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

Submitted to:

Sonia Munmun
Lecturer
Department of Finance
Jagannath University, Dhaka

Submitted by:

Sheikh Salah Uddin

ID: 115290
BBA 5 th Batch
Department of Finance
Jagannath University

Date of Submission: 02 July 2015.

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.

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 Stress Testing of Sonali Bank Limited

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
Department of Finance
Jagannath University
25 April 2015; 06:15 AM

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

2
 Stress Testing of Sonali Bank Limited

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.

Letter of Transmittal

02 June 2015

3
 Stress Testing of Sonali Bank Limited

Sonia Munmun,
Lecturer,
Department of Finance,
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
Department of Finance,
Jagannath University, Dhaka.

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 Stress Testing of Sonali Bank Limited

Declaration from the Writer

t
I, Sheikh Salah Uddin
, ID: 115290, Registration No: 1101335290, BBA
h
4 2nd
year
semester, Department of Finance, Jagannath University, Dhaka hereby declare that this is
the report of internship program titled “Stress
ing of Test
Sonali Bank Limited”uniquely
is
after the completion of three months’ work hard at Sonali Bank Limited,
prepared by me
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
4h year nd2 Semester
t

Department of Finance
Jagannath University, Dhaka

5
 Stress Testing of Sonali Bank Limited

Declaration from the Supervisor

I, Sonia Munmun
, hereby very pleased to declare
Sheikh
thatSalah 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
Department of Finance
Jagannath University, Dhaka

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 Stress Testing of Sonali Bank Limited

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

Testingof Sonali Bank Limited” for researching and writing an internshi

p 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

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.

7
 Stress Testing of Sonali Bank Limited

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 risk 1 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.

Acronyms and Elaboration

Table 1: Abbreviations used in this report

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

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Stress Testing of Sonali Bank Limited

9
Stress Testing of Sonali Bank Limited

Table of Contents

10
Stress Testing of Sonali Bank Limited

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 Stress Testing of Sonali Bank Limited

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

12
 Stress Testing of Sonali Bank Limited

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
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

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 Stress Testing of Sonali Bank Limited

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 21: Cumulative Credit Shock in Scenario-
2 ............................................................. 73 Figure 22: Cumulative Credit Shock in
Scenario-3 ............................................................. 74
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

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 Stress Testing of Sonali Bank Limited

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.

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 Stress Testing of Sonali Bank Limited

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
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.

16
 Stress Testing of Sonali Bank Limited

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 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

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: 17

1.4. Major objective:

1
1.4. Minor objectives:
2  To gather the practical experience based on the theoretical knowledge.
Stress Testing of Sonali Bank Limited

 To be habituated with the corporate environment and culture.

divisions of SBL, Savar Branch, Dhaka. In this report, I will try to make an overall analysis
on thefinancial
To fulfill risks of SBL. program.
the internship

 To maintain the overall banker-customer relationship.

1.4
 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.

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:

18
 Stress Testing of Sonali Bank Limited

Apply these data into your investment portfolios in bank industry

Follow the recommendations to improve the financial system.

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

objectives of the study.
 Understand the present position of SBL

 Know about the new idea of Stress Testing

 Know the stress levels of SBL

1.6 Methodology of the Report:

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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 Stress Testing of Sonali Bank Limited

Methodology Framework

Internship under
Internship at SBL
Supervisors

Primary Data Secondary Data

Research at Bank &

Home

Reporting the
Findings &
Recommendations

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.

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:

20

 Practical desk work.

  Face to face conversation with the Sonali Bank Staff College Supervisor.
 Facing some practical situation related with the day to day banking activities.
Stress Testing of Sonali Bank Limited
1.7. Secondary Sources:
2 Annual Reports (2013, 2014) of Sonali Bank Limited.

Papers & journals about the Central bank CMS requirement.

1. Limitations of the Study:

8
Any research work needs high degree of involvement regarding collection of information,

 Website of SBL.

 Brochures.

