1 Scenario-2 Scenario-3

5% shock 10% shock 15% shock

Loan to Industries (working Capital) ৳ 3,38,85,74,442 ৳ 3,38,85,74,442 ৳ 3,38,85,74,442

Increase in Provision ৳ 16,94,28,722 ৳ 33,88,57,444 ৳ 50,82,86,166

Revised CAR (%) 12.20% 12.16% 12.13%


(For detailed calculation, please see Annex-VII)

So, only 0.11% fall in the CAR happens for the worst case scenario of credit shock. This is

absolutely in favor of Sonali Bank Limited because of they did not give much loan or

advances to the industry sector. The related graph is shown below-

Figure 14: Credit Risk – increase in NPLs’ under B/L category in a sector

12.24%

12.20%

12.16%

12.13%

12.06%

12.08%

12.10%

12.12%

12.14%

12.16%

12.18%

12.20%

12.22%

12.24%

12.26%

Current 5% shift 10% shift 15% shift

CA

R (

%)

PL of industry sector shifts to B/L catagory

Shock while Industry Sector fail to repay

Current

5% shift

10% shift

15% shift


68

4.5.5 Increase of NPLs due to default of some highest loan borrowers

Now, let us see the impact while performing loan of the highest loan borrowers directly

downgraded to bad/loss category. Let use 5%, 7.5% and 10%.

Table 16: Credit Shock – increase in NPLs’ due to Top 8 large loan borrowers’ failure

Magnitude of Shock


5% shift 7.5% shift 10% shift

Loan to Top 8 large loan borrowers ৳ 8,04,15,90,000 ৳ 8,04,15,90,000 ৳ 8,04,15,90,000

Increase in Provision ৳ 40,20,79,500 ৳ 60,31,19,250 ৳ 80,41,59,000

Revised CAR (%) 12.15% 12.10% 12.06%


(For detailed calculation, please see Annex-VIII)

As Sonali Bank Limited gave about 10% of their capital to those 8 large loan borrowers,

there is highest 0.17% fall in the CAR for the worst case scenario of credit shock. This is

absolutely in favor of Sonali Bank Limited because of they did not give much loan or

advances to the industry sector. The related graph is shown below-

Figure 15: Credit Shock – increase in NPLs’ due to Top 8 loan borrowers’ failure

12.24%

12.15%

12.10%

12.06%

11.95%

12.00%

12.05%

12.10%

12.15%

12.20%

12.25%

Current 5% shift 7.5% shift 10% shift

CA

R (

%)

some of top borrowers fail to repay

Shock while Top 8 Borrowers fail to repay

Current

5% shift

7.5% shift

10% shift


69

4.6 Equity Price Shock

At this stage of the study, we will see the impact of fall in stock market prices and the

consequences in the CAR.

The equity price shock of Sonali Bank Limited is-

Table 17: Equity price Risk – fall in Stock Prices


10% Fall 20% Fall 40% Fall

Total exposure in stock market ৳ 13,45,00,88,772 ৳ 13,45,00,88,772 ৳ 13,45,00,88,772

Fall in the stock price ৳ 1,34,50,08,877 ৳ 2,69,00,17,754 ৳ 5,38,00,35,509

Tax adjusted Loss ৳ 77,33,80,104 ৳ 1,54,67,60,209 ৳ 3,09,35,20,418

Revised CAR (%) 12.07% 11.90% 11.56%


(For detailed calculation, please see Annex-IX)

In these three scenarios, highest 0.68% fall can be found in the CAR for the worst case

scenario of equity price shock. The graph is shown below-

Figure 16: Equity price Shock

12.24%

12.07%

11.90%

11.56%

11.20%

11.40%

11.60%

11.80%

12.00%

12.20%

12.40%

Current 10% fall 20% fall 40% fall

CA

R (

%)

Fall in Stock prices

Stock Market Price Shock

Current

10% fall

20% fall

40% fall


70


71

5.1 Different Shocks from Stress Testing Scenarios

Stress Testing shall be carried out assuming three different hypothetical scenarios described

here:

5.1.1 Minor Level Shocks:

These represent small shocks to the risk factors. The level for different risk factors can,

however, vary. With the ‘Scenario-1’, this level of shock is shown.

