Internship Report

On
Credit & Risk Management of Sonali Bank Limited: A Study on
Sadarghat Corporate Branch, Dhaka

Supervised By
Dr. Md. Miraj Hossen
Associate Professor
Department of Management Studies
Jagannath University, Dhaka 1100

Prepared By
Manash Biswas
ID: B-150202003
BBA Program
Session: 2015-16
Department of Management Studies
Jagannth University, Dhaka-1100

Date of Submission: 05/08/2020

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 Acknowledgement

First of all, I would like to give my sincere gratitude to almighty God for giving me the strength
and ability to finish the task within the planned time.

I also want to thank especially to my supervisor Dr. Md. Miraj Hossen, Associate Professor,
Department of Management Studies, Jagannath University, Dhaka-1100 for his inspiring
guideline, valuable suggestion and constant help throughout the work and in preparation of the
report.

I am also grateful to Abdur Rashid (Principal Officer), Md. Shafikur Rahman (Principal Officer),
Md. Koesh Al Mahmud (Senior Principal Officer) and also grateful to other officer of Sonali
Bank Ltd, Sadarghat Corporate Branch, Dhaka, who helped me in preparing the report by giving
their suggestion, supervision and information which is valuable to me. They helped and support
me to complete my report successfully.

I would like to take the opportunity to express my wholehearted gratitude to my friends, family
member, near and dear who offered encouragement, information, inspiration and assistance
during preparing the report.

Delete the marked area, no need this information

Manash Biswas

ID: B-150202003

Session: 2015-2016

Department of Management Studies

Jagannath University, Dhaka-1100

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 Declaration

I do solemnly declare that this report submitted in partial fulfillment of the requirement of the
BBA program, Department of Management Studies, Jagannath University, Dhaka, is the result of
my research work and written in my own language. That no part of this report consist of
materials copied and plagiarized from published or unpublished work of other material and that
all materials, borrowed or reproduced from other published or unpublished sources have either
been put under quotation or duly acknowledge with full reference in appropriate place(s).

………………...

Manash Biswas

ID: B-150202003

Session: 2015-16

Department of Management Studies

Jagannath University, Dhaka-1100

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 Certificate of Approval

This is to certify the report entitled “Credit and Risk Management of SBL??” has been submitted
by Manash Biswas, Department of Management Studies, Jagannath University, Dhaka-1100. The
candidate carried out this report under my direct supervision and guidance, and this work has not
been presented any other Degree or Diploma. (how could I know it?)

…………………………..

Dr. Md. Miraj Hossen

Associate Professor
Department of Management Studies
Jagannath University, Dhaka-1100

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 Letter of Transmittal

August 5, 2020

Dr. Md. Miraj Hossen

Associate Professor
Department of Management Studies
Jagannath University, Dhaka-1100
Subject: Submission of Internship Report titled on ……………………

Dear Sir,
I am glad to submit you the Internship Report covering the topic “Credit And Risk Management
of Sonali Bank Ltd.” that you have assigned to me as integral part of BBA internship program.
For preparing this report I tried my level best to accumulate relevant and up-to-date information
from all available sources.

In completing the report, I have tried my best in importing every available details of the bank
avoiding unnecessary amplification of the report. I hope that, this report will meet the standards
of your judgments.

Sincerely

------------------------
Manash Biswas
ID: B-150202003
Session: 2015-16
Department of Management Studies
Jagannath University

Dhaka 1100.

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 Executive Summary

The Internship report is prepared as requirement of BBA program of Jagannath University. This
report is on “Credit Process and Risk Management” of Sonali Bank Limited. This report is
intended to assist the reader in detailed understanding the credit risk management process. It also
attempts to capture the procedures practiced in Sonali Bank Limited (SBL) in relation to credit
handling. The purpose of this report is to have an idea about the credit process and risk
management procedure of Sonali Bank and then to assess its effectiveness in connection with.

In this report, first of all I’ve discussed about the objectives, scopes, limitations and the
methodology containing the sources of data I’ve collected from.

Secondly, in the organizational part I have provided detailed information about the organization
with its company profile, Corporate Vision and Mission, product & service and resources.

Thirdly I’ve discussed about the overall credit processes and risk management of SB which starts
with the branch and done fully under head office’s credit department.

Finally I tried to give some suggestion to the base of my knowledge and experience which I have
achieved during internship at Sonli Bank Ltd. Sadarghat Corporate Branch, for further growth in
credit and convenience in credit risk management and expansion of this Branch. The whole
system has been described elaborately keeping in mind the most important segments. In addition
the diagrams Credit Approval Process & Credit documentation, Credit Risk Grading score sheet
add a clear understanding of the system.

In this stage you should write about your observation, findings, limitations, and suggestions
in concise way not to write the contents of each chapters. Please edit it.

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 Appendix

What is Appendix? Do you know where to place appendix?

Abbreviatio Full Form

n
BB Bangladesh Bank
CRG Credit Risk Grading
CRM Credit Risk Management
FDR Fixed Deposit Receipt
SBL Sonali Bank Limited
L/C Letter of Credit
AGM Assistant General Manager
GM General Manager
DGM Deputy General Manager
ATM Automated Teller Machine
DMD Deputy Managing Director

Why page number start from cover page? It should be

start from chapter 01

Table of Contents
Chapter One.............................................................................................................................................10
Introduction.............................................................................................................................................10
1.1Origin of the Report..........................................................................................................................10
1.2 Background of the Study.................................................................................................................10
1.3 Objective of the Report...................................................................................................................11