 Other business websites. 

 Text books

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.

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 Stress Testing of Sonali Bank Limited

 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

 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

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. report.

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 Stress Testing of Sonali Bank Limited

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:

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 Stress Testing 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.
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*

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 Stress Testing of Sonali Bank Limited

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.b d

E-mail : [email protected]

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

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 Stress Testing of Sonali Bank Limited

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.

26
 Stress Testing of Sonali Bank Limited

1972

National Bank
1949
of Pakistan

The Bank of The

Bahwalpur Premier
Limited Bank
Limited

Figure 2: Formation history of Sonali Bank Limited

2. Ancillary Services:
4
Sonali Bank Limited offers multiple special services with its network of branches throughout
the country in addition to its normal banking operations.

2.4. Collection:
1 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

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 Stress Testing of Sonali Bank Limited

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.

Widows, divorcees and destitute women allowances.

Freedom Fighters' allowances.

Maternal allowances for poor women.

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 Govt. & Non-Govt. Teachers' salary.

o Food procurement bill on behalf of the Govt.

2.4.3 Social Services:

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 Stress Testing of Sonali Bank Limited

o Old age allowances. o o o o Disability allowances. 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.

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:

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 Stress Testing of Sonali Bank Limited

2.5. Branch Computerization

:
1
1148branches 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
(
2
3 in this )year

2.5. Foreign Remittance:

2
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. ATM:
3
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.
Bangla Bank Ltd. and Brac Bank Ltd. besides those of Q-Cash consortium. Sonali Bank
recently launched Credit Card.

30
 Stress Testing of Sonali Bank Limited

Table 3: ATM & card services of SBL

ATM Status title Number

ATM facilities 64
Debit card issued 54442increased
(
3
15252015)
in

Credit card issued 969 increased

(
4
232015)
in

2.5. Online and SMS Banking: At present109 branches of Sonali Banks are included
4in 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.
2.6 Card Facilities of Sonali Bank Limited:

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 Stress Testing 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  Mutual Trust Bank Limited

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):

Table 4: Charges for transaction from other's booth

32
 Stress Testing of Sonali Bank Limited

Other Bank Transaction Charges per Transaction including VAT:

22 Q-Cash Member Banks Tk 11.50

Omnibus Network (Brac Bank) Tk 17.25

Dutch Bangla Bank 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,
SemiGovernment, 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.

33
 Stress Testing of Sonali Bank Limited

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 Tk. 3,00,000.00

II. Deputy General Manager & Assistant Tk. 2,00,000.00

General Manager

III. SEO Tk. 1,50,000.00

IV. Executive Officer Tk. 1,00,000.00

V. Senior Officer & Officer 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  Hamdan Exchange Canada

• Zenj Exchange Co. W.L.L.  Al Rajhi Commercial Foreign  Nationa Finance

Exchange Co, Exchange
Bahrain  Al Amoudi Exchange Company

• National Commercial Bank

34
 Stress Testing of Sonali Bank Limited

• Al Mulla International Exchange • Eastern union remittance &

Co.W.L.L. exchange ltd., U.K.  British

• Al Muzaini Exchange Co. K.S.C.C.  Arab Commercial Bank  Habib

Al Moosa Exchange Company exchange co. L.L.C.