5.1.2 Moderate Level Shocks:

It envisages medium level of shocks and the level is defined in each risk factor separately.

The ‘Scenario-2’, in every type of risk displays this level of shock.

5.1.2 Major Level Shocks:

It involves big shocks to all the risk factors and is also defined separately for each risk factor.

Major Level Shocks are tried to be expressed by the ‘Scenario-3’, in every type of risk.

Assumptions behind each Scenario: The Stress Testing at this stage is only

a single factor sensitivity analysis. Each of the five risk factors has been given

shocks of three different levels. The magnitude of shock has been defined

separately for each risk factor for all the three levels of shocks.

Figure 17: Imagine how stress on your pencil damages what percent of that


72

5.2 Cumulative Credit Shock Scenarios of SBL

Total stress from aggregate 5 types of credit shock is shown in different scenarios of SBL

below (credit shock for total loss of capital in not included, but discussed later):

Table 18: Aggregate of 5 types of Credit Shocks


Cumulative impact of

Credit Shock

৳ 32,60,47,88,364 ৳ 36,26,54,38,639 ৳ 47,43,30,03,624

Tax adjusted Provision (N/A) ৳ 32,60,47,88,364 ৳ 36,26,54,38,639 ৳ 47,43,30,03,624

Revised Regulatory Capital ৳ 16,98,10,82,064 ৳ 13,32,04,31,789 ৳ 2,15,28,66,804

Revised RWA ৳ 3,72,65,95,11,636 ৳ 3,68,99,88,61,361 ৳ 3,57,83,12,96,376

Revised CAR (%) 4.56% 3.61% 0.60%

In scenario-3, it is shown the position of Sonali Bank Limited after a major shock in the

credit sector (Especially in NPLs). But, scenario-2, moderate shock is not much more shock

than the minor level of shock in scenario-1. It is easier to understand this by graph:

Figure 18: Aggregate of 5 types of Credit Shock Scenarios

If we see the impact of different levels of shock in individual credit shocks, the easiest way

to draw some pie charts and those charts are given below:

12.24%

4.56%3.61%

0.60%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Current Credit

Scenario-1

Credit

Scenario-2

Credit

Scenario-3

CA

R (

%)

Cumulative credit shock scenarios

Aggregate of 5 types of Credit Shocks

Current

Credit Scenario-1

Credit Scenario-2

Credit Scenario-3


73

Figure 19: Cumulative Credit Shock in Scenario-1


2.65%

88.16%

7.44%

0.52%

1.23%

Parts of Cumulative Credit Minor Level Shock

Increase in NPLs

Downgrade of NPL Categories

Fall of FSV of Mortgage

A whole sector shifts into B/L

Top borrowers fail to repay

4.77%

79.26%

13.38%

0.93%

1.66%

Parts of Cumulative Credit Moderate Shock

Increase in NPLs






74


5.3 Cumulative Total Shock of SBL

Total stress from aggregate 5 types of shocks is shown in different scenarios of SBL below.

This includes credit shocks, interest rate shock, foreign exchange rate shock and equity price

shock. Total shock is divided into three levels of shocks as usual through three different

scenarios:

Table 19: Total shock of Sonali Bank Limited


Cumulative shocks ৳ 46,12,34,96,081 ৳ 63,30,28,54,073 ৳ 89,33,41,35,652

Tax adjusted Loss ৳ 40,37,80,45,301 ৳ 51,81,19,52,513 ৳ 71,52,61,54,540

Revised Capital ৳ 9,20,78,25,127 ৳ -2,22,60,82,085 ৳ -21,94,02,84,112

Revised RWA ৳ 3,64,88,62,54,699 ৳ 3,53,45,23,47,487 ৳ 3,33,73,81,45,460

Revised CAR (%) 2.52% -0.63% -6.57%

5.47%

71.31%

20.46%

1.07%1.70%

Parts of Cumulative Credit Major Level Shock

Increase in NPLs






75

Again, there is a huge shock in scenario-1, which represents the minor level of shock.

Though this shows minor level of shock, this is really about moderate shock than the single

‘scenario-1’s of different shocks.