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 1.4 Scope of the Study...........................................................................................................................11
1.5 Limitation of the Study....................................................................................................................11
Chapter Two............................................................................................................................................13
Company Overview.................................................................................................................................13
2.1 Background of the Organization......................................................................................................13
2.2 Service Area.....................................................................................................................................14
2.3: Organization Hierarchy of Sonali Bank Ltd......................................................................................16
2.4 Mission, Vision& Slogan...................................................................................................................16
2.5 Objectives and Values of Sonali Bank Limited.................................................................................17
2.6 Product of Sonali Bank.....................................................................................................................17
Chapter Three..........................................................................................................................................19
Methodology of the Study: Data and Methods......................................................................................19
3.1 Methodology...................................................................................................................................19
3.2 Data.................................................................................................................................................19
3.2.1 Types of Data: Qualitative Data and Quantitative Data............................................................20
3.3Collection of data.............................................................................................................................21
3.3.1 Collection of data......................................................................................................................21
3.3.2 Processing of data.....................................................................................................................21
3.3.3 Presentation of data...................................................................................................................21
3.4 Tools and Techniques......................................................................................................................22
Chapter Four...........................................................................................................................................23
Literature Review....................................................................................................................................23
Literature Review..................................................................................................................................23
Chapter Five............................................................................................................................................25
Credit and Risk Management Process of Sonali Bank Limited...........................................................25
5.1 Credit...............................................................................................................................................25
5.2 Credit and Risk Management Process.............................................................................................25
5.2.1 Credit Processing/Appraisal......................................................................................................26
5.2.2 Credit Approval/Sanction.........................................................................................................27
5.2.3 Credit Documentation...............................................................................................................28
5.2.4 Credit Administration...............................................................................................................28
5.2.5 Disbursement............................................................................................................................29
5.2.6 Monitoring and Control of Individual Credits...........................................................................30

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 5.2.7 Monitoring the Overall Credit Portfolio (Stress Testing)..........................................................31
5.2.8 Credit Classification.................................................................................................................32
5.2.9 Classified Loans.......................................................................................................................32
5.3 Risk Grading on Loan in Sonali Bank Limited...................................................................................33
5.4 Loan Classification Guidelines from Bangladesh Bank.....................................................................39
5.5 Recovery of Loan.............................................................................................................................40
5.5.1 Programs for Loan Recovery....................................................................................................40
5.5.2 Steps for Loan Recovery against Defaulters.............................................................................40
Chapter Six..............................................................................................................................................42
Findings, Recommendation & Conclusion............................................................................................42
6.1 Findings of the Report.....................................................................................................................42
6.2 Recommendations...........................................................................................................................43
6.3 Conclusion.......................................................................................................................................43
Reference Books and Articles.................................................................................................................45
Web References.......................................................................................................................................45

Chapter One

Introduction

1.1 Origin of the Report

In today’s world only academic education does not give a student perfect knowledge to become
competitive with the outside competitive world. Internship is highly needed to gain idea,
knowledge and experience practically. From this internship program students get the chance to
learn facing the real business world. This report is an internship report prepared as a requirement
for the finishing of BBA program (Major in Management Studies) of Jagannath University. The

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primary goal of internship is to provide the job experience to the student and an opportunity to
application of theoretical knowledge in real life situation. The program covers a period of 45
days of organizational attachment. This organization has a positive image to the customer’s mind
giving better service. As it maintain the motion with the competitive business world, its
activities, culture and style operate an intern student to be best at any field of working life.

Sonali Bank Ltd is the place where I could do my internship program. The report titled “Credit
Risk Management of Sonali Bank Limited”: An analysis on Sadarghat Corporate Branch, Dhaka
has been prepared an internship report fulfillment of BBA program authorized by the
Department of Management Studies of Jagannath University, Dhaka-1100.

As an intern, I have get opportunity to work with the organization from 30 December, 2019 to 12
February, 2020 and acquired idea about credit and risk management. To be a skilled banker only
theoretical knowledge is not sufficient, practical knowledge is also needed. This report gives a
clear idea about performance, activities and strategies of Bangladesh Credit and Risk
Management.

1.2 Background of the Study

The report entitled “Credit Risk Management System of Sonali Bank Limited : An analysis on
Sadarghat Corporate Branch, Dhaka” has been prepared as an internship report fulfillment of
BBA Program authorized by the Department of Management Studies of Jagannath University,
Dhaka-1100.

1.3 Objective of the Report

Objective of the report the main objective of the report is to identify and evaluate the credit risk
management system of Sonali Bank Limited, which includes the following specific objectives:

Specific objectives:

a) To know the practices of credit structure of the bank Sonali Bank Limited, Sadarghat
Corporate Branch, Dhaka.
b) To identify the recovery system performed by the bank Sadarghat Corporate Branch, Dhaka.
c) To measure the effectiveness of the bank in the utilization of available resources.

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d) To asses and highlight the legal actions flowed by the Branch in terms of credit recovery.

1.4 Scope of the Study

Sonali Bank is the largest commercial bank in Bangladesh. It Bank has a total of 1224 branches.
Last one is in Damla, Sreenagar, Munshiganj. Out of them, 467 are located in urban areas, 746 in
rural areas, and 2 are located Overseas(India).It also operates the Sonali Exchange Company Inc.
in USA and Sonali Bank (UK) Ltd., United Kingdom, to facilitate foreign exchange remittances.
Here I tried to learn about how to manage credit risk management, tools of credit risk
management, loan recovery system, facing problems in loan recovery system, performance of the
bank in loan recovery system etc. All things comes under the theory of credit risk management
and finally I would conclude with the critical evaluation of credit risk management under the
guidelines of bank companies act 1991 and a discussion on major findings and
recommendations.

1.5 Limitation of the Study

In preparing these reports I have faced some problems which are as follows:

I. Limitation of time: It was one of the main constraints that hindered to cover all
aspects of the study.
II. Lack of Secondary Information: The secondary source of information was not
enough to complete the report.
III.  Limitation of the Scope: Some confidential information was not disclosed by various
personnel of their respective department. Such as:
IV. The in sufficiency of information basically various information are not provided
V. To me by the employees of the bank in terms of security and other corporate
VI. Obligation.
VII. Bank employees are very busy; they could not pay enough time.
VIII. Legal action related information was not available.
IX. Some consumers’ of the bank did not give answers in some issues.

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 X. All the clients whom I interviewed.

Chapter Two
Company Overview (SBL- Is it a company?)