W.L.L. • Mashreq Bank Psc

• Al Rostamani International
• Bahrain Exchange Company W.L.L
Exchange Company  U.A.E.
• City international exchange co.
Exchange centre L.L.C.
W.L.L.
• Wall street exchange centre L.L.C.
• Dollarco Exchange co. Ltd.
• Ridha Al Ansari Exchange
• Kuwait Bahrain International Ex.
Establishment
Co. W.L.L.
• Al Ahalia Money Exchange Bureau
• National money exchange co.
• Lari Exchange Establishment
W.L.L.
• Global Exchange Italia Srl, Italy, USA
• Oman exchange company
ltd., • Trans-fast remittance L.L.C., france
kuwait • Western Union
• U.A.E. Exchange centre W.L.L. • Dalil Exchange
• May Bank, Malaysia 26 IME (M) • NBL SDN Malaysia
SDN.BHD • Al-Rajhi Bank
• Bank Muscat S.A.O.G. • Arab National Bank
• Gulf overseas exchange co. L.L.C. • Arabian Exchange  Bank Al Bilad,
• National Bank Of Oman K.S.A.
• Oman International Exchange • Al. Jamil Exchange Co.  Daulat
L.L.C., oman
enterprise inc.
• Oman & Uae Exchange Centre & co. • Indian Bank, Singapore
L.L.C.
• Al Ansari Exchange
• Eastern Exchange Eastablishment  • Al falah exchange, U.A.E.  Al
Trust exchange company W.L.L.
Ghurair Exchange, Italy  Bank Al-
• Al Dar For Exchange Works, Qatar
Jazira ,K.S.A.
• Balaka Exchange Pte Ltd

35
 Stress Testing of Sonali Bank Limited

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

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

36
 Stress Testing of Sonali Bank Limited

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. Aims & Objectives:

2
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.

2.9.3 Functions of Islamic Banking:

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

1. Collection of Deposits

37
 Stress Testing of Sonali Bank Limited

2. Investment Assistance

2.9.3.. Deposit Collection Activities:

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

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.

38

2.9.3.1
.b.iv. Mudaraba Haj Savings A/C
:
(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. Stress Testing of Sonali Bank Limited

2.9.3.. Investment Activities:

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

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):

39
 Stress Testing of Sonali Bank Limited

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
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,

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.b
d

Figure 4: Banner for Islamic Banking of SBL

40
 Stress Testing of Sonali Bank Limited

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.b
d

Figure 4: Banner for Islamic Banking of SBL

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

41
 Stress Testing of Sonali Bank Limited

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

42
 Stress Testing of Sonali Bank Limited

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 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.

43
 Stress Testing of Sonali Bank Limited

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.

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.

44
 Stress Testing of Sonali Bank Limited

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.

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:

45
 Stress Testing of Sonali Bank Limited

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:-

 Increase in the NPLs

Credit  Shift in the NPLs
Risk  Fall in FSV
 Some Extreme Events

 BS Positions
Interest  DGAP
Rate Risk  MVE

Exchange
Rate Risk
Liquidity Equity
Risk Price Risk

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 analysis, considering any second round effects, and finally summarizing and
interpreting the results. We can see these steps as following figure:

46
 Stress Testing of Sonali Bank Limited

Investigatio Diagnostic
n s

Interpretio Analytics
n
Figure 6: Parts of Stress Testing

3.4. Credit Risk:

1Credit 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
47
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
 performing loans directly downgraded to bad/loss category having 100% provisioning
requirement.
Stress Testing of Sonali Bank Limited
 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.

 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

 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
‐adjusted impact of the additional required provision (if any) will be
collaterals and tax
calibrated in the CAR for the each scenario under all categories.

48
 Stress Testing of Sonali Bank Limited

 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
‐adjusted impact of the additional required provision (if any) will be
collaterals and tax
calibrated in the CAR for the each scenario under all categories.

bad/loss category having 100% provisioning requirement.

Figure 7: Credit Risk includes these parts of management

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

49
 Stress Testing of Sonali Bank Limited

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).

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

50
 Stress Testing of Sonali Bank Limited

liabilities should be taken along with their respective maturity or re-pricing period,
whichever is earlier.

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.

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:

51
 Stress Testing of Sonali Bank Limited

Weighted Average Duration of Assets (DA) = ∑

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 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

52
 Stress Testing of Sonali Bank Limited

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.

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.

53
 Stress Testing of Sonali Bank Limited

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.

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:

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 Stress Testing of Sonali Bank Limited

Projected capital Early remediation

ratios are a key framework is based
component of Regulatory on capital ratio
stress test results Capital thresholds

Enhanced
Stress
Prudential
Testing
Supervision

Figure 8: Relationship between Stress Test & Bank 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.

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.

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 Stress Testing of Sonali Bank Limited

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,
nonperforming 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.

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 Stress Testing of Sonali Bank Limited

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:

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 Stress Testing of Sonali Bank Limited

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:

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Stress Testing of Sonali Bank Limited

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 Stress Testing of Sonali Bank Limited

Repricing Yield to Market Value Janu-

Property and Assets Book Value Coupon Duration WAD WAy
Period Maturity 2015
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

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 Stress Testing of Sonali Bank Limited

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.

Repricing Yield to Market Value Janu-

Property and Labilities Book Value Coupon Duration WAD WAy
Period Maturity 2015

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 Stress Testing of Sonali Bank Limited

Now, return to the equations applied here:

Weighted Average Duration of Assets (DA) = ∑

= 1.3073

Weighted Average Duration of Liabilities (DL) =∑

= 0.2440

So, the most desired Duration GAP,

MVL
DGAP=DA− ×DL63
MVA

= 1.078080941
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.
Stress Testing of Sonali Bank Limited

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.

4.2

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:

T+T
CAR =
RWA

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

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 Stress Testing of Sonali Bank Limited

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:

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 Stress Testing of Sonali Bank Limited

4.4 Exchange Rate Shock

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 Stress Testing of Sonali Bank Limited

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

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

4.5 Credit Shock:

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

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 Stress Testing of Sonali Bank Limited

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:

= −

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

The impact on CAR is like below-

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 Stress Testing of Sonali Bank Limited

Figure 11: Credit Shock – increase in NPLs

4.5.2 Downward shift in NPLs categories:

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 Stress Testing of Sonali Bank Limited

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

Figure 12: Credit shock -downward shift of NPL categories

4.5.3 Fall in FSV of Mortgaged Collateral

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

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 Stress Testing of Sonali Bank Limited

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

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

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:

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 Stress Testing of Sonali Bank Limited

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

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

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

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 Stress Testing of Sonali Bank Limited

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

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-

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 Stress Testing of Sonali Bank Limited

Table 17: Equity price Risk – fall in Stock Prices

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 Stress Testing of Sonali Bank Limited

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.

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 Stress Testing of Sonali Bank Limited

5.1. Moderate Level Shocks:

2 envisages medium level of shocks and the level is defined in each risk factor separately.
It
The ‘Scenario
-2’, in every type of risk displays this level of shock.

5.1. Major Level Shocks:

2
It involves big shocks to all the risk factors and is also defined separately for each risk factor.
are tried to be expressed by the ‘Scenario
Major Level Shocks -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
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

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 Stress Testing of Sonali Bank Limited

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:

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 Stress Testing of Sonali Bank Limited

Parts of Cumulative Credit Minor Level Shock

1.23%
0.52%
2.65%

7.44%
Increase in NPLs
Downgrade of NPL Categories
Fall of FSV of Mortgage
A whole sector shifts into B/L
Top borrowers fail to repay
88.16%

Figure 19: Cumulative Credit Shock in Scenario-1

Parts of Cumulative Credit Moderate Shock

1.66%
0.93%
4.77%

13.38%
Increase in NPLs
Downgrade of NPL Categories
Fall of FSV of Mortgage
A whole sector shifts into B/L
Top borrowers fail to repay
79.26%

Figure 20: Cumulative Credit Shock in Scenario-2

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 Stress Testing of Sonali Bank Limited

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

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 Stress Testing of Sonali Bank Limited

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
scenario3, which means the major level of shock is really far below from the current CAR.
Here is the graphical presentation:

Cumulative Shock of SBL

15.0%
0 12.2%
4
10.0%
0

5.0 % Curren
2.5 %
CAR (%)

0 tTotal Scenario-1
2
0.0 % Total Scenario-2
0 -0.63
% Total Scenario-3

-5.00
%

-6.57
%
-10.00
%
Cumulative total shock scenarios

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.

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 Stress Testing of Sonali Bank Limited

Parts of Total Minor Level Shock

1.21% 2.92%

25.18% Credit Shock

Interest Rate Shock
FX rate Shock
70.69%
Equity Price Shock

Figure 23: Parts of Cumulative Total Scenario-1

Parts of Total Moderate Level Shock

1.77% 4.25%

Credit Shock
57.29% Interest Rate Shock
36.70%
FX rate Shock
Equity Price Shock

Figure 24: Parts of Cumulative Total Scenario-2

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 Stress Testing of Sonali Bank Limited

Parts of Total Major Level Shock

6.02%
1.88%

Credit Shock
53.10
%
Interest Rate Shock
39.01
% FX rate Shock
Equity Price Shock

Figure 25: Parts of Cumulative Total Scenario-3

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.

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:

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 Stress Testing of Sonali Bank Limited

Table 20: Liquidity Shock – fall in Liquid Liabilities

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

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 Stress Testing of Sonali Bank Limited

So, 40.00% NPL causes the total capital become zero.

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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

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 Stress Testing of Sonali Bank Limited

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

6.2 Recommendations

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 Stress Testing of Sonali Bank Limited

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

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

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 Stress Testing of Sonali Bank Limited

 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.

6.2.4 Some Tips for Regular Stress Testing of Banks:

The stress‐testing framework involves the scope of the risks covered and the

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 Stress Testing of Sonali Bank Limited

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.

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

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 Stress Testing of Sonali Bank Limited

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.

Annex-I
In the FS of SBL, the maturity of the deposits could be found as this table-

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 Stress Testing of Sonali Bank Limited

Annex-II
Interest Rate Shock
Factors for the calculation of interest rate risk scenarios:

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Annex-III

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 Stress Testing of Sonali Bank Limited

Annex-IV
Credit Risk – increase in NPLs Shock
Total NPLs ৳ 86,43,66,40,000.00

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Stress Testing of Sonali Bank Limited

Tax (N/A) 0.00%

RC ৳ 49,58,58,70,428.00
RWA ৳ 4,05,26,43,00,000.00
CAR 12.24%

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The Scenario Calculations are following:

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Stress Testing of Sonali Bank Limited
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%
The Scenario Calculations are following:
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 Regulatory Capital ৳ 47,16,00,55,024.81
Revised RWA ৳ 4,02,83,84,84,596.81
Revised CAR (%) 11.71%
Fall in CAR (% points) 0.53%

Scenario-1 (20% 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 ৳ 4,85,16,30,806.37 20%
Tax adjusted provision (N/A) ৳ 4,85,16,30,806.37 0%
Revised Regulatory Capital ৳ 44,73,42,39,621.63
Revised RWA ৳ 4,00,41,26,69,193.63
Revised CAR (%) 11.17%
Fall in CAR (% points) 1.06%

Scenario-1 (40% 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 ৳ 9,70,32,61,612.74 40%
Tax adjusted provision (N/A) ৳ 9,70,32,61,612.74 0%
Revised Regulatory Capital ৳ 39,88,26,08,815.26
Revised RWA ৳ 3,95,56,10,38,387.26
 Stress Testing of Sonali Bank Limited
Revised CAR (%) 10.08%
Fall in CAR (% points) 2.15%

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

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Annex-VIII
Credit Shock – Increase in NPLs’ due to Top 8 large loan borrowers’ failure

Here are the large 8 borrowers of SBL:

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Total liquid liability = Repay (Within a month + Within 3 months + Within 12 month)

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 Stress Testing of Sonali Bank Limited

So, those assets and liabilities are taken which have highest maturity of 12 months. The detailed calculation is given here:
 Stress Testing of Sonali Bank Limited

Reference & Bibliography

Bangladesh Bank. (2013-2014). Annual Report. Dhaka: Bangladesh Bank.

Bangladesh Bank. (2015). Government Borrowing from Domestic Sources during

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