But total moderate level of shock in scenario-2 drives CAR to the negative side and scenario-

3, which means the major level of shock is really far below from the current CAR. Here is

the graphical presentation:

Figure 22: Total shock of Sonali Bank Limited

As in cumulative credit shock, if we want to see the impact of different level of shocks in

individual shock items, the easiest way to draw some pie charts.

Those charts are given below in order to simplify the category effects of each of the total

scenario.

12.24%

2.52%

-0.63%

-6.57%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

CA

R (

%)

Cumulative total shock scenarios

Cumulative Shock of SBL

Current

Total Scenario-1

Total Scenario-2

Total Scenario-3


76

Figure 23: Parts of Cumulative Total Scenario-1


70.69%

25.18%

1.21% 2.92%

Parts of Total Minor Level Shock

Credit Shock

Interest Rate Shock

FX rate Shock

Equity Price Shock

57.29%36.70%

1.77% 4.25%

Parts of Total Moderate Level Shock

Credit Shock

Interest Rate Shock

FX rate Shock

Equity Price Shock


77


So, we can see that, with the increase of the level of shock, the impact of Interest Rate Shock

takes place of the credit shock in the Total Shock amount.

53.10%

39.01%

1.88%6.02%

Parts of Total Major Level Shock

Credit Shock

Interest Rate Shock

FX rate Shock

Equity Price Shock


78

5.4 Liquidity Shock

The ratio of liquid assets to liquid liabilities after some fall in the liquid liability later is being

calculated here. Suppose liquid liability reduces in three different scenarios by 10%, 20%

and 30% respectfully.

The scenarios are given below:

Table 20: Liquidity Shock – fall in Liquid Liabilities


10% 20% 30%

Liquid Asset ৳ 3,74,51,87,73,169 ৳ 3,74,51,87,73,169 ৳ 3,74,51,87,73,169

Liquid Liability ৳ 3,50,42,23,15,728 ৳ 3,50,42,23,15,728 ৳ 3,50,42,23,15,728

Liquidity Ratio (%) 106.88% 106.88% 106.88%

Fall in Liquid Liabilities ৳ 35,04,22,31,573 ৳ 70,08,44,63,146 ৳ 1,05,12,66,94,718

Revised Liquid Assets ৳ 3,39,47,65,41,596 ৳ 3,04,43,43,10,023 ৳ 2,69,39,20,78,451

Revised Liquidity Liabilities ৳ 3,15,38,00,84,155 ৳ 2,80,33,78,52,582 ৳ 2,45,29,56,21,010

Revised Liquidity Ratio

after shock 107.64% 108.60% 109.82%

(Please take a peer view to the Annex-X in order to see the calculation of liquid assets and

liquid liabilities)

We can easily see that the liquidity ratio is gradually rising because of the excess liquid asset

than the liquid liability. This is a sign of a good bank.

But another view shows that, the impact is not as frustrating as the highest change of liquidity

ratio is 2.94%.


79

5.5 When NPL Increases up to Total Capital

Now let us see the change in CAR when NPL increases up to total capital.

The shock is expressed here:

Table 21: Shock of NPL increases up to total capital

Total Loan ৳ 3,40,02,61,03,592.00

Total NPLs ৳ 86,43,66,40,000.00

NPL to Total Loan (%) 25.42%

Total Regulatory Capital ৳ 49,58,58,70,428.00

Increase in NPL ৳ 49,58,58,70,428.00

Increase in Provision ৳ 49,58,58,70,428.00

Revised Regulatory Capital ৳ 0.00

Total Risk Weighted Asset ৳ 4,05,26,43,00,000.00

Revised risk weighted assets ৳ 3,55,67,84,29,572.00

Revised CAR 0.00%

Fall in CAR (% age points) 12.24%

Revised NPL ৳ 1,36,02,25,10,428.00

Revised NPL to Loan (%) 40.00%

So, 40.00% NPL causes the total capital become zero.