2.1 Background of the Organization (make all paragraph justified alignment)

Sonali Bank was established in 1972 under the Bangladesh Banks (Nationalization) Order,
through the amalgamation and nationalization of the branches of National Bank of Pakistan,
Bank of Bahawalpur and Premier Bank branches located in East Pakistan until the
1971 Bangladesh Liberation War. When it was established, Sonali Bank had a paid up capital of
30 million taka. In 2001, it’s authorized and paid up capital were Tk 10 billion and Tk 3.272
billion respectively. Presently, it’s authorized and paid up capital is Tk 10 billion and Tk 9
billion respectively. The bank's reserve funds were Tk 60 million in 1979 and Tk 2.050 billion

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on 30 June 2000. In 2013, $250,000 was stolen from the bank by Cyber criminals using the Swift
International payments network. In 2016 the Bank signed a Memorandum of Understanding
with PayPal. (https://en.wikipedia.org/wiki/Sonali_Bank)

Company Profile
FEATURES VALUES
Name Sonali Bank Limited
Registered Office 35-42, 44 Motijheel Commercial Area, Dhaka,
Bangladesh

Legal Status Public Limited Company

Chairman Md. ZiaulHasanSiddiqui
CEO & Managing Director Mr. Md. AtaurRahmanProdhan
Company Secretary Mr. Tauhidul Islam
Date of Incorporation 3June 2007
Authorized Capital BDT 6,000.00 Cr.
Paid up Capital BDT 4530.00 Cr.

Date of Vendor’s Agreement 15 November, 2007

Number of Branch 1224
Number of Employees 17,965
Genesis Emerged as Nationalized Commercial bank in 1972,
following the BB (Nationalized) Order No. 1972(PO
No. 26 of 1972)
SWIFT BSONBDDH
Website www.sonalibank.bd.com

E-mail itd@sonalibank.com .bd

(https://www.sonalibank.com.bd/profile.php)

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 Table 2.1: SBL Profile

2.2 Service Area

Sonali Bank has a total of 1224 branches.Out of them, 467 are located in urban areas, 746 in
rural areas, and 2 are located overseas(India). It also operates the Sonali Exchange Company Inc.
in USA and Sonali Bank (UK) Ltd., United Kingdom, to facilitate foreign exchange remittances.
Sonali Bank UK remits up to 14 destinations across Bangladesh directly, these
include Dhaka, Chittagong, Sylhet, Moulvibazar, Beanibazar, Balaganj, Biswanath, Jagannathpu
r, Sunamganj, Gopalganj, Nabigonj, Hobigonj, Kulaura or Tajpur. There are currently three
branches in the UK, one located in Osborn Street, London, another in Small Heath; Birmingham
and in Manchester. The home country branches are:

Category Number

Number of Rural Branches 709

Number Of Urban Branches 440

Number of Regional Offices 16

Number of Principal Offices 46

Number of G.M. Offices 11

Number Of Foreign Branches 02

Total 1224

(https://www.sonalibank.com.bd/overview.php)
Table 2.2: Branches of SBL

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2.3: Organization Hierarchy of Sonali Bank Ltd

2.4 Mission, Vision& Slogan

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Vision

Socially committed leading banking with global presence

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

Slogan

“Your trusted partner in innovative banking”. (https://www.sonalibank.com.bd/mission.php)

2.5 Objectives and Values of Sonali Bank Limited

Objectives
i. Contribute towards the progress of nation
ii. By supporting ethical values and best practices
iii. To achieve customer satisfaction through diversified banking activities
iv. To improve customer service by introducing new IT based technology so that
customer can get their service without any difficulties
v. To ensure adequate rate of return on investment
vi. Availability of credit at customer need
vii. To ensure optimum utilization of available r

2.6 Product of Sonali Bank

Sonali Bank Ltd. are available following types of products and services:
Savings Account

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 Current Account
Corporate Account
General Services Short term Deposit
Fixed Deposit Scheme
Special Savings Scheme
Special Deposit Scheme
Monthly Saving Scheme
Deposit Service Monthly Income Scheme
General Loan
Terms Loan
Project Loan
Transport Loan
Loan Against House Building
Loan Against Imported Merchandise
Loan Against Trust Receipt
Loan Against Packing Credits
Housing Loan Scheme
House Repairing Loan Scheme
Consumers Financial Scheme
Small Business Loan Scheme
Personal Loan Scheme
Cash credit
Loan Services
Security Overdraft
Payment Against Document
Table 2.4: Product of Sonali Bank Limited

Other Services

i. SBL ATM Service

ii. Online Banking
iii. Telegraphic Transfer
iv. Demand Draft
v. Remittance

Chapter Three
Methodology of the Study: Data and Methods

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3.1 Methodology

What type of primary data used? How did you collect it?
In preparation of the report, both the primary and secondary sources are used during data
collection. The monitoring techniques to primary data, the officers and employees of Sonali
Bank Ltd. will be collected through informal interviews with the author’s data observation.
What is this? To, conduct this study the following methodology was implemented.

3.2 Data

Data (singular datum) are individual units of information. A datum describes a

single quality or quantity of some object or phenomenon. In analytical processes, data are
represented by variables.

Although the terms "data", "information" and "knowledge" are often used interchangeably, each
of these terms has a distinct meaning. In popular publications, data is sometimes said to be
transformed into information when it is viewed in context or in post-analysis. In academic
treatments of the subject, however, data are simply units of information. Data is employed
in scientific research, businesses management (e.g., sales data, revenue, profits, stock price),
finance, governance (e.g., crime rates, unemployment rates, literacy rates), and in virtually every
other form of human organizational activity (e.g., censuses of the number of homeless people by
non-profit organizations).

Data is measured, collected and reported, and analyzed, whereupon it can be visualized using

graphs, images or other analysis tools. Data as a general concept refers to the fact that some
existing information or knowledge is represented or coded in some form suitable for better usage
or processing. Raw data ("unprocessed data") is a collection of numbers or characters before it
has been "cleaned" and corrected by researchers. Raw data needs to be corrected to
remove outliers or obvious instrument or data entry errors (e.g., a thermometer reading from an
outdoor Arctic location recording a tropical temperature). Data processing commonly occurs by

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stages, and the "processed data" from one stage may be considered the "raw data" of the next
stage. Field data is raw data that is collected in an uncontrolled "in situ"
environment. Experimental data is data that is generated within the context of a scientific
investigation by observation and recording. Data has been described as the new oil of the digital
economy. (https://en.wikipedia.org/wiki/Data)

Why you write these data type?

3.2.1 Types of Data: Qualitative Data and Quantitative Data

Here are two general types of data.

 Quantitative data is information about quantities; that is, information that can be measured and
written down with numbers. Some examples of quantitative data are your height, your shoe size,
and the length of your fingernails. Speaking of which, it might be time to call Guinness. You've
got to be close to breaking the record.

Qualitative data is information about qualities; information that can't actually be measured.
Some examples of qualitative data are the softness of your skin, the grace with which you run,
and the color of your eyes. However, try telling Photoshop you can't measure color with
numbers.

Here's a quick look at the difference between qualitative and quantitative data.

i. The age of your car. (Quantitative.)

 
ii. The number of hairs on your knuckle. (Quantitative.)
 
iii. The softness of a cat. (Qualitative.)
 
iv. The color of the sky. (Qualitative)
v. The number of pennies in your pocket. (Quantitative)

These two types of data is important for the report. With the help of these two types I conduct
my report. (https://www.shmoop.com/probability-statistics/qualitative-quantitative-data.html)

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3.3Collection of data

In this study both primary & secondary data were collected.

i. Primary source:

 Personal observation
 Desk work in different section, of the bank.
 Conversation with bank’s employees.

ii. Secondary Source:

 Annual report of Sonali Bank Limited

 Variety of books, articles & journal related to what?
 Banking. Information from the internet.

3.3.1 Collection of data

As, the, data which I collected from both sources, were segregated, for fulfilling the purpose of
this report. What is this?

3.3.2 Processing of data

As, I, have collected data, these were further processed, to fulfill the purpose of this study.

3.3.3 Presentation of data

The collected data were segregated &then processed, after that those were inserted in tables &
charts & presented in the body of this report.

So, to prepare this report combinations of the following method of research in social science
have been followed:

 Interview method
 Observation method
 Desk study method

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3.4 Tools and Techniques

A tool is a device or computer app that enables you do something. A technique is a process or
procedure that you follow. For example there are guidelines for how to construct an effective
scientific experiment such as you make sure the participants are unbiased. Here used various
techniques for analyzing CRG calculation. These are:

i. Leverage
ii. Profitability
iii. Coverage
iv. Liquidity
v. Security Measures
vi. Management Capability Skill

Chapter Four
Literature Review

Literature Review

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Lillian Kisivuli Essendi et el (2013), observed that savings and credit cooperatives members and
the regulator are involved in formulation of credit policy, in risk identification process executive
management, credit committee, credit managers, and employee are also involved in to a large
extent.  Kenya’s financial sector is dominated by commercial banks, Insurance companies,
Pension funds and Mortgages who have roots to the colonial period and were historically
oriented towards meeting the financial needs of external trade and large scale commerce.
Through his study he established the effect of credit risk management on loans portfolio among
Saccos in Kenya. He reviewed liquidity theory, portfolio theory, tax theory of credit, credit risk
theory. Risk identification is vital for effective risk management, for Saccos to manage risks
facing them effectively they need to know how to identify the credit risks. The first step in risk
identification is identifying and prioritizing key risks which are reviewed and approved by the
management committee. He outlined the need to adopt sound credit risk management practices
and portfolio management in order to achieve the ultimate goal of good recovery and to maintain
good loan asset quality.
Mohammad Ashraf Ud Dowlaet el, observed that credit risk management is related to the bank
performance. The customers are categorized into different portfolios each of which is
homogenous in several characteristics. Instead of manage every single client the bank will handle
them in groups and therefore usually saves time, effort and cut cost.
Kwadwo Boatenget el (2019), observed the relationship of credit risk management and
performance of banks of Ghana using camel ratings. It analyses the financial soundness of bank.
Capital adequacy, Assets, management efficiency, earnings capacity, liquidity, sensitivity are the
component of CAMELS rating and The dependent variable used for the study was the financial
performance of the banks measured by return on equity (ROE) whereas the independent
variables were the CAMEL component. After analyzing the ratios computed from the financial
statements of the selected banks, he found that Earning stood out as the highly significant factor
that affects the performance of banks in Ghana. Capital adequacy, assets quality, management
efficiency, and liquidity were equally found to be significantly affecting the performance of
Ghanaian banks. Sensitivity, on the other hand, was found to be the only insignificant factor of
the CAMELS model that affects the performance of banks in Ghana.   
L. A. S. Perera and P. S. Morawakageet el (2016), investigated the effect of credit risk
management on the shareholder value and researched in commercial bank of Sri Lanka. The

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impact of loans to deposits ratio on banks’ shareholders’ value shows that increasing more and
more non-performing loans in a bank, it will lead to increase the credit risk of the bank.
Ultimately it will affect to decrease the shareholder’s return. Increasing the capital retained in the
bank for the sake of minimizing the credit risk, it will lead to have opportunity cost for the bank.
Granting more and more loans, even though it led to increase the credit risk, it will increase the
interest income of the bank.  Ultimately it will lead to increase the shareholder value through
increasing of income of the bank. 
Aliu Muhamet, Sahiti Arbanaet el (2016), Analyzed the effect of credit risk management on net
interest income and the of credit risk management on overall profitability of banks. He stated that
an increase in nonperforming loans will result in profit erosion and thus a decrease in profit,
implying that the two variables will have an inverse relationship; and increase in capital reserves
will be an impediment to the income generating capacity of the banks, thus result in a decline in
profitability, establishing a negative relationship between the two. The outcome from the
multivariate regression showed across all the banks that a partial linear relationship existed
between the credit risk management indicators and the profitability indicators.

Chapter Five
Credit and Risk Management Process of Sonali Bank Limited

5.1 Credit

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The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lender’s
trust in a people /firms or company’s ability or potential ability and intention to repay. In
other words, credit is the ability to command goods or services of another in return for
promise to pay such goods or services at some specified time in the future. For a bank, it is
the main source of profit and on the other hand, the wrong use of credit would bring
disaster not only for the bank but also for the economy a whole.
The objective of the credit management is to maximize the performing asset and
the minimization of the non-performing asset as well as ensuring the optimal point of loan
and advance and their efficient management. Credit management is a dynamic field where
a certain standard of long-range planning is needed to allocate the fund in diverse field and
to minimize the risk and maximize the return on the invested fund.

5.2 Credit and Risk Management Process

The Credit and Risk Management Division is vital for the efficient functioning of SBL. It is
critically scrutinizes the credit proposals from risk weighted point of view before sanctioning
approvals ensuring a high quality credit portfolio. The goal of credit risk management is to
maximize a bank’s risk-adjusted rate of return by maintaining credit risk exposure within
acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as
well as the risk in individual credits or transactions. The credit risk management process of
Sonali Bank Ltd. Covers the following tasks:

a) Credit processing/Appraisal
b) Credit Approval/Sanction
c) Credit Documentation
d) Credit Administration
e) Disbursement
f) Monitoring and Control of Individual Credits
g) Monitoring the Overall Credit Portfolio (stress testing)
h) Credit Classification
i) Disbursement of Loan

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 j) Classified Loans
k) Recovery of Loan

5.2.1 Credit Processing/Appraisal

Credit processing is the stage where all required information on credit is gathered and
applications are screened. Credit application forms should be sufficiently detailed to permit
gathering of all information needed for credit assessment at the outset. In this connection,
financial institutions should have a checklist to ensure that all required information is, in fact,
collected. Financial institutions should set out pre-qualification screening criteria, which would
act as a guide for their officers to determine the types of credit that are acceptable. For instance,
the criteria may include rejecting applications from blacklisted customers. These criteria would
help institutions avoid processing and screening applications that would be later rejected. The
next stage to credit screening is credit appraisal where the financial institution assesses the
customer’s ability to meet his obligations. Institutions should establish well designed credit
appraisal criteria to ensure that facilities are granted only to creditworthy customers who can
make repayments from reasonably determinable sources of cash flow on a timely basis.

As a general rule, the appraisal criteria will focus on:

i. Amount and purpose of facilities and sources of repayment;

ii. Integrity and reputation of the applicant as well as his legal capacity to assume the credit
obligation;
iii. Risk profile of the borrower and the sensitivity of the applicable industry sector to
economic fluctuations;
iv. Physical inspection of the borrower’s business premises as well as the facility that is the
subject of the proposed financing;
v. Current and forecast operating environment of the borrower;
vi. Management capacity of corporate customers

5.2.2 Credit Approval/Sanction

A financial institution must have in place written guidelines on the credit approval process and
approval authorities of individuals or committees as well as the basis of those decisions.

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Approval authorities should be sanctioned by the board of directors. Approval authorities will
cover new credit approvals, renewals of existing credits, and change it terms and conditions of
previously approved credits, practically credit restructuring, all of which should be fully
documented and recorded. Prudent credit practice requires that persons empowered with the
credit approval authority should not also have the customer relationship responsibility.

Depending on the size of the financial institution, it should develop a corps of credit risk
specialists who have high level expertise and experience and demonstrated judgment in
assessing, approving and managing credit risk. An accountability regime should be established
for the decision-making process, accompanied by a clear audit trail of decisions taken, with
proper identification of individuals/committees involved. All this must be properly documented.

Figure 5.2.1: Credit Sanction Process

5.2.3 Credit Documentation

Documentation is an essential part of the credit process and is required for each phase of the
credit cycle, including credit application, credit analysis, credit approval, credit monitoring, and
collateral valuation, and impairment recognition, foreclosure of impaired loan and realization of
security. The format of credit files must be standardized and files neatly maintained with an

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appropriate system of cross-indexing to facilitate review and follow up. The Bangladesh Bank
will pay particular attention to the quality of files and the systems in place for their maintenance.
Documentation establishes the relationship between the financial institution and the borrower
and forms the basis for any legal action in a court of law. Institutions must ensure that
contractual agreements with their borrowers are vetted by their legal advisers. Required
documents are:

i. Trade License copy

ii. Stock Report
iii. Payment Receipt of Tax in City Corporation
iv. CIB inquiry form & payment for this
v. NID Card Photocopy
vi. Recent 3 years Company’s financial statement for calculating CRG
vii. Tax Identification Number (TIN)
viii. All Documents must be attached.

5.2.4 Credit Administration

Financial institutions must ensure that their credit portfolio is properly administered, that is, loan
agreements are duly prepared, renewal notices are sent systematically and credit files are
regularly updated. An institution may allocate its credit administration function to a separate
department or to designated individuals in credit operations, depending on the size and
complexity of its credit portfolio (Credit Risk Management: Industry Best Practices2005,
Bangladesh Bank).

A financial institution’s credit administration function should, as a minimum, ensure that:

i. Credit Administration procedures should be in place to ensure the following. Credit files
are neatly organized, cross-indexed, and their removal from the premises is not permitted;
ii. The borrower has registered the required insurance policy in favor of the bank and is
regularly paying the premiums;

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 iii. Credit facilities are disbursed only after all the contractual terms and conditions have
been met and all the required documents have been received;
iv. Collateral value is regularly monitored;
v. The borrower is making timely repayments on interest, principal and any agreed to fees
and commissions;
vi. The established policies and procedures as well as relevant laws and regulations are
complied with; and
vii. On-site inspection visits of the borrower’s business are regularly conducted and
assessments documented.

5.2.5 Disbursement

Once the credit is approved, the customer should be advised of the terms and conditions of the

credit by way of a letter of offer. The duplicate of this letter should be duly signed and returned

to the institution by the customer. The facility disbursement process should start only upon

receipt of this letter and should involve, inter alia, the completion of formalities regarding

documentation, the registration of collateral, insurance cover in the institution’s favor and the

vetting of documents by a legal expert. Under no circumstances shall funds be released prior to

compliance with pre-disbursement conditions and approval by the relevant authorities in the

financial institution (L.R.Chowdhury, 2004).

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 Figure 5.2.5: Disbursement

5.2.6 Monitoring and Control of Individual Credits

To safeguard financial institutions against potential losses, problem facilities need to be
identified early. A proper credit monitoring system will provide the basis for taking prompt
corrective actions when warning signs point to deterioration in the financial health of the
borrower. Examples of such warning signs include unauthorized drawings, arrears in capital and
interest and deterioration in the borrower’s operating environment. Financial institutions must
have a system in place to formally review the status of the credit and the financial health of the
borrower at least once a year. More frequent reviews (e.g. at least quarterly) should be carried
out of large credits, problem credits or when the operating environment of the customer is
undergoing significant changes.

In broad terms, the monitoring activity of the institution will ensure that:

i. Funds advanced are used only for the purpose stated in the customer’s credit application;

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 ii. Financial condition of a borrower is regularly tracked and management advised in a
timely fashion;
iii. Collateral coverage is regularly assessed and related to the borrower’s financial health;
iv. The institution’s internal risk ratings reflect the current condition of the customer.

5.2.7 Monitoring the Overall Credit Portfolio (Stress Testing)

An important element of sound credit risk management is analyzing what could potentially go
wrong with individual credits and the overall credit portfolio if conditions/environment in which
borrowers operate change significantly. The results of this analysis should then be factored into
the assessment of the adequacy of provisioning and capital of the institution.
Such stress analysis can reveal previously undetected areas of potential credit risk exposure that
could arise in times of crisis. Possible scenarios that financial institutions should consider in
carrying out stress testing include:

i. Significant economic or industry sector downturns;

ii. Adverse market-risk events; and
iii. Unfavorable liquidity conditions.

Financial institutions should have industry profiles in respect of all industries where they have
significant exposures. Such profiles must be reviewed /updated every year. Each stress test
should be followed by a contingency plan as regards recommended corrective actions. Senior
management must regularly review the results of stress tests and contingency plans. The results
must serve as an important input into a review of credit risk management framework and setting
limits and provisioning levels.

5.2.8 Credit Classification

It is required for the board of directors of a financial institution to “establish credit risk
management policy, and credit impairment recognition and measurement policy, the associated
internal controls, documentation processes and information systems; “Credit classification
grades individual credits in terms of the expected degree of recoverability. Financial institutions

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must have in place the processes and controls to implement the board approved policies, which
will, in turn, be in accord with the proposed guideline. They should have appropriate criteria for
credit provisioning and write off. International Accounting Standard 39 requires that financial
institutions shall, in addition to individual credit provisioning, assess credit impairment and
ensuing provisioning on a credit portfolio basis. Financial institutions must, therefore, establish
appropriate systems and processes to identify credits with similar characteristics in order to
assess the degree of their recoverability on a portfolio basis.

Financial institutions should establish appropriate systems and controls to ensure that collateral
continues to be legally valid and enforceable and its net realizable value is properly
determined. This is particularly important for any delinquent credits, before netting off the
collateral’s value against the outstanding amount of the credit for determining provision. As to
any guarantees given in support of credits, financial institutions must establish procedures for
verifying periodically the net worth of the guarantor.

5.2.9 Classified Loans

Banks are financial service firm, producing and selling professional management of the public’s
funds as well as performing many other roles in the economy. But now-a-days commercial banks
are not performing their activities smoothly for a large burden of default loan. Every year Sonali
Bank distributes thousand crore taka among individuals, organizations etc. but a large sum of
these distributed fund cannot be recovered in due time. The Bank has to classify this loan.

Signs for Classification

First and foremost requirement for any and all credit managers is to identify a problem credit in
it’s earlier stages by recognizing the signs of deterioration. Such signs include but not limited to
the following:

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 i. Non-payment of interest or principal or both on due dates or past dues beyond reasonable
period or recurring past dues.
ii. In case of Overdraft no movement in the account beyond a reasonable period.
iii. Deterioration in financial condition of the client, as gathered from client’s latest financial
statement.
iv. A shortfall in collateral coverage, particularly if the collateral was a key factor in the
decision-making.
v. Death or withdraw of key-owners or management personnel.
vi. Company filing for bankruptcy or voluntary dissolution.
vii. Adverse market report about the company itself or its principal owners.

5.3 Risk Grading on Loan in Sonali Bank Limited

Before giving a loan of Sonali Bank Ltd., the senior officer of Sonali Bank collects recent 3
years financial information about the borrower organization. Then, the officer uses Credit Risk
Grading (CRG) model to learn the risk of the credit. Here shows a CRG calculation with the
hypothetical data of Sonali Bank Limited, Sadarghat Corporate Branch Dhaka. The CRG
calculation started with the next page. Here uses an enterprise’s information that is collected
from the Sonali Bank Ltd. Sadarghat Corporate Branch, Dhaka. The Senior Principal Officer of
this bank, helps me to understand how to calculate credit risk break down. With his help, I also
prepare a spreadsheet of CRG that are shown on the next page. Here I use a company’s
information named M/S Shop & Life enterprise. These calculations are discussed on the next
page:

Borrower Name: M/S Shop & Life enterprise Branch Name: Sadarghat Corporate Brach, Dhaka
Score Obtained:81 Risk Grading: Acceptable

R 4 Risk Weight Formula Input Actual Parameter Range Score S

R Paramete Data(Crore) Obtained co
is rs Score re
k O
C bt
o ai

Page | 32
m n
p e
o d
n
e
n
ts
F Leverage 15% (Total (6.34/30.0) 0.21 Less than 0.25 15 1
i Liability/Tan 0.26-0.35 14 5
n gible Net
0.36-0.50 13
a Worth)
n 0.50-0.75 12
ci 0.76-1.25 11
a 1.26-2.00 10
l 2.01-2.50 08
R 2.51-2.75 07
is More than 2.75 00
k
( Liquidity 15% (Current 24.00/6.34 21.00 Greater than 2.74 15 1
5 Asset/Curren 2.50-2.74 14 5
0 t Liability)
2.00-2.49 13
% 1.50-1.99 12
)
1.10-1.49 11
0.90-1.09 10
0.80-0.89 08
0.70-0.79 07

Less than 0.70 00

Profitabili 15% (Operating (2.75/60.00)* 4.58% More than 25% 15 0

ty Profit/Sales) 100 20% to 24% 14 9
*100
15% to 19% 13
10% to 14% 12
7% to 9% 10
4% to 6% 09
1% to 3% 07
Less than 1% 00

Coverage 5% (Earnings (2.75/1.17) 2.35 More than 2.00 05 0

before int. & 5
1.51 to 2.00 04

Page | 33
 Tax/Interest 1.25 to 1.50 03
on Debt)
1.00 to 1.24 02
Less than 1 00

50% Total Score of Financial Risk 4

4
Risk
Components 6 Risk Weigh Parameter Range Score Score
Parameter t Obtained
Business/ Size of Business 5% More than 60 crore Tk. 5 0
Industry Risk (Sales in BDT) Tk. 30 crore to Tk. 59.99 4
(18%) crore
Tk. 10 croreto Tk. 29.99 3
crore
Tk. 5 crore to Tk. 9.99 crore 2
Tk. 2.5 Crore to Tk. 4.99 1
crore
Less than 2.5 crore 0
Age of Business 3% More than 10 Years 3 3
5 -10 Years 2
2-5 Years 1
Less than 2 Years 0
Business Outlook 3% Favorable 3 2
Stable 2
Slightly Uncertain 1
Cause of Concern 0
Industry 3% Strong (10%+) 3 2
Growth Good (5%+ - 10%) 2
Moderate (1%-5%) 1
No Gross (Less than 1%) 0
Market 2% Dominant Player 2 1
Competition
Moderately Competitive 1
Highly Competitive 0
Entry/Exit Barrier 2% Difficult 2 1
Average 1
Easy 0
18% 9%

Page | 34
 Risk 3 Risk Parameters Weight Parameter Range Score Obtained
Components Score

Managemen Experience 5% More than 10 Years 5 5

t Risk
5 to 10 Years 3
1 to 5 Years 2

No Experience 0

Second 4% Ready Succession 4 3

Line/Succession
Succession within 1 to 2 3
Years
Succession Within 2 to 3 2
Years
Succession in Questioned 0

Team Work 3% Very Good 3 2

Moderate 2

Poor 1
Regular Conflict 0

Total Score 12% Total Obtained 10%

Risk 3 Risk Parameters Weight Parameter Range Score Obt

Component ain
ed
Sco
re
Security
Risk (10%)
Primary Security Coverage 4% Fully Pledge Security 4 3
Hypothecation Charge 3
2nd Charge/Inferior Charge 2

Page | 35
 Simple Hypothecation 1
No Security 0
Collateral Coverage 4% Regd. Mortgage on Municipal 4 4
Area
Regd. Mortgage on Pourashava 3
Area
Equitable Mortgage/Plant & 2
Machinery
Negative Loan on Collateral 1
No Collateral 0
Support (Personal Guarantee) 2% Personal Guarantee with High 2 1
Net Worth
Personal Guarantee with 1
Average Net Worth
No Support or Guarantee 0

Total Score 10% Actual Obtained Score 8

%
Risk Components 4 Risk Weig Parameter Sco Scor
Parameters ht Range re e
Obt
aine
d
Relationsh Account 5% More than 3 5 5
ip Risk Conduct Years With
(10%) Faultless
Records
Less than 3 4
Years With
Faultless
Records
Accounts 2
Having
Satisfactory
Dealings
Irregular 0
Dealings in
Account
Utilization 2% More than 60% 2 2
Limit 40% - 60% 1
Less than 40% 0
Compliance of 2% Fully 2 2
Covenants Compliance

Page | 36
 Some Non- 1
compliance
No Compliance 0
Personal 1% Personal 1 1
Deposit Accounts of
Key Sponsors
with Significant
Deposit
No Depository 0
Relationship
Total Score 10% Actual Obtained Score 10
%
Parameters Obtained Score
Financial Risk (50%) 44
Business/ Industry Risk (18%) 9
Management Risk (12%) 10
Security Risk (10%) 8
Relationship Risk (10%) 10
Total 81
Grading Score Range
Superior 100%
Good 85-99%
Acceptable 75-84%
Marginal/Watch List 65-74%
Special Mention 55-64%
Substandard 45-54%
Doubtful 35-44%
Loss/Bad Loan 00-34%
Here we can see that the company achieve 81 score out of 100 score. If we focus on its score

than we can see that they reached the acceptance position. If they have required loan and have

applied for the loan. The bank should provide loan to this customer.

So we can say that the loan is ACCEPTABLE condition.

5.4 Loan Classification Guidelines from Bangladesh Bank

Classification of overdue loans and advances opened a new era in the credit management of
commercial banks in Bangladesh. Before 1989 no specific guidelines were followed by the
commercial banks for this purpose. In 1989, Bangladesh Bank issued BCD circular No.34/1989

Page | 37
stating specific rules and conditions of loan classification. After that each schedule banks except
BKB, RAKUB, and BSB would be responsible for its own loan classification according to the
guidelines are presented in the following figure:

Figure 5.4: Guideline from Bangladesh Bank

According to this circular loans and advances were classified on a loan by loan basis rather
sample classification. This process was continued till 1994. Bangladesh Bank further issued a
circular in1995 (BCD circular#20/1994). The title of the circular was “Revised rules of
classification and provisioning of loans and advances,” which came into implementation from
January 1, 1995.

5.5 Recovery of Loan

The Recovery procedure of Sonali Bank is the ultimate combination of time, effort of money. It
follows several procedural steps to recover the lending amount, which is joint effort of JBL,
society and legal institutions. There are several programs taken by the bank to recover the
disbursed loans. They are discussed here after.

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5.5.1 Programs for Loan Recovery
When Sonali Bank sanctions loans and advances to its customers, they clearly state the
repayment pattern in the loan agreement. But some credit holders do not pay their credit in due
period. The nationalized and private sector commercial banks have to face this sort of problems.
This situation is especially severe in Sonali Bank. To overcome the problem of overdue loan, the
bank needs to take some particular loan recovery programs. They are

i. Establishing credit supervision and monitoring cell in the bank 

ii. Re-structuring the loan sanctioning and distributing policy of the bank 
iii. Sanctioning loans and advances against sufficient securities as best as possible
iv. Giving more powers to the branch manager in credit management decision-making
process
v. Offering a package of incentives to the sound borrowers
vi. Giving more emphasis on short term loans and advances
vii. Imposing restrictions on loans and advances for sick industries
viii. Taking legal actions quickly against unsound borrowers as best as possible within the
period specified by the law of limitations.

5.5.2 Steps for Loan Recovery against Defaulters

The following steps are taken by Sonali Bank Ltd against the defaulters for recovery of loan:

i. Reminding the party to repay the loan after validity dates: First of all, the Credit
Administration division reminds the borrower about the remaining days to repay the loan
mentioning the validity dates from time to time.
ii. Send final notice: If the borrower fails to repay the loan within the sanctioned period for
repayment then he or she is given an additional period for the repayment of the loan
attaching a final notice for the repayment as well.
iii. Send legal notice: When the borrower fails to repay the loan even after the additional
period and the final notice, the credit administration of JBL sends a legal notice to the
borrower mentioning that if he or she is not capable to repay the loan within a specific
time then the bank will file a suit in the court against him or her.
iv. Eventually sue a case against the party: Finally, the bank, not getting any repayment from
the borrower, suits a case against the defaulter according to the respective law. Then the

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 decision of the court will be final for the recovery process and both the party and bank
will have to abide by the law.

These are the general procedures for recovery of loan followed by Sonali Bank Ltd.

Chapter Six
Findings, Recommendation & Conclusion

6.1 Findings of the Report

Every bank has its own credit procedure. The Sonali Bank Ltd possesses a standard credit
procedure. As the objective of my report is to make a comment on the credit risk management of
Sonali Bank Ltd, I tried my best to collect data for the report and find out the reality. Based on
the data generated during my internship period I have summed up my findings here and I think
this will help me to achieve my objectives:

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 1. The bank follows the overall credit assessment and risk grading process according to the
rules of Bangladesh Banking a somewhat manner.
2. With a view to implementing government policies, SBL has been maintaining its position
in extending credit to government bodies, sector corporations and private enterprises.
3. But in practice credit officers do not fill up the proposal form properly. Most of the cases,
they use assumption rather than exact figure. This practice might end up with bad or
classified one.
4. SBL distribute loans without sufficient security in some cases. This is violation of the
Bangladesh bank order.
5. Sometime the document verification is done after loan sanctioning the loan.
6. There is shortage of manpower and lack of proper training for the employees in credit
section.
7. The credit proposal evaluation process is lengthy .Therefore, sometimes valuable clients
are lost.
8. The website of SBL does not contain all required information about loan and advance.
9. In many cases bank face the problem of recovery because the credit officer fails to value
collateral property. Proper valuation means collateral will exactly cover the risk of bad
loan. Officials must do it with due care.
10. SBL is not efficient in processing and executing legal actions against defaulters for their
nonpayment of loans and advances.

6.2 Recommendations

To improve the risk management culture further, Sonali Bank Limited should adopt some of the
industry’s best practices that are not practiced currently. These are:

i. Continuous monitoring of the customer should be conducted so that loan cannot be

classified.
ii. The bank should emphasis more on loan diversification like loans on different promising
sectors and newly invented thrust sectors in the economy.
iii. Political intervention should be avoided while approving and sanctioning loan.

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 iv. Every day the business environment is changing and so the risk. So the bank should be
developed as a dynamic organization to adapt with the changing circumstances.
v. All the loan documentations have to done honestly. The bank should concentrate more on
proper documentation of all types of loans to make the department trustworthy & healthy.
vi. The documents supporting the security against the loan have to be verified properly by
the bank before sanctioning the loan.
vii. An Early Alert Account system should be introduced to have adequate monitoring,
supervision or close attention by management.
viii. There should be a Recovery Unit to manage directly the accounts with sustained
deterioration. To encourage Recovery Unit, incentive program may also be introduced.

6.3 Conclusion

It goes without saying that credit policy cannot be isolated from the broader monitory policy of
the country. Like any other segment of the economic policy, credit is very important for any
financial institution as it generates profit and gear up economic activities of the country. In other
words, credit is business and it is input in the production process of the country. Since credit has
inherent risk, therefore proper utilization of the loans are essential to meet the requirements of
the borrower. Thelon applied for by the borrower must not be employed for unproductive
purpose. In this regard, the Sonali Bank Limited must closely follow the progress of the loan and
the way the borrower is utilizing the funds. In this way the Sonali Bank Limited will deter any
fake activities on the part of the borrower Credit evaluation system of Sonali Bank Limited is
very lengthy process. It has been revised time to time in response to the respective circular of
Bangladesh Bank. The overall credit activity of Sonali Bank Limited is composed of corporate
credit division and credit administration. The credit management system of Sonali Bank Limited
is more or less effective as recovery position of classified loan is high and classified loan has
been decreasing gradually during the year. They always trying to improve their credit policy for
minimizing loss and maximizing profit and various measures are undertaken to develop the
credit management system.

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Reference Books and Articles
 Alam, M. Z., &Musukujjaman, M. (2011). Risk management practices: A critical
diagnosis of some selected commercial banks in Bangladesh. Journal of Business and
Technology (Dhaka), 6(1), 15-35.
 Boateng, K. (2019). Credit Risk Management and Performance of Banks in Ghana: the
‘Camels’ Rating Model Approach. KwadwoBoateng (2018). Credit Risk Management
and Performance of Banks in Ghana: the ‘Camels’ Rating Model Approach. International
Journal of Business and Management Invention, 8(02).
 Chowdhury, M. A. F., & Islam, M. N. (2016). Re-examining Determinants of
Performance of Commercial Banks in Bangladesh: New Evidence from Dynamic GMM,
Quantile Regression and Wavelet Coherence Approach. In Annual Banking Conference
2015.
 Essendi, L. K. (2013). The effect of credit risk management on loans portfolio among
Saccos in Kenya. Unpublished MBA Research Project, University of Nairobi..

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  Muhamet, A., & Arbana, S. (2016). The effect of credit risk management on banks’
profitability in Kosovo. European Journal of Economic Studies, (4), 492-515.
 Perera, L. A. S., & Morawakage, P. S. (2016). Credit risk management and shareholder
value creation: with special reference to listed commercial banks in Sri Lanka.

Web References
1. https://www.sonalibank.com.bd/mission.php

2. https://www.sonalibank.com.bd/profile.php

3. https://en.wikipedia.org/wiki/Sonali_Bank

4. https://www.sonalibank.com.bd/overview.php

5. https://www.shmoop.com/probability-statistics/qualitative-quantitative-data.html

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