Bangladesh Bank Off-site Supervision Review

Off-site Supervision Practices of Bangladesh Bank: A Comprehensive Review 2015
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1. Introduction:
This report is based on the Off-site supervision practice under Department of Off-site
supervision of Bangladesh Bank.I have given the heighest focous on CAMELS rating. The
standerd and Calculation process has been included in my report based on the available
information given by the employees of DOS. My report has been divided in different chapters
and under these chapter i have described the sections of DOS ,CAMELS rating, Reporting
process, limitations, findings and recommandations. Bangladesh Bank runs supervisory activities
in order to maintain the efficiency, solvency and overall stability in the financial Sector. It aims
to develop the sector to serve and protect the interests of the depositors. Bangladesh Bank has
given the responsibility to regulate and supervise the banks operating in Bangladesh under the
article7A (f) of Bangladesh Bank Order 1972 and section 44 of Bank Companies Act, 1991.The
primary objectives of the bank supervision are to ensure the safety, stability and discipline of the
banking sector and banks compliance with the banking rules and regulations. Bangladesh Bank
identifies the weakness and takes the necessary measures for strengthening the financial condi-
tion of the banks. Supervision activities are of two types; one is On-site supervision and another
is Off-site supervision. There are seven departments of Bangladesh bank are presently perform-
ing On-site inspection. These departments are namely; Department of Banking Inspection 1, De-
partment of Banking Inspection 2, Department of Banking Inspection 3, Department of Banking
Inspection 4, Department of Foreign Exchange Inspection, Financial Integrity and Customer
Services Department, Bangladesh Financial Intelligence Unit. Three types of inspections are
mainly done by these departments. These are comprehensive inspection, risk based inspection or
system check inspection, Special inspection. On the other hand, Department of Off-site supervi-
sion (DOS) and Foreign Exchange Operation Department run off-site supervision activities. DOS
is responsible for continuous monitoring and assessment of key performance indicators of banks
on the basis of various returns and statements. DOS perform its activities through CAMELS rat-
ing, liquidity and capital adequacy monitoring. DOS plays an important role in implementing the
policy guidelines through continuous guidance. In term of any unhealthy condition of any partic-
ular bank DOS take the bank under its close supervision and extra monitoring to get back a
sound and stable condition of that bank. Here Bangladesh Bank try to protect the interest of the
depositors. However through the whole report, off-site suppervision system has been described
and the recent initiatives taken by DOS with its effect on the total banking system have also been
described in my report. In the last part of the report i have included a detail of CAMELS rating.
Here, the weight of the components of the CAMELS rating has been given and process of
calculation has aslo been added. I hope this report will give you a details scenario of Off-site
Supervision Practice by Bangladesh Bank.

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1.1 Objective of the report
There are two types of objectives of this report. One is general objective and another is specific
objective.
1.1.1 General objective:
The main objective is to collect information on how the central bank supervises the information
provided by the banks and financial institutions & also promote and maintain soundness, solven-
cy, and systematic stability of the financial sector and supervise all the activities of them
1.1.2 Specific objective:
I have defined some specific objectives in my research.
To know the overall function of the deparment of Off-site Supervision
To know the Supervision system and Supervision tools of DOS
To know the procedure of CAMELS Rating
To know the reporting procedure of CAMELS
To find the limitations of CAMELS and DOS
1.2 Scope of the report
This report is all about the off-site supervision by bangladesh bank .I have put most emphasis on
the CAMELS rating. So, anyone can get a through knowledge about the CAMELS rating
process.we know CAMELS rating is a complecated calculation process but i have tried to show a
easy calculation process with a snap view. i think it will be beneficial to the general people as
well as the bank officials to understand CAMELS rating process.
1.3 Methodology
Research Type:
This is a descriptive research which is relevant to an inquisitive study as it require huge observa-
tion and analysis on the process of supervision by the central bank.
Types of data:
For this report, data will be collected from the each section of the off-site supervision department
as I will rotate all the 9 sections of the off-site supervision department (DOS).

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Primary Sources:
a) Discussion with officials of the central bank.
b) Face to face conversation with the section’s head.
c) Close observation.
Secondary Sources:
a) Statements provided by the 56 banks to the central bank.
b) CAMELS’ standard.
c) Guidlines and circulars
d) Others tools used by the Bangladesh Bank.
e) Bangladesh Bank’s website
1.4 Limitations of the report
Bangladesh bank does not discloseall the information regarding the rating system and given
weight on the components of the CAMELS. So, it may not be possible for me to discolse the
exact rating and weight. There is some information which is very confidential. So, some data
could not been collected for confidentiality or secrecy of management. It was difficult to gather
accurate information required for the convenience of this report. Because of time shortage, many
related area could not be focused in depth.

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2. Literature review:
Banks serve as backbone to the financial sector, which facilitate the proper utilization of finan-
cial resources of a country. The banking sector is increasingly growing and it has witnessed a
huge flow of investment. In addition to simply being involved in the financial intermediation ac-
tivities, banks are operating in a rapidly innovating industry that urges them to create more spe-
cialized financial services to better satisfy the changing needs of their customers. It therefore in-
creasingly urges the need of more frequent banking examination.
Some works was done on CAMELS rating nationally and internationally .But all these works do
not show complete off-site supervision practices followed by Bangladesh Bank. So, it can be said
no one has done any work on the whole Off-site supervision system in our country. For that rea-
son I got inspired to work on the topic “Off-site Supervision Practices of Bangladesh Bank: A
Comprehensive Review”.
Here I have tried to give a details overview of the Off-site supervision Department of Bangla-
desh Bank. I gave my height focus on the CAMELS rating practice and reporting procedure done
by Department of Off-site Supervision. Some related Research stimulated me to work on this
topic. I can mention some of the project prepared on off-site supervision and CAMELS rating.
Keeley (1998) this study uses the capital adequacy component of the CAMEL rating system to
assess whether regulators in the 1980s influenced inadequately capitalized banks to improve
their capital. Using a measure of regulatory pressure that is based on publicly available infor-
mation, he found that inadequately capitalized banks responded to regulators' demands for great-
er capital. This conclusion is consistent with that reached by Keeley (1988)
Gilbert (1991) a measure of regulatory pressure based on confidential capital adequacy ratings
reveals that capital regulation at national banks was less effective than at state-chartered banks.
This result strengthens a conclusion reached by Gilbert (1991).
Rahul Kanti Datta (2012) did his internship on the topic of “CAMELS Rating System Analysis
of Bangladesh Bank in Accordance with BRAC Bank Limited”. He found a great impact of the
CAMELS rating on the performance of the bank. He showed the CAMELS rating procedure de-
pending on the BRAC Bank Ltd.
Md. Anwarul Kabir (2012) did a project on the topic of “Performance Analysis through CAM-
EL Rating: A Comparative Study of Selected Private Commercial Banks in Bangladesh”. I can
mention some excellent work on CAMELS rating that helped me a lot to complete my report.
Hirtle and Lopez (1998) did a report on CAMELS rating. Despite the continuous use of finan-
cial ratios analysis on banks performance evaluation by banks' regulators, opposition to it skill
thrive with opponents coming up with new tools capable of flagging the over-all performance (