80


81

6.1 Findings from the Whole Analysis

We can summarize the total analysis into a single table like this:

Table 22: Findings from whole analysis

Regulatory Capital ৳ 49,58,58,70,428.00

Risk Weighted Asset ৳ 4,05,26,43,00,000.00

Market Value of Total Asset ৳ 9,31,56,74,10,199.01

Capital Adequacy Ratio 12.24%

Weighted Average Duration of Assets 1.3073

Weighted Average Duration of Liabilities 0.2440

Weighted Average Yield of Assets 2.90%

Weighted Average Yield of Liabilities 4.67%

Duration GAP 1.078080941

Fall of CAR due to Major Interest Rate Shock 4.56%

Fall of CAR due to Major FX Rate Shock 0.21%

Fall of CAR due to Major Credit Shock 11.63%

Fall of CAR due to Major Share Price Shock 0.68%

CAR does not Fall in SBL by which Shock Liquidity Shock

‘NPL to Total Loan (%)’ needed to wipe out RC 40.00%

Total Fall of CAR in the Worst Case Scenario 18.81%

So, overall decisions are:

Sonali Bank Limited can take long position and in more amount of foreign currency

Sonali Bank Limited can invest more in security markets

They should keep more mortgage collateral to reduce provision for NPLs

They can produce more by increasing deposits


82

6.2 Recommendations

6.2.1 Some Corrections for Sonali Bank Limited

Total Net Government Domestic Borrowing during December FY 15 should be

Tk.432770000000. And from banking sector, this would be Tk. 312210000000. So,

this would be a huge shock if bond price or coupon rate or interest rate falls.

Due to world economy recession, Bangladeshi garments and textile industry directly

affected so NPL in two large sectors affect by this way because data shows SBL has

investments in these two areas.

I would like to suggest, Sonali Bank should strictly follow the principles of sound

lending and they should make stronger their credit monitoring department than the

past times. Among the most important of these are honesty, reliability, thoroughness

and willingness to always be open to new ideas and new ways of meeting customer

needs.

6.2.2 Mitigating credit risk

As Stress Testing of Sonali Bank Limited shows that Credit Risk is the top terror in their

financial system, they should take more necessary steps to reduce Credit Risk. Sonali Bank

Limited can mitigate credit risk using several methods:

Risk-based pricing: Lenders generally charge a higher interest rate to borrowers

who are more likely to default, a practice called risk-based pricing. Lenders consider

factors relating to the loan such as loan purpose, credit rating, and loan-to-value ratio

and estimates the effect on yield (credit spread).

Covenants: Write stipulations on the borrower, called covenants, into loan

agreements:

o Periodically report its financial condition

o Refrain from paying dividends, repurchasing shares, borrowing further, or

other specific, voluntary actions that negatively affect the company's

financial position


83

o Repay the loan in full, at the lender's request, in certain events such as

changes in the borrower's debt-to-equity ratio or interest coverage ratio

Credit insurance and credit derivatives: Lenders and bond holders may hedge

their credit risk by purchasing credit insurance or credit derivatives. These contracts

transfer the risk from the lender to the seller (insurer) in exchange for payment. The

most common credit derivative is the credit default swap.

Tightening: Reduce credit risk by reducing the amount of credit extended, either in

total or to certain borrowers. For example, a distributor selling its products to a

troubled retailer may attempt to lessen credit risk by reducing payment terms from

net 30 to net 15.

Diversification: Lenders to a small number of borrowers (or kinds of borrower) face

a high degree of unsystematic credit risk, called concentration risk. Lenders reduce

this risk by diversifying the borrower pool.

Deposit insurance: Government of Bangladesh establishes deposit insurance

through BB to guarantee bank deposits in the event of insolvency and encourage

consumers to hold their savings in the banking system instead of in cash.

6.2.3 Limiting FX risk:

Sonali Bank Limited should use a number of foreign exchange hedging strategies to reduce

the exchange rate risk. Transaction exposure can be reduced either with the use of the money

markets, foreign exchange derivatives such as forward contracts, futures contracts, options,

and swaps, or with operational techniques such as currency invoicing, leading and lagging

of receipts and payments, and exposure netting.

Sonali Bank Limited may adopt alternative strategies to financial hedging for managing their

economic or operating exposure, by carefully selecting production sites with a mind for

lowering costs, using a policy of flexible sourcing in its supply chain management,

diversifying its export market across a greater number of countries, or by implementing

strong research and development activities and differentiating its products in pursuit of

greater inelasticity and less foreign exchange risk exposure.


84

6.2.4 Some Tips for Regular Stress Testing of Banks:

The stress‐testing framework involves the scope of the risks covered and the

process/procedure to carry out Stress Testing. This framework should be flexible enough to

adopt advanced models for stress testing. It involves:

A well constituted organizational structure defining clearly the roles and

responsibilities of the persons involved in the exercise. Preferably, it should be the

part of the risk management functions of the bank/FI. The persons involved should

be independent from those who are actually involved in the risk taking and should

directly report the results to the senior management.

Defining the coverage and identifying the data required and available.

Identifying, analyzing and proper recording of the assumptions used for stress

testing.

Calibrating the scenarios or shocks applied to the data and interpreting the results.

An effective management information system that ensures flow of information to the

senior management to take proper measures to avoid certain extreme conditions.

Setting the specific trigger points to meet the benchmarks/standards set by

Bangladesh Bank.

Ensuring a mechanism for an ongoing review of the results of the Stress Testing

exercise and reflecting in the policies and limits set by management and board of

directors.

Taking this Stress Testing as a starting point and developing in‐house Stress Testing

model to assess the bank/FI’s specific risks.


85

Conclusion

Stress testing is an appealing risk-management tool that helps supervisors to settle on

whether financial institutions are financially stretchy sufficient to absorb losses that could

occur in different adverse scenarios. By doing Stress Testing top management of financial

organization will be able to know how to take the edge off risk, what should be the

combination of banks portfolio, in which area bank can be more flexible and in which area

bank should reduce investment. One of the alarming areas is stock market collapse in

December 2010.

It is the tool that provides risk managers with additional information on possible portfolio

losses arising from extreme, although plausible, scenarios. In addition, stress scenarios can

often be an effective communication tool within the firm and to outside parties, such as

supervisors and investors.

After completing this report, I am amazed seeing the fact that Sonali Bank Limited is the

largest government commercial bank, its credit policy is not so adequate because some

industries can hamper the regulatory capital up to 1% fall in CAR if they fail to pay 50% of

their borrowed amounts. In the recent past, Sonali Bank Limited suffered from lack of RC

and the reason behind that was the same.

Other than the credit policy, management is not so strong in the branches and so banking is

hampered sometimes and the customers are losing their belief of banking in Sonali Bank

Limited. To make and keep a vital capital in Sonali Bank Limited, stress testing should be

comprehensively used for both internal and external purposes and may be maintained by

individual branches.


86

Annex-I

In the FS of SBL, the maturity of the deposits could be found as this table-

TOTAL DEPOSIT & PAYABLES

On Demand ৳ 82,64,56,90,506.00 0.10622 11%

1 Month ৳ 69,76,62,48,164.00 0.08967 9%

6 Months ৳ 81,14,16,02,756.00 0.10429 10%

1 Year ৳ 77,64,67,30,765.00 0.0998 10%

5 Years ৳ 1,74,71,50,01,612.00 0.22456 22%

10 Years ৳ 2,92,12,74,14,498.00 0.37546 38%

More than 10 Years

Total ৳ 7,78,04,26,88,301.00 ৳ 1.00 100%

So, the maturity of the fixed deposits can be calculated with the percentages:

Fixed Deposit

On Demand ৳ 43,88,48,92,958.67

1 Month ৳ 37,04,59,04,197.30

6 Months ৳ 43,08,62,21,793.78

1 Year ৳ 41,23,04,43,442.97

5 Years ৳ 92,77,37,32,024.90

10 Years ৳ 1,55,11,97,67,734.38

Total ৳ 4,13,14,09,62,152.00


87

Annex-II

Interest Rate Shock

Factors for the calculation of interest rate risk scenarios:

MVA (on-BS) ৳ 9,31,56,74,10,199.01

MVA (off-BS) ৳ 2,29,92,97,38,014.00

MVA (Total) ৳ 11,61,49,71,48,213.01

DGAP 1.078080941

Tax 42.50%

y 2.90%

RC ৳ 49,58,58,70,428.00

RWA ৳ 4,05,26,43,00,000.00

CAR 12.24%

Calculation of interest rate risk scenarios:

Scenario-1

interest increase 1%

Fall in MVE ৳ 9,75,97,83,589.39

Fall in MVE (on & off balance sheet) ৳ 11,61,49,71,482.13

Tax adjusted loss ৳ 6,67,86,08,602.22

Revised Regulatory Capital ৳ 42,90,72,61,825.78

Revised RWA ৳ 3,98,58,56,91,397.78

Revised CAR (%) 10.76%

Fall in CAR (% points) 1.47%

Scenario-2


Fall in MVE ৳ 19,51,95,67,178.79




Revised RWA ৳ 3,91,90,70,82,795.55



Scenario-3


Fall in MVE ৳ 29,27,93,50,768.18




Revised RWA ৳ 3,85,22,84,74,193.33




88

Annex-III

Foreign Exchange Rate Shock

Net Exposure in FX ৳ 11,17,45,47,154.00

Tax 42.50%

RC ৳ 49,58,58,70,428.00

RWA ৳ 4,05,26,43,00,000.00

CAR 12.24%

The Scenario Calculations are followed:

Scenario-1

increase in Exchange Rate 5%

Loss on Exchange Rate Change ৳ 55,87,27,357.70

Tax adjusted loss ৳ 32,12,68,230.68


Revised RWA ৳ 4,04,94,30,31,769.32


Fall in CAR (% point) 0.07%

Scenario-2


Loss on Exchange Rate Change ৳ 1,11,74,54,715.40



Revised RWA ৳ 4,04,62,17,63,538.65



Scenario-3


Loss on Exchange Rate Change ৳ 1,67,61,82,073.10



Revised RWA ৳ 4,04,30,04,95,307.97




89

Annex-IV

Credit Risk – increase in NPLs Shock

Total NPLs ৳ 86,43,66,40,000.00

Tax (N/A) 0.00%

RC ৳ 49,58,58,70,428.00

RWA ৳ 4,05,26,43,00,000.00

CAR 12.24%

The Scenario Calculations are followed:

Scenario-1

Total Loan ৳ 3,40,02,61,03,592.00

Total Performing Loan ৳ 2,53,58,94,63,592.00

Total NPLs ৳ 86,43,66,40,000.00

NPLs to Loans (%) 25.42%

% Increase in NPL 1%

Increase in NPL ৳ 86,43,66,400.00

Increase in Provisions (after adjustment of eligible security) ৳ 86,43,66,400.00

Tax adjusted provision (not yet applicable) ৳ 86,43,66,400.00


Revised RWA ৳ 4,04,39,99,33,600.00



Revised NPLs ৳ 87,30,10,06,400.00

Revised NPLs to loan 25.67%

Scenario-2

Total Loan ৳ 3,40,02,61,03,592.00


Total NPLs ৳ 86,43,66,40,000.00



Increase in NPL ৳ 1,72,87,32,800.00

Increase in Provisions (after adjustment of eligible security) ৳ 1,72,87,32,800.00

Tax adjusted provision (not yet applicable) ৳ 1,72,87,32,800.00


Revised RWA ৳ 4,03,53,55,67,200.00



Revised NPLs ৳ 88,16,53,72,800.00



90

Scenario-3

Total Loan ৳ 3,40,02,61,03,592.00


Total NPLs ৳ 86,43,66,40,000.00



Increase in NPL ৳ 2,59,30,99,200.00

Increase in Provisions (after adjustment of eligible security) ৳ 2,59,30,99,200.00

Tax adjusted provision (not yet applicable) ৳ 2,59,30,99,200.00


Revised RWA ৳ 4,02,67,12,00,800.00



Revised NPLs ৳ 89,02,97,39,200.00


Annex-V

Credit Risk – downward shift in NPLs categories Shock:

Total NPLs ৳ 86,43,66,40,000.00

Tax (N/A) 0.00%

RC ৳ 49,58,58,70,428.00

RWA ৳ 4,05,26,43,00,000.00

CAR 12.24%

The Scenario Calculations are following:


91

Scenario-1 SMA SS DF B/L

Total NPLs ৳ 7,99,06,13,434.41 ৳ 5,81,44,46,371.42 ৳ 11,25,48,64,028.90 ৳ 69,39,93,27,743.13

FSV of Mortgaged Collateral

৳

- ৳ 1,61,91,46,371.42 ৳ 4,62,26,14,028.90 ৳ 21,62,30,17,743.13

Total Risky NPLs

৳

- ৳ 4,19,53,00,000.00 ৳ 6,63,22,50,000.00 ৳ 47,77,63,10,000.00

% of Provision 0% 20% 50% 100%

Provision ৳

- ৳ 83,90,60,000.00 ৳ 3,31,61,25,000.00 ৳ 47,77,63,10,000.00

Weighted Amount of provisi

on ৳ 51,93,14,95,000.00

% Shift in next category 50% 50% 50% 100%

Shifted NPLs category ৳ 3,99,53,06,717.21 ৳ 2,90,72,23,185.71 ৳ 5,62,74,32,014.45 ৳ 69,39,93,27,743.13

Revised Classified NPLs

after shift ৳ 6,90,25,29,902.92 ৳ 8,53,46,55,200.16 ৳ 75,02,67,59,757.57

Revised Provision after Shift ৳ 1,38,05,05,980.58 ৳ 4,26,73,27,600.08 ৳ 75,02,67,59,757.57

Revised

Weighted Amount provision ৳ 80,67,45,93,338.24


Tax adjusted Provision (N/A) ৳ 28,74,30,98,338.24


Revised RWA ৳3,76,52,12,01,661.76



Scenario-2


92


Shifted NPLs category ৳6,39,24,90,747.53 ৳ 4,65,15,57,097.14 ৳ 9,00,38,91,223.12 ৳ 69,39,93,27,743.13

Revised Classified NPLs after shift ৳ 7,55,53,80,021.81 ৳ 6,90,25,29,902.92 ৳ 78,40,32,18,966.24


Revised Weighted provision ৳ 83,36,55,59,922.07




Revised RWA ৳ 3,73,23,40,80,077.94



Scenario-3


Shifted NPLs category ৳ 7,99,06,13,434.41 ৳ 5,81,44,46,371.42 ৳ 11,25,48,64,028.90 ৳ 69,39,93,27,743.13

Revised Classified NPLs after

shift ৳ 7,99,06,13,434.41 ৳ 5,81,44,46,371.42 ৳ 80,65,41,91,772.02


Revised

Weighted Amount of provision ৳ 85,15,95,37,644.62




Revised RWA ৳ 3,71,44,01,02,355.38



Annex-VI

Credit Shock – Fall in the FSV of Mortgaged Collateral

Calculation of Weighted FSV of collateral:

SS DF B/L

FSV ৳ 1,61,91,46,371 ৳ 4,62,26,14,029 ৳ 21,62,30,17,743

% of Provision 20% 50% 100%


Scenario-1 (10% Fall) Amounts % of fall

Total FSV of Mortgaged Collateral ৳ 27,86,47,78,143.45

Weighted Forced Sale Value of Collateral ৳ 24,25,81,54,031.86

Fall in the FSV of Collateral ৳ 2,42,58,15,403.19 10%

Tax adjusted provision (N/A) ৳ 2,42,58,15,403.19 0%


Revised RWA ৳ 4,02,83,84,84,596.81



Scenario-1 (20% Fall)






Revised RWA ৳ 4,00,41,26,69,193.63



Scenario-1 (40% Fall)






Revised RWA ৳ 3,95,56,10,38,387.26




94

Annex-VII

Credit Shock – Increase in NPLs’ under B/L category in industry sector:

Calculation of total

WC to industry Hypo. ৳ 3,11,87,62,564.00

WC to industry Pledge ৳ 26,98,11,878.00

Total Industry ৳ 3,38,85,74,442.00


Scenario-1

Loan to Industries (working Capital) ৳ 3,38,85,74,442.00

% to be shifted in B/L category 5%

Increase in NPLS under B/L category ৳ 16,94,28,722.10

Increase in Provisions (after adjustment of value of

eligible securities, if any) ৳ 16,94,28,722.10

Tax adjusted Provision ৳ 16,94,28,722.10


Revised RWA ৳ 4,05,09,48,71,277.90



Scenario-2








Revised RWA ৳ 4,04,92,54,42,555.80



Scenario-3








Revised RWA ৳ 4,04,75,60,13,833.70




95

Annex-VIII

Credit Shock – Increase in NPLs’ due to Top 8 large loan borrowers’ failure

Here are the large 8 borrowers of SBL:

1 Bangladcsh P.Eolcun Corporilion (B. P. C)

2 Beximco Grourp

3 Brneladesh Sugar and Food lnd. Corporation

4 Hallrnrk Group

5 Max Spinning Mills

6 Anwara Spinning Mills

7 Bargladcsh Agricultural Dcvelopment Corporation (BADC)

8 Bargladesh Chemical Ind. Corp. (BCIC)


Scenario-1

Loan to Top 8 large loan borrowers ৳ 8,04,15,90,000.00

% to be shifted to B/L catagory 5%

Increase in Provision ৳ 40,20,79,500.00

Increase in provision (after adjustment of value of el

igible securities; if any) ৳ 40,20,79,500.00

Tax adjusted Provision (N/A) ৳ 40,20,79,500.00


Revised RWA ৳ 4,04,86,22,20,500.00



Scenario-2


% to be shifted to B/L catagory 7.50%






Revised RWA ৳ 4,04,66,11,80,750.00



Scenario-3


96


% to be shifted to B/L catagory 10%






Revised RWA ৳ 4,04,46,01,41,000.00



Annex-IX

Equity price shock :

Components of calculation:

Share Exposure ৳ 13,45,00,88,772.00

Tax (N/A) 42.50%


Scenario-1

Total exposure in stock market ৳ 13,45,00,88,772.00

% Fall in the stock price 10%

Fall in the stock price ৳ 1,34,50,08,877.20

Tax adjusted Loss ৳ 77,33,80,104.39


Revised RWA ৳ 4,04,49,09,19,895.61



Scenario-2


97




Tax adjusted Loss ৳ 1,54,67,60,208.78


Revised RWA ৳ 4,03,71,75,39,791.22



Scenario-3




Tax adjusted Loss ৳ 3,09,35,20,417.56


Revised RWA ৳ 4,02,17,07,79,582.44



Annex-X

Calculation of liquid asset and liquid liability:

Here we used the maturity periods of assets and liabilities to find out the absolute liquidity.

Here are the components used for scenario calculation:

Liquidity Ratio = Liquid Assets

Liquid Liability

Total liquid assets = Recovery (Within a month + Within 3 months + Within 12 month)

Total liquid liability = Repay (Within a month + Within 3 months + Within 12 month)


98

So, those assets and liabilities are taken which have highest maturity of 12 months. The detailed calculation is given here:

Liquid Assets Within a month Within 3 months Within 12 month

Cash in hand ৳ 53,38,20,74,145.00 ৳ - ৳ -

Balance with other bank and financial

institutions ৳ 8,73,25,65,042.00 ৳ 28,09,00,00,000.00 ৳ 2,87,00,00,000.00

Money at call on short notice ৳ 9,22,55,82,000.00 ৳ - ৳ -

Investments ৳ 20,55,62,16,102.00 ৳ 53,96,00,00,000.00 ৳ 36,17,60,95,166.00

Loans and Advances ৳ 47,39,38,55,183.00 ৳ 3,61,03,10,513.00 ৳ 10,30,56,31,739.00

Other assets ৳ 19,59,48,05,426.00 ৳ 19,27,10,65,003.00 ৳ 61,35,05,72,850.00

Total Liquid Asset ৳ 1,58,88,50,97,898.00 ৳ 1,04,93,13,75,516.00 ৳ 1,10,70,22,99,755.00

৳ 3,74,51,87,73,169.00

Liquid Liabilities Within a month Within 3 months Within 12 month

Borrowings from Bangladesh Bank, other

banks financial institutions and agents ৳ - ৳ - ৳ 88,17,09,418.00

Deposits ৳ 1,52,41,19,38,670.00 ৳ 81,14,16,02,756.00 ৳ 77,64,67,30,765.00

Provision and other liabilities ৳ 6,23,21,108.00 ৳ 2,57,73,005.00 ৳ 38,25,22,40,006.00

Total Liuqid Liability ৳ 1,52,47,42,59,778.00 ৳ 81,16,73,75,761.00 ৳ 1,16,78,06,80,189.00

৳ 3,50,42,23,15,728.00


99

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