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efficiency) of a bank. This research paper was carried out; to find the adequacy of CAMEL in
capturing the overall performance of a bank; to find the relative weights of importance in all the
factors in CAMEL; and lastly to inform on the best ratios to always adopt by banks regulators in
evaluating banks' efficiency. In addition, the best ratios in each of the factors in CAMEL were
identified. For example, the best ratio for Capital Adequacy was found to be the ratio of total
shareholders' fund to total risk weighted assets. The paper concluded that no one factor in CAM-
EL suffices to depict the overall performance of a bank. Among other recommendations, banks'
regulators are called upon to revert to the best identified ratios in CAMEL when evaluating
banks performance
Barker and Holdsworth (1993) did research at international level, several academic studies ex-
amined whether and to what extent private supervisory information is useful in supervisory mon-
itoring of banks. With respect to predicting banks failure, Barker and Holdsworth find evidence
that CAMEL ratings are useful, even after controlling a wide range of publicly available infor-
mation about the condition and performance of banks.
Cole, R.A. and Gunther, J.W. (1998) Cole and Gunther examined the question about CAMELS
rating usefulness and found that CAMEL ratings contain useful information and helps banking
organization to be more careful to its operations.
Hirtle, B.J. and Lopez, J.A (1999) Hirtle and Lopez also inquired into the worth of CAMEL
ratings in assessing banks current condition. While comparing to past CAMEL ratings to current
CAMEL ratings, they found that the private supervisory information contained in the past
CAMEL ratings provides further insight into bank current conditions, as summarized by current
CAMEL ratings and that for the period from 1989 to 1995, the private supervisory information
gathered during the last on-site exam remains useful with respect to current condition of a bank
for 6 to 12 quarters.
Sahajwala, R and P. V. D. Bergh (2000) found overall problems in the banking sector can be
identified through macro banking data. However, such aggregated data may tend to conceal seri-
ous problems within individual banking institutions. As the stability of the banking system also
depends on the safety and soundness of individual banks, it is useful to have specific systems in
place to effectively monitor the risk profile and financial condition of each institution.
Eric Rosengren, Joe Peek and Geoffrey Tootell (1999) his paper finds that confidential bank
supervisory information could help the Board staff more accurately forecast important macroe-
conomic variables and is used by FOMC members to guide monetary policy. These findings
suggest that the complement between supervisory responsibilities and monetary policy should be
an important consideration when evaluating the structure of the central bank.

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Fernando L. Delgado and Mynor Meza (2011) Improvements in financial regulation and su-
pervision in the Central American region (CAPDR) have strengthened financial stability. Pru-
dential instruments with potential macroeconomic effects have been introduced. Nonetheless,
compared with the larger Latin American and selected industrial countries, there is still important
scope for CAPDR to enhance financial supervision and regulation. Based on two surveys, and
the analysis of the Basel Core Principles, the paper determines that some weaknesses exist in
risk-based supervision, and that macro prudential measures have scarcely been deployed.
Uyen Dang (2011) Banking supervision has been increasingly concerned due to significant loan
losses and bank failures from the 1980s till now. In the light of the banking crisis in recent years
worldwide, CAMEL is a useful tool to examine the safety and soundness of banks, and help mit-
igate the potential risks which may lead to bank failures. The research has been conducted as a
case study of American International Assurance Vietnam (AIA). It aims to determine whether
the CAMEL framework plays a crucial role in banking supervision. Furthermore, the purpose is
to identify the benefits as well as drawbacks which the CAMEL system brings to AIA. The re-
search problem was explored by quantitatively analyzing a bank’s overall performance.
When I was searching for the research paper for literature review, I could not find a single report
or any research paper on the overall Off-site supervisory activities performed by Bangladesh
Bank. So I inspired to make the report on Off-site supervision Practices of Bangladesh Bank: A
Comprehensive Review.

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3. Overview of the DOS (Department of Off-site Supervision):
In Bangladesh, Bangladesh Bank started with On-site supervision Department. But it was not
absolute for proper supervision. For that reasons it was necessary to launch the Department of
Off-site supervision. DOS started its operation from 1993. An essential part of any supervisory
system is the evaluation of a bank's policies, practices, the quality of assets, adequacy of loan
loss provision & reserve and procedures related to the granting of loans and making of invest-
ments and the ongoing management of the loan and investment portfolios. For effective supervi-
sion, Central Bank supervises scheduled banks by conducting regular contact with management
of the banks and collecting, reviewing, analyzing related documents, information and statistical
returns provided by banks on a sole and consolidated basis. Supervision is especially done for
proper controlling over the scheduled banks, to protect deposits of depositors and ranking banks
by calculating CAMELS rating for consideration of general people which provide information to
general people where to invest. In Bangladesh, Bangladesh Bank is responsible for supervision
system. It supervises scheduled banks with a number of experts. They supervise banks on regular
basis. Especially DOS supervise banks from the statements submitted by banks twice a day
whereas DBI supervise from primary data. DBI supervise by going the selected banks with a
group of expert and examine statements of the banks. Both of the department’s take action
against banks if the statements provide wrong data/ information or even irrelevant information.
Every country of the world follows this system of supervision under Bank Company Act-1991.
The functions are performed through eight sections and one general section under Department of
Off-site supervision. The names of the sections are as follows:
a) Off-site Section
b) Capital Adequacy Monitoring Section
c) Statutory Reserve Monitoring Section
d) Large Loan Section
e) Risk Management Monitoring Section
f) Special Studies Section
g) Statement Section
h) Bank Supervision Specialist(1 to 6)
i) General Section

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3.1. Objectives of DOS:
To understand the safety, soundness and stability of the banking system by overseeing individual
banks on the basis of various returns/financial statements and making sure banking discipline as
well as depositor's interest and confidence in the banking system.
3.2. Functions of DOS1:
• Performance analysis and monitoring of the scheduled banks on the basis of CAMELS.
Banks having weaknesses in any areas of operation are brought under Early Warning cat-
egory or Problem Bank category and monitored very closely to improve their perfor-
mance.
• Monitoring maintenance of Statutory Liquidity Requirements (CRR, SLR) of scheduled
banks. Imposing and realizing penal interest and penalty for the shortfall of CRR and
SLR.
• Assessment and monitoring of Capital Adequacy of banks. Review and monitoring of
loans/deposits of Government and state owned Enterprises with scheduled banks.
• Monitoring the overall credit, deposit, investment and liquidity position of the banking
system
• Review of the minutes of the Board of Directors, Executive Committee, Board Audit
Committee meetings and the audited Financial Statements of scheduled banks and advis-
ing the banks to take necessary remedial measures their against.
• Provide deposit insurance coverage and safety nets to protect depositor's interest and thus
enhance market discipline and systemic stability.
• Review of the Large Loan portfolio of the scheduled banks.
• Maintaining asset/liability of the liquidated banks and dealing with the court cases relat-
ing to the properties of liquidated banks, as official liquidator.
1
(Department of Off-site Supervision)
Department of Off-site Supervision. (n.d.).Retrieved February 10, 2015 from Bangladesh Bank:
http://www.bangladesh-bank.org/

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3.3.Sections of DOS with the process of implementation of the Off-site Supervision Tools:
3.3.1. Off-site Section:
Off-site section is the most important section in the intire DOS.This section basically deals with
the CAMELS rating of the scheduled banks .This section genarate some half-yearly, quarterly
reports based on the information given by the scheduled banks to reflect the condition of the
banking industry.After analysis of the report DOS take the necessary punitive actions to get rid
of the situation.
1. Half-yearly reports:
• report on CAMELS rating
• report on profitability statement
2. Quarterly reports: Report on Top 20 defaulters on indevidual bank’s
3. Time to time submission of the data or information to the BRPD and IMF as
demanded
This section does the major functions of the entire department. This section performs the basic
off-site surveillance over the scheduled banks on the basis of the following resources.
• Statement processed by respective sections of this department and collecting necessary
information viz. capital, deposit, credit, liquidity etc. of the schedule banks
• Annual reports, P&L accounts, balance sheets, comparative financial statements etc. from
scheduled banks
• Statement as per format from scheduled banks
• On-site inspection reports by the ‘Department of Banking Inspection’
• Making on-site special inspection if required and reports thereof
Steps involved in the overall process are as follow:
• Get all the returns and gather data from scheduled banks Input other financial information
from respective statement of BB
• Feed data into a formatted work sheet. Calculation various Financial Ratios
• Organize the ratios to feed the CAMELS matrix to ascertain the individual component
wise strength
• Examine ratios with standard or testing ratios
• Intra/Inter Analysis of ratios
• Compare with adjusted means ranking and get composite CAMELS rating
• Prepare a trend analysis for minimum five years
• Make the summary position of the bank

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To calculate CAMELS rating the followings are followed: Under the CAMELS rating system
banks are assigend two sets of rating
• Performance rating
• An overall composite rating
Performence rating :Performance rating compise six individual rating that address each of the
CAMELS components.
An overall composite rating: An overall composite rating is a single rating that is based on a
comprehensive assesment of the overall condition of the bank.
Both ratings are expressed by using a numerical scale of 1 to 5 in ascending order of supervisory
concern.So, 1 represents the best rating while 5 indicates the worst rating.
preserving the integrity of the rating ,it is very essential to remain the rating confidential.this
rating is known to the Bank in question and to BB supervisory staff.The rating must never be
used in advertising or other promotional activities of the bank and must never be realesed by the
bank to the third parties to get some favour .Bangladesh bank’s staffs must aslo ensure cation in
term of communication concerning the rating to ensure the confidentiality.failure to maintain
confidentiality can lead to competive situation where BB can push pressure and accountability.
The components of CAMELS:
(C)apital adequacy
(A)sset quality
(M)anagement
(E)arnings
(L)iquidity
(S)ensitivity to market risk
Measurement scale of CAMELS Rating:2To evaluate the banks a numerical scale of “1 to 5” is
used. Hare rating ‘1’ means best rating that showes the finnancial soundness and stability in all
respect.On the othe hand, rating ‘5’ means the worst rating showes the worst financial condition
of a perticular bank.
2
(Trautmann, 2006)
Trautmann, P. Y. (2006). CAMELS RATINGS USAID-Funded Economic Governance II Project.IRAQ: BearingPoint.

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1 Strong
2 Satisfactory
3 Fair
4 Marginal
5 Unsatisfactory
Ratings:
1) If a bank is rated 1, it is considered sound in all respect ,resistent to outside shockes
and Bangladesh Bank need not to take any supervisory steps.
2) If a bank is rated 2, it is considered sound but may demonstrate modest and minor
weakness which are easily correctable and Bangladesh Bank need to take normal
supervisory concerne.
3) If a bnak is rated 3, it is considered vulnerable from financial, operational and
compliance perspect. it is required more than normal supervision.
4) If a bnak is rated 4, it is considered having serious problem with financial weekness
,solvency problem. it is required close supervision actions.this banks are treated as
problem vanks.
5) If a bnak is rated 5, it shows the probality of failure, severe weekness and require
assistance or even takenover by Regulatory Authority.
Snap view on Calculation:
Two parts:
Parts Weight
Ratios 70%
Questionnaires 30%
A. Ratios[Appendix-C]:(46 ratios are considered in total under the 6 components)
Components Ratios
Capital Adequacy 9 Ratios
Assets 8 Ratios
Management Questionnaire
Earnings 14 Ratios
Liquidity 12 Ratios
Sensitivity to market risk 3 Ratios

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B. Questionnaire[Appendix-B]:(different questions are set in different componentes but
management is mainly qestion based ).
3.3.2. Capital Adequacy Monitoring Section:
Guidelines on Risk Based Capital Adequacy (RBCA) for Banks’ (Revised regulatory capital
framework in line with Basel II) have been introduced from January 01, 2009 parallel to existing
BRPD Circular No. 10, dated November 25, 2002.At the end of parallel run period, Basel II re-
gime has been started and the guidelines on RBCA has come fully into force from January 01,
2010 with its subsequent supplements/revisions. Instructions regarding Minimum Capital Re-
quirement (MCR), Adequate Capital, and Disclosure requirement as stated in these guidelines
have to be followed by all scheduled banks for the purpose of statutory compliance.
Basel II is concentrated on the followings:
• Introduction and constituents of Capital,
• Credit Risk,
• Market Risk,
• Operational Risk,
• Supervisory Review Process,
• Supervisory Review Evaluation Process,
• Market Discipline,
• Reporting Formats
Some activities under this section are as follows:
Three pillars:
1. Marginal Capital Requirement
2. Supervisory Review
3. Market Discloser/discipline
Three tiers:
• Tier 1 capital
• Tier 2 capital
• Tier 3 capital

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Pillar one: MCR (Marginal Capital Requirement):
Another name is CAR (Capital Adequacy Ratio).Currently we maintain CAR @10% or 400 cor-
er taka whichever is higher. CAR is supervised in a quarter bases.
MCR= (Total Eligible Capital/Total RWA)
Total Eligible Capital= (tier one+tier two+tier three) capital
RWA= (Credit risk+Market Risk+Operational risk) weighted asset
Tier one capital includes:
b) Non-repayable share premium account
c) Statutory reserve
d) General reserve
e) Retained earnings
f) Minority interest in subsidiaries
g) Non-cumulative irredeemable preference shares
h) Dividend equalization account
Tier two capital includes:
Tier 2 capital called ‘Supplementary Capital’ represents other elements which fall short of some
of the characteristics of the core capital but contribute to the overall strength of a bank and con-
sists of:
a) General provision
b) Revaluation reserves
• Revaluation reserve for fixed assets
• Revaluation reserve for securities
• Revaluation reserve for equity instrument
c) All other preference shares
d) Subordinated debt

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Tier three capital includes:
Tier 3 capital called ‘Additional Supplementary Capital’, consists of short-term subordinated
debt (original maturity less than or equal to five years but greater than or equal to two years)
would be solely for the purpose of meeting a proportion of the capital requirements for market
risk.
Pillar two (Supervisory Review):
The key principle of the supervisory review process (SRP) is that “banks have a process for as-
sessing overall capital adequacy in relation to their risk profile and a strategy for maintaining
their capital at an adequate level”. Banks should have an exclusive body (called SRP team)
where risk management unit is an integral part, and a process document (called Internal Capital
Adequacy Assessment Process-ICAAP) for assessing their overall risk profile, and a strategy for
maintaining adequate capital. Adequate capital means enough capital to compensate all the risks
in their business, and to develop and practice better risk management techniques in monitoring
and managing their risks.
Pillar three (Market discipline):
The purpose of Market discipline in the Revised Capital adequacy Framework is to complement
the minimum capital requirements and the supervisory review process. The aim of introducing
Market discipline in the revised framework is to establish more transparent and more disciplined
financial market so that stakeholders can assess the position of a bank regarding holding of assets
and to identify the risks relating to the assets and capital adequacy to meet probable loss of as-
sets. For the said purpose, banks will develop a set of disclosure containing the key pieces of in-
formation on the assets, risk exposures, risk assessment processes, and hence the capital adequa-
cy to meet the risks.
Banks should have a formal disclosure framework approved by the Board of Directors/Chief Ex-
ecutive Officer. The process of their disclosures will include validation and frequency.
RWA (Risk Weighted Asset):
To calculate total Credit risk weighted asset, standardised approach is used in Bangladesh. On
the other hand to calculate market risk we consider several risk factors and in term of operational
risk they follow Basic Indicator Approach.
Credit Risk:
Credit risk is the potential that a bank borrower or counterparty fails to meet its obligation in ac-
cordance with agreed term.

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Market Risk:
Market risk is defined as the risk of losses in on and off-balance sheet positions arising from
movements in market prices. The market risk positions subject to this requirement are:
a) The risks pertaining to interest rate related instruments and equities in the trading
book; and
b) Foreign exchange risk and commodities risk throughout the bank (both in the banking
and in the trading book
For the purpose of capital charge for market risk will include:
1. Equity position and commodity position
2. Overall foreign exchange exposure
3. Trading positions in derivatives and
4. Derivatives for the purpose of hedging trading book exposures
Basel III:3
To strengthen global capital and liquidity rules with the goal of promoting a more resilient bank-
ing sector, the Basel Committee on Banking Supervision (BCBS) issued “Basel III: A global
regulatory framework for more resilient banks and banking systems” in December 2010. The ob-
jective of the reforms was to improve the banking sector’s ability to absorb shocks arising from
financial and economic stress, whatever the source, thus reducing the risk of spillover from the
financial sector to the real economy.
Components of Capital: For the purpose of calculating capital under capital adequacy frame-
work, the capital of banks shall be classified into two tiers. The total regulatory capital will con-
sist of sum of the following categories:
1) Tier 1 Capital (going-concern capital)
i. Common Equity Tier 1
ii. Additional Tier 1
2) Tier 2 Capital (gone-concern capital)
3
(Banking Regulation & Policy Department ,Bangladesh Bank, December 21, 2014)
Banking Regulation & Policy Department ,Bangladesh Bank. (December 21, 2014). Implementation of Basel III in
Bangladesh (BRPD Circular No- 18). Dhaka: Bangladesh Bank.

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Differences between Basel II and Basel III (Capital):
These instructions will be adopted in a phased manner starting from the January 2015, with full
implementation of capital ratios from the beginning of 2019, as per Table 2below. All banks will
be required to maintain the following ratios on an ongoing basis:
1. Common Equity Tier 1 of at least 4.5% of the total RWA.
2. Tier-1 capital will be at least 6.0% of the total RWA.
3. Minimum CRAR of 10% of the total RWA.
4. Additional Tier 1 capital can be admitted maximum up to 1.5% of the total RWA or
33.33% ofCET1, whichever is higher.
5. Tier 2 capital can be admitted maximum up to 4.0% of the total RWA or 88.89% of
CET1,whichever is higher
6. In addition to minimum CRAR, Capital Conservation Buffer (CCB) of 2.5% of the
total RWA is being introduced which will be maintained in the form of CET1.
3.3.3. Statutory Reserve Monitoring Section:
The main objective of the section is to work on the reserve rate of the banks. This section has
introduced all the guidelines and has set the rules for maintaining the Cash Reserve Ratio (CRR)
and Statutory Liquidity Ratio (SLR). The section checks whether all the scheduled banks are
maintaining the balance properly with Bangladesh Bank or not. If it finds the violation in main-
taining the balance, it charges the penalties for the scheduled banks. Other activities of this sec-
tion can be formulated as maintaining the Cash Reserve Ratio and what will be the components
of the cash reserve, the components of Statutory Liquidity Ratio and also provides the guidelines
for the use of the foreign currency. This section also made the submission of reports regarding
the maintenance of CRR and SLR mandatory for the scheduled banks.
The Paid up capital and Statutory Reserve of all Bank Companies in Bangladesh has been raised
at the minimum ceiling of taka 200.00 cores by amending Article 13 of Bank Company Act,
1991 vide Bank Company (Amendment) Ordinance 2007 on October 08, 2007. In view of the
aforesaid amendment of the Act, banks having shortfall of paid up capital and Statutory Reserve
will follow the following instructions to meet the shortfall:
1. At least 50% of shortfall of required capital must be fulfilled within June 2008;
2. The residual portion of the required capital must be fulfilled within Jun 2009;
3. To raise minimum required capital banks may raise the reserve by keeping profit after
tax, by issuing Right Shares or IPO, if applicable;

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4. Feasibility of merging with other banks and financial institutions may be considered to
ensure the fulfillment of required capital and reserve within the given time limit;
5. Any bank having shortfall of required capital and reserve will not pay or declare cash
dividend;
6. Foreign bank will have to meet the capital shortfall by not repatriating the profit or by
bringing in additional capital from abroad within the said time limit;
7. All Scheduled Banks will take necessary measures to amend their Memorandum and
Articles of Association in conformity with the amendment of the Act.
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR):
All scheduled banks in Bangladesh have to maintain Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR) in Compliance with the instructions given in clause (1) of Article 36 of
Bangladesh Bank Order, 1972 (as amended up to 2003) and clause (1) of section 33.
A. Cash Reserve Ratio (CRR):
Every scheduled bank has to maintain a balance in cash with BB the amount of which shall not
be less than such portion of its total demand and time liabilities as prescribed by BB from time to
time, by notification in the official Gazette. BB may also prescribe the procedure of maintenance
of cash reserve pursuant to its monetary policy objectives. At present, the required CRR is 6% on
bi-weekly average basis of the average total demand and time liabilities (ATDTL) with a provi-
sion of minimum 5.5% on daily basis of the same ATDTL. Banks are advised to follow the cir-
cular issued by Monetary Policy Department of BB in this regard.
Components of Cash Reserve:
At present, banks are allowed to maintain cash reserve with local currency (Taka) only. The day
end balances of the Taka current accounts maintained with different offices of BB will be aggre-
gated to compute the maintained cash reserve of the day. The balance so maintained shall be un-
encumbered in all aspect. The encumbered (lien against discounting facility, etc. and capital lien
in case of foreign banks) portion of the balance will be deducted while computing both the main-
tained amount and excess of cash reserve.
B. Statutory Liquidity Ratio (SLR):
Every scheduled bank has to maintain assets in cash or gold or in the form of un-encumbered
approved securities the market value of which shall not be less than such portion of its total de-
mand and time liabilities as prescribed by BB from time to time. BB may also prescribe the pro-
cedure of determination of assets and liabilities and percentages of maintainable assets in differ-

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ent classes. At present, the required SLR is 13% daily for conventional banks and 5.5% daily for
Islamic Shari'ah based banks and Islamic Shari'ah based banking of conventional banks of their
average total demand and time liabilities. Banks are advised to follow the circular issued by
Monetary Policy Department of BB from time to time in this regard.
(I) Components eligible for calculation of Statutory Liquidity Reserve: The eligible compo-
nents for maintaining Statutory Liquidity Reserve are cash in tills (both local and foreign
currency), gold, daily excess reserve (excess of Cash Reserve) maintained with BB, bal-
ance maintained with the agent bank of BB and un-encumbered approved securities as
defined in section 5 clause, credit balance in Foreign Currency Clearing Account main-
tained with BB. Daily excess of Cash Reserve (if any) will be calculated using the fol-
lowing formula: Daily excess of Cash Reserve = (Day-end balance of un-encumbered
cash maintained in Taka current accounts with BB – Required cash reserve on Bi-weekly
average basis).
(II) Guidelines for use of Foreign Currency from Foreign Currency Clearing Account for
SLR purpose:
Banks may use foreign currency from Foreign Currency Clearing Account maintained
with BB for SLR purpose as long as there is credit balance in the account. However, no
interest will be paid on the used portion of foreign currency. For-ex Reserve and Treasury
Management Department (FRTMD) of BB will credit interest on the balance held in the
account as usual. After getting the certification from Department of Off-site supervision
(DOS) regarding the actual amount of foreign currency used for SLR purpose, FRTMD
will adjust (if required) the interest amount. Banks should take utmost care while report-
ing the use of foreign currency in DB-5fc statement as any misreporting regarding the
amount of foreign currency used for SLR purpose will attract a penalty two times of the
amount of interest already credited for the misreported amount along with reversal of the
interest credited.
C. Computation of Demand and Time Liabilities:
For the purpose of maintenance of CRR and SLR, demand and time liabilities should include all
on-balance sheet liabilities excluding the items listed below:
Paid up capital and reserves;
• Loans taken from BB;
• Credit Balance in Profit and Loss account;
• Inter-bank items;

Page | 19
• Repo, Special Repo and any kind of Liquidity Support taken from BB. A list of compo-
nents, (which are not limited to) is attached with this circular (Annex-1). Banks are ad-
vised to approach BB for any doubt in reckoning a particular liability as demand or time
liability for CRR and SLR computation.
D. Classification and valuation of SLR eligible securities:
Banks shall follow the instructions of DOS Circular Letter No.05/2008, DOS Circular Letter
No.05/2009 and DOS Circular Letter No.21/2009 for classification and valuation of SLR eligible
securities held under different portfolios. The maximum limit of holding approved Securities un-
der Held to Maturity (HTM) portfolio were prescribed in DOS Circular Letter No.05/2008 and in
the subsequent amendments by DOS Circular Letter No.17/2011, and DOS Circular Letter-
No.24/2011. However, the maximum limit is re-set as under which will be effective from Febru-
ary 01, 2014: For all non-Primary dealer banks: 110% of SLR .For all Primary dealer banks:
125% of SLR.
3.3.4. Large Loan Section:
The term large loan refers to any exposure to a single person or counterparty or a group which is
equal to or greater than 10% of the capital. This section also sets a ceiling against Bank’s total
loans and Advances. All banks have to follow the given ceiling and have to issue loan. If not the
section let the higher authority knows and then takes initiative against that bank. The bank may
sanction large loan as per the following set against their respective classified loans.
Rate of Net classified loans Large loan portfolio ceiling against
Banks total loans & advances
Up to 5% 56%
More than 5% but up to 10% 52%
More than 20% 40%
This set up for issuing large loan let Bangladesh Bank to determine whether a bank is maintain-
ing the criteria or not properly before the issuance of large loan. The Large loan section of Off-
Site Supervision strictly follows the rules regarding the ceiling. If it gets violated this section
starts taking initiative against the bank.
The “L” form as a tool for monitoring the Large Loan
A). Loan overview of the bank:

Page | 20
The Large Loan Section introduces the ‘l’ form that best describes the overall scenario of the
bank regarding the loans and advances. a bank has to fill the ‘L’ form given in the BRPD circular
No. 02/2014. After filling this form the bank has to submit itt to the ‘large loan section’. The
section scrutinizes each and everything regarding the form and thus the information gets verified.
b). Individual large loans:
Here the form is provided to collect all the individual information. This form is really vital for a
bank and The Section of Large loan puts all their concerns regarding this statement. This form
includes the following details of a borrower,
• CIB subject code
• Tax Identification Number
• Business Address
• Nature of Ownership
• Types of organization
• Net worth of the borrower
• Purpose of loan
• CRG score
All of this information lets the Section know the details of the borrower and if the CIB subject
code or the TIN No. matches the section strictly starts taking initiative with the bank along with
the borrower.
c). under direct supervision:
Sometimes the Section with the help of DBI (Department of Banking Inspection) takes direct
action if it finds a single violation in the related field.
The provided sector wise Loan & Large Loan concentration:
The section has made a template where the sector wise concentration has been concluded. This
template is being made so that the purpose of large loan can remain and the overall development
of the entire sector can be flourished.
SL
No.
Sector Sub-sectors/ Industries
1 Agriculture i) Crops
ii) Forestry
iii) Livestock
iv) Fisheries
v) Others

Page | 21
2 Mining & Quar-
rying i) Lime Stone
ii) White Clay
3 Industry
i) Large
Scale
a) Food Manufacturing
b) Beverage
c) Tobacco
d) RMG & Textiles
e) Footwear, other wearing
apparel & made up Tex-
tiles
f) Wood cork & ailed prod-
ucts
g)
Furniture & Fixture
h) Leather, Rubber & Plastic
i)
Metallic & Non-metallic
j) Ship building
h) Pharmaceutical
b) Small Scale
4 Constructions
5 Power, Gas, Wa-
ter & Sanitary
Services
i) Power Generation
ii) Gas
iii) Water & Sanitary Services
6 Transport, Stor-
age & commu-
nication
i)
ii)
Land Transport
Air Transport
iii) Water Transport

Page | 22
iv) Communication
v) Storage
7 Trade Services
8 Housing Ser-
vices i) Urban
a) Commercial
b) Residential
ii) Rural
9 Public Admen.
Defense
This sector wise distribution always helps to develop a country and thus the Central Bank of
Bangladesh introduced it. A bank has to follow and keep in mind when and what to give priority
in. As a section of Off-site supervision the Large Loan Section verifies if the concentration is
given priority or not.
Basic Functions:
• This section ensures that the banks shall follow the instructions regarding Credit risk
management guidelines and Risk management guidelines.
• Collect and analyze the periodic statement of large loan from the banks which has to be
made under the given guidelines of the DOS (Department of Off-Site Supervision).
• Set the rules of collecting loan information on their borrowers from Credit Information
Bureau (CIB) before sanctioning, renewing or rescheduling.
• Verifies if the limit of the outstanding amount of exposure, both funded and non-funded,
to a single person/counterparty or a group has exceed to 35% or not as it cannot go up
35% of the capital at any point of time
• The section also checks if the aggregate outstanding principal amount of funded expo-
sures has exceeded the limit of 15% or not as it cannot exceed the limit of 15%.
The large loan section mainly works with the dealing of big loans. It sets the limit, it verifies the
statement and it takes necessary steps if it finds the violation. The importance of Large Loan
Section as a section of DOS is very vital. It also helps to develop the country’s overall economic
scenario by doing its regular activities properly.
3.3.5. Risk Management Monitoring Section:
Bangladesh Bank being the central bank always tries to govern scheduled banks in unblemished
way. Soon after the global recession in 2008, like other central banks all over the world Bangla-
desh Bank was also worried about the smooth going of Banking Industry. From that ground risk
management activities have emerged as one of the crucial steps for ensuring stability in banking
industry of Bangladesh.

Page | 23
At primary stage, banks were very much irresponsible to maintain rigorous risk management ini-
tiatives. On the other hand, Bangladesh Bank has tried to gradually ensure proper following of
rules and regulation of risk management by all the commercial banks. Risk management officer
was employed by scheduled commercial banks just to show Bangladesh bank authority as the
accountability to the law. As this was happening continuously, Bangladesh Bank strictly ordered
to assign risk management officer who will be at least equivalent to AGM in terms of designa-
tion and responsibility. Bangladesh Bank is striving hard for proper risk management in all
scheduled banks.
Definition:
Risk management is the deliberate acceptance of risk for profit-making. It requires informed de-
cisions on the tradeoff between risk and reward, and uses various financial and other tools to
maximize risk-adjusted returns within pre-established limits. Risk-taking is an inherent element
of the banking business and, indeed, profits are in part the reward for successful risk taking in
business. On the other hand, excessive and poorly managed risk can lead to losses and thus en-
danger the safety of a bank's depositor
Objectives of risk management:
The objective of risk management is to identify and analyze risks and manage their consequenc-
es. The banking sector has perhaps the most specific focus on the management of financial risks.
The guiding standard that is a key influence on central banks and banking regulations comes
from the Swiss-based Bank for International Settlements (BIS), and particularly it's BCBS. The
update of the standards, known as Basel II, has been, or is in the process of being, applied by
bank regulators across the world. While Basel II introduces a new and more complex method of
calculating regulatory capital requirements, its implementation requires that the bank adopt en-
hanced policies and procedures of risk management, in order to generate the necessary data for
the calculations. Risk management is a discipline at the core of every financial institution and
encompasses all the activities that affect its risk profile. It involves identification, measurement,
monitoring and controlling risks to ensure that
A. The individuals who take or manage risks clearly understand it;
B. The organization's risk exposure is within the limits established by the board;
C. Risk taking decisions are explicit and clear;
D. Risk taking decisions are in line with the business strategy and objectives set by the
board;
E. The expected payoffs compensate for the risks taken; and
F. Sufficient capital as a buffer is available to take risk.
BB puts forward this document for the purpose of providing guidelines to all banking companies
on risk management systems that are expected to be in place. The document sets out minimum
standards that shall be expected of the risk management framework at any banking company. For

Page | 24
the purpose of these guidelines, risk in a banking company refers to the possibility that the out-
come of an action or event could have an adverse impact on the bank's capital, earnings or its
viability. Such outcomes could either result in direct loss of earnings and erosion of capital or
may result in imposition of constraints on a bank's ability to meet its business objectives. These
constraints could hinder a bank's capability to conduct its business or to take advantage of oppor-
tunities that would enhance its business. As such, banks are expected to ensure that the risks an
institution is taking are warranted
Overview of risk:
Risks are considered warranted when they are understandable, measurable, controllable and
within a banking company's capacity to readily withstand adverse results. Sound risk manage-
ment systems enable managers of banking companies to take risks knowingly, reduce risks
where appropriate and strive to prepare for a future, which by its nature cannot be predicted with
absolute certainty. Risk management is a discipline at the core of every banking company and
encompasses all activities that affect its risk profile. Banks should attach considerable im-
portance to improve the ability to identify measure, monitor and control the overall risks as-
sumed. Risk management is very important especially when the banks are dealing with multiple
activities, involving huge funds having both local and international currency exposure.
Banking companies in Bangladesh, while conducting day-to-day operations, usually face the fol-
lowing major risks:
a) Credit risk (including concentration risk, country risk, transfer risk, and settlement risk)
b) Market risk (including interest rate risk in the banking book, foreign exchange risk, and equity
market risk)
c) Liquidity Risk
d) Operational Risk
e) Other risks (Compliance, strategic, reputation and money laundering risk)
Risk management unit:
BB should ensure that the banks are prudently managing their risks because risks can cause
Systemic threats and jeopardize the stability of the entire financial system. Therefore, BB has
imposed prudential requirements to assess banks' risk management capacity and has instructed
the banks to establish an independent Risk Management Unit (RMU). The RMU not only con-
ducts stress testing for examining the bank's capacity of handling future shocks, but also deals
with all potential risks that might occur in future.
Quarterly reporting:
• ICAAP: Internal capital adequacy assessment process (ICAAP), including an evaluation
of the bank's preferred risk profile, the actual risks identified, the means by which they

Page | 25
will be mitigated, and what risks will be covered by capital. The results of stress tests
should be covered in this report. The overall capital need shall also be reported.
• Key figures from the credit portfolio: An overview of credit-quality indicators focusing
on unauthorized excesses and overdue payments, the number of upgrades and down-
grades in the classification system, and trends in lending volumes.
Annual reporting:
• Risk policy: Review of the overall risk policy, including a consideration of
whether any revisions are required.
• ICAAP: An evaluation of the preferred risk profile, the overall capital need, and
the conclusions drawn from stress testing
• Risk management framework: A thorough analysis of the bank's risk profile,
including identification and description of risks and an update on the use of risk
management models
• Credit portfolio quality: An analysis of adversely-classified loans, provisions
and charge-offs by types of loan.
3.3.6. Special Studies Section:
This section of DOS focuses on the special facts regarding the report and queries of related per-
sons. The section include two types of work known as-
a) Scheduled work
b) Other works (Solving the sudden quires of asked parties)
Routine work: It includes preparing all the statements that is useful for DOS as well as for the
BB to take decision. Primarily this section deals with the loans and advances that have been pro-
vided.
Loans and Advance:
Under this, the central bank use to verify what amount has been issued or deposited to what sec-
tor. Generally loans and advances have to maintain criteria of issuance that Central Bank de-
cides. Here the Bank has to categories the loan whether it’s outstanding or classified. Generally
the Bank issues the loan to 7 parties. These are,
• Government Institutions
• Autonomous and Semi-Autonomous bodies
• Public Non-financial corporations
• Local authorities
• Non-Bank depository corporations-public other financial intermediaries
• Insurance Companies
• Pension Funds-public

Page | 26
As it has discussed earlier under this part the Central bank has to determine whether the provided
loan to this section is classified or Outstanding.
So, this one can be considered as the routine work of the Bangladesh Bank under the Special
Studies section of the section of DOS.
Statements:
Under routine work this section has to prepare some statements on monthly basis and sometimes
on quarter basis.
I) Monthly Statement:
Sometimes, DOS needs to verify some information regarding the loans and advance of the State
owned commercial banks as well as BASIC bank. What amount of loan has been borrowed from
the Central bank and how it gets used by those state owned commercial banks? Through this
Monthly statement this section knows can let the DOS know the real scenario of the State Owned
commercial banks regarding the borrowed loan.
ii) Quarterly Statement:
This section also needs to prepare some statement on quarter basis. Mainly this quarterly state-
ment includes all the information regarding the Loan disversement Sanction Limit, Recovery and
Overdue. Etc. the statement also include all the components of the macro level.
Special studies also analyzes with the data of the loans and advance for the last 5 years of the
commercial banks. Whether the private commercial bank is performing well in their field or not
also gets included in this statement.
Unscheduled work:
Unscheduled work can be termed as the works that this section does in sudden time. Generally y
this section has to do a lot with it because sometime some parties want some papers that best de-
scribe the picture of the overall banking sector of the country. The Special Studies section some-
times asked to perform some work for the following parties,
The Finance Ministry, CPD, BIBM, BPC, Parliamentary House, IMF, BIC, and If the Governor
wants some information to get the pictures that best Describes the Banking Industry.
Other Roles:
The Department of off- site supervision has to play a vital role to ensure the best monitor in the
field of Banking Industry. As a department of off -site supervision special studies play the role of
directing the commercial banks in the right way.
A). The Section let the central Bank direct the banks regarding their loans when the per-
centage of outstanding and classified loans exceeds 10 percent or above.

Page | 27
B) When the amount of outstanding and classified loan becomes 1core-10 core and 10
cores above CIB sends report to this section and this section starts taking initiative
against it by taking extra care of that commercial bank.
C) Apart from these, sometimes the Governor wants the list of top 100 borrowers and
sometimes top 50 defaulters so that the proper action can be taken before becoming a per-
forming loan to Non-Performing.
These are the tasks that this section has to do. Though the field is not that much broad but the
works cannot underestimated. It really holds a great importance as a section of DOS like the oth-
er sections do.
3.3.7. Statement Section:
Statement section,a prominent section under DOS,performs different activities.But they prepare
three major statement for continuous supervision purpose.these statements are as followes;
A. Weekly Statement
B. Unadjusted Intra-Branch Transaction Statement
C. Unadjusted Suspend Account Statement
This section does the following functions for inspection:
• Press briefing related to scheduled banks financial statements.
• Prepare statement of deposits of scheduled banks.
• Supervise & prepare compare statement of assets and liabilities.
• Prepare statement of cash in tiles of scheduled banks.
• Examine liquidity position of the banks.
• Supervise credit deposit ratio of the banks.
• Observe money supply.
• Prepare statement of deposit and advances of schedule banks.
A.Weekly Statement:
Main objective of the Statement is to check the Asset/Liability position of a bank.On the othe
way, they calculate Advance to Deposite ratio.
A/D ratio (Advance Ratio) is done on weekly basis. The formula is as provided-
ADR= (Advance excluding interbank-EDF-Refinance)/ (Deposit excluding inter bank+ Inter-
bank deposit surplus).
Acceptable range for convetional banks are 85%.on the other hand for Islamic banks this ratio
acceptable is 90%.
The formula for the loan to deposit ratio is exactly as its name implies, loans divided by deposits.

Page | 28
The loan to deposit ratio is used to calculate a lending institution's ability to cover withdrawals
made by its customers. A lending institution that accepts deposits must have a certain measure of
liquidity to maintain its normal daily operations. Loans given to its customers are mostly not
considered liquid meaning that they are investments over a longer period of time. Although a
bank will keep a certain level of mandatory reserves, they may also choose to keep a percentage
of their non-lending investing in short term securities to ensure that any monies needed can be
accessed in the short term.
Liquidity and the Loan to Deposit Ratio
Loans in the numerator of the formula are investments or assets for a bank. Deposits in the de-
nominator of the formula can be considered the same as debt as the individual depositors are es-
sentially granting monies to the bank with a return equal to the deposit rates and that can be
called upon at any time. In these respects, the loan to deposit ratio is similar to a liquidity ratio
and debt ratio.
Use of Loan to Deposit Ratio
The loan to deposit ratio can be used by investors and internally by the company to determine the
financial institutions short term viability. Although many depositors may not be as concerned
when a financial institution is insured, the loan to deposit ratio may be used to ensure that any
money needed is immediately available. Banking insurance companies may also find this ratio or
some variation of it of use when underwriting the policy to determine insurability.
Deposit of a bank is one of the key indicators of weekly statement
Demand deposit Time Deposit
B.Unadjusted Intra-Branch Transaction Statement:
Statement was first initiated by the circular of DOS-2(2007). This statement allows knowing the
amount of transaction of a bank that is unadjusted.Bank prepare a statement on how much the
amount of intra-branch transections
C.Unadjusted Suspend Account Statement
This monthly statement was first initiated by the circular of DOS 2(2007).Bank must have to
keep 100% provision if it is unadjusted for more than one year.
Deposit

Page | 29
3.3.8. Bank Supervision Specialist (1 to 6):
Here, there are six BSS (Bank Supervision Specialist) working under DOS. they are taking care
of the total banking industry. like BSS-1 is working with statewon banks and BSS-2 is working
with other 9 private commercial scheduled banks.Other BSSs are also working their operations
with other commercial scheduled banks.
BSS (Banking Supervision Specialist) -1
Banking supervision specialist previously known as Review section of Off-site supervision now
monitoring and supervising all the banks of our country. BSS 1 include all the state owned banks
and the specialized banks under two units. Unit 1 includes the state owned commercial banks and
unit 2 includes the specialized banks of the country.
Unit 1:
BSS has to introduce this unit 1 for many reasons. These reasons are weak governance and inter-
nal controls, financial irregularities, moral suasion, and social directed lending policies. These
facts were quite strong enough to increase the vulnerabilities and risk associated with the state
owned commercial banks (SCBs). Historically, SCBs non-performing loan was higher than any
other banks in the country due to poor performance. The legacy of the non-performing loan of
SCBs is very old. In the late nineties, the key financial indicators other than NCBs (Nationalized
Commercial Bank) were deteriorating and the market share of the NCBs in banking sector was
dropping significantly. In order to monitor the activities of these banks closely, MOU (Memo-
randum of Understanding) was introduced by this unit of BSS 1 for Sonali, Janata, Agrani and
Rupali in the year of 2003. The objective of the MOU is to increase the operational efficiency of
these banks. Curbing the non-performing loan is one of the major objectives of the MOU. Due to
poor performance, an MOU was also formulated for BASIC in 2013. The most significant event
was that when Bangladesh Bank employed an inspector in the board meetings by the board of
directors.
The functions of unit 1 can be formulated in the following way,
• The Unit verifies whether the issued loan cross the limit of the 10% of the bank’s capital
or not. If it gets crossed, the unit with the help of DBI (Direct Banking Inspection) solves
it.
• Unit 1 also helps those banks by providing the capital and plays the role of a savior. It al-
so provides all possible guidelines to make a loan performing from non- performing.
• When a bank fails to get the repayment from a borrower this unit then take initiatives and
ensures the recovery of the loan. So, it will not be unwise to say that Unit 1 of BSS 1 also
plays a vital role in the recovery.

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Unit 2:
It was discussed earlier that the four specialized banks are included in this unit. These are BASIC
Bank, BDBL (Bangladesh Development Bank Limited), BKB (Bangladeshi Krishi Bank), and
RAKUB (Rajshahi Krishi Unnayan Bank)
The MOU (Memorandum of Understanding) is also applicable for the included banks under unit
2.After signing the MOU these specialized banks are obliged to submit the monthly and quarter-
ly statements regularly. On the basis of the statements the unit of the BSS 1 section monitors the
performance of the specialized banks.
As it was mentioned previously that, curbing the non-performing loan is the major objectives of
the MOU, so, BASIC bank has to formulate a MOU in the year 2013 for poor performance. The
following major issues are incorporated in the MOU,
• To maintain the annual adjusted loan growth compared to previous year;
• To maintain the single borrower exposure limit 15% of paid up capital (maximum funded
limit 10% of Paid-up-Capital) where for other SCBs the limit is 15% of total capital
(maximum funded limit 10% of total capital)
The function of this unit are given as follows,
• To verify whether the specialized banks are doing their job properly in their related sec-
tors or not. For example, I can conclude that recently this unit has found that BKB is con-
centrating more on the large loan than developing the Agriculture sector.
• All sorts of bindings are provided so that these banks perform their job only on their rele-
vant sector.
• This unit has to prepare two reports on the basis of their review. These are DRR (diag-
nostic Review Report) and QRR (Quarterly Review Report).
3.3.9. General Section:
General section works with the Human Resource of the Department of Off-site Supervision.They
co-ordinate among all the sections under DOS. They actually confirm the interlinkage among the
sections and employees.

Page | 31
4. Recent initiatives of DOS and its impact on overall banking system:
Recent initiatives of DOS:4
A lots of recent initiatives has been taken through out the past four or five years under DOS.
Some very important initiatives can be quoted here;
A. The supervission strategy adopted and followed by Deparment of Off-site
Supervision:
I. Revision of CAMELS rating guidlines and its up-gradation
II. Strong monitoring over Liquidity Management
III. Constant review of the financial statements of banks
IV. Introducing marking to market based revaluation system
V. Risk management of banks
VI. Guidlines regarding investment in capital market
VII. Establishing Islami Inter Banks Fund management
VIII. Introduction of self-Assesment Report
IX. Introduction of Stress Testing Management and Guidline
B. Supervision Techniques carried out under institutional Structure Reform:
I. Formation of Risk Management Unit
II. Implementationof Large loan monitoring Softwere
C. Establishment of Bank Supervision Specialist Structure
D. Aranged some awareness program
E. supervision tools established under polices issued by other department of BB and
structural reformation:
I. Capital Adequacy Monitoring
II. Initiation of Enterprise data warehouse(EDW)
III. Launchingthe Intregrated Supervision System software
4
Hassan, S. R. (2013). Off-site supervision of Bangladesh Bank Recent Initiatives (2009-2013). Retrieved
march 04, 2015 from www.bb.org.bd: http://www.bb.org.bd/pub/special/new_initiatives_dos_e.pdf

Page | 32
IV. Coordination between Off-site and on-site Supervision
V. Risk Management Committee of theboard of directors
Substantial progress has been made in achiving goals os Bangladesh bank due to the aforesaid
initiatives taken place by DOS in the last five years.The capital base of the whole banking
system has become deeperbecause of close monitoring by Bangladesh Bank.
Impact of the initiatives on overall banking system: [Appendix-E]
Substantial progress has been made in achieving off-site supervision goals of Bangladesh bank
due to the aforesaid initiatives taken by DOS in the last five years. The capital base of the whole
banking system has become deeper because of close monitoring by Bangladesh Bank.
Impacts can be shown through using graphs to compare among the number of years:
Capital to Risk Weighted Assets Ratio by Type of Banks: (in percent)
Source: Off-site supervision of Bangladesh Bank Recent Initiatives (2009-2013), DOS, Bangla-
desh Bank
From a capital adequacy perspective, now Bangladesh is in stronger position than many other
countries. The CAR for the whole banking industry was 11.31 percent in June 2012, as against a
minimum of 10 percent and increased to 11.52 percent by December 2013.
-15
-10
-5
0
5
10
15
20
25
30
SCBs DFIs PCBs FCBs
Figure-1
Capital to Risk Weighted Assets Ratio by Type of Banks
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Page | 33
Increase amount of capital maintained by banks:
The amount of capital maintained by banks was Tk.205.78 billion in December2008 and stood at
Tk.651.91 billion in December 2013, amounting to a 217 capital growth. Transfer of large por-
tions of income into capital as well as new capital injections by bank is accounted for this
growth. As a result the base of the whole banking system in your country has been strengthened.
Ratio of Net NPLs to Total Loans by Type of Banks: (in percent)
⋅ Source: Off-site supervision of Bangladesh Bank Recent Initiatives (2009-2013), DOS, Bang-
ladesh Bank.
Nonperforming loan dropped to 7.17 percent in June 2012 from 10.79 in December 2008.Here
we see some shortfall in the recent years but the amount of provision kept was increasing. This
Ratio soared throughout 2013 because of political instability and its adverse effects on business.
Effect of stress testing technique on Banks:
In order to estimate systematic risk, a stress testing technique was introduced and strengthened,
which encouraged banks improve their shock absorbing capacity by giving more emphasis in
maintaining capital and provisions. At seen in stress testing, most of the banks have a moderate
level of reliance. At this moment liquidity management in banking system remains stable, with
the call money rate hovering at satisfactory level.
-100
0
100
200
300
400
500
Amounts of NPLs Required Provision Provision kept Excess/Shortfall
Figure-2
Ratio of Net NPLs to Total Loans by Type of Banks
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Page | 34
Required Provision and Provision Maintained - all Banks: (billion taka)
Source: Off-site supervision of Bangladesh Bank Recent Initiatives (2009-2013), DOS, Bang-
ladesh Bank.
Here we see the ups and downs of the total required provision held by all four categories banks.
In the recent years DOS is giving more focus on this thing. In the graph we see PCBs and FCBs
are in good condition. On the other hand SCBs are in shortfalls. So they should be kept under
direct supervision and help them to maintain the required provision.
Profitability Ratios by Type of Banks:
Source: Off-site supervision of Bangladesh Bank Recent Initiatives (2009-2013), DOS,
Bangladesh Bank.
-5
0
5
10
15
20
25
SCBs DFIs PCBs FCBs
Figure-3
Required Provision and Provision Maintained - all Banks
2005 2006 2007 2008 2009 2010 2011 2012 2013
-1
0
1
2
3
4
SCBs DFIs PCBs FCBs
Figure-4
ROA: (in percent)
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Page | 35
Source: Off-site supervision of Bangladesh Bank Recent Initiatives (2009-2013), DOS,
Bangladesh Bank.
Over the couple of years we see the trend of ROA and ROE is positive or upward. It is increasing
year to year. Due to recent political instability these indicators are getting bad in the very recent
years. ROA and ROE are showing comparatively better in term of FCBs. State-owned Commer-
cial Banks are not performing well. On the other hand Private Commercial Banks are doing well
indeed.
However due to continuous monitoring of the implementation status of capital marketing expo-
sure-related policies and regulations, investment in capital market by the banks (on both a solo
and consolidated basis) has come down within the prescribed limit. In fact risk associated with
capital market exposure has reduced a lot.
Supervision of the banking sector is complex, never-ending process. So to keep up with the
changes of the financial market all the supervision patterns are changing.
-15
-10
-5
0
5
10
15
20
25
30
SCBs DFIs PCBs FCBs
Figure-5
ROE: (in percent)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Page | 36
5. CAMELS Rating: An Introduction
In 1979, the Uniform Financial Institutions Rating System (UFIRS) was implemented in U.S.
banking institutions, and later globally, following a recommendation by the U.S. Federal Re-
serve. The system became internationally known with the abbreviation CAMEL, reflecting five
assessment areas: capital, asset quality, management, earnings and liquidity. In 1995 the Federal
Reserve and the OCC replaced CAMEL with CAMELS, adding the "S" which stands for finan-
cial (S)ystem. This covers an assessment of exposure to market risk and adds the 1 to 5 rating for
market risk management.
Bangladesh Bank (BB), as central bank, has the statutory task of regulating and supervising the
banking system of Bangladesh.To play this importent role, it is true that BB should be able to
scrutinize the overall performance of the banking system.BB aslo assess the safety and
soundness of each individual banking company.
CAMELS is a uniform rating system for all banking companies. through this rating system we
can get a meaningful and concise information about the condition of the banking
system.CAMELS rating hepls to identify the banks that require colse supervision.Bangladesh
bank put numerical rating to the key areas of the CAMELS components.The componenets are
Capital adequacy, Asset quality, Management, Earnings, Liquidity Sensitivity to market
risk.Then they assign an overall composite rating to each banking company.
BB is able to categorize banks into groups based on their overall strength, quality and operating
soundness. So, the rating system refered as CAMELS is a supervisory tool to help identifing the
banks that are having problems and require supervision.CAMELS describes;
(C)apital adequacy
(A)sset quality
(M)anagement
(E)arnings
(L)iquidity
(S)ensitivity to market risk
Under the CAMELS rating system banks are assigend two sets of ratings :
• Performance rating
• An overall composite rating
Performence rating :Performance rating compise six individual rating that address each of the
CAMELS components.

Page | 37
An overall composite rating: An overall composite rating is a single rating that is based on a
comprehensive assesment of the overall condition of the bank.
Both ratings are expressed by using a numerical scale of 1 to 5 in ascending order of supervisory
concern.So, 1 represents the best rating while 5 indicates the worst rating.
preserving the integrity of the rating ,it is very essential to remain the rating confidential.this
rating is known to the Bank in question and to BB supervisory staff.The rating must never be
used in advertising or other promotional activities of the bank and must never be realesed by the
bank to the third parties to get some favour .Bangladesh bank’s staffs must aslo ensure cation in
term of communication concerning the rating to ensure the confidentiality.failure to maintain
confidentiality can lead to competive situation where BB can push pressure and accountability.
Rating-1:
Indicates strong performance and risk management practices that consistently provide for safe
and sound operations. Management clearly identifies all risks and employs compensating factors
mitigating concerns. The historical trend and projections for key performance measures are con-
sistently positive. Banks in this group resist external economic and financial disturbances and
withstand the unexpected actions of business conditions more ably than Banks with a lower
composite rating. Any weaknesses are minor and can be handled in a routine manner by the
board of directors and management. These Banks are in substantial compliance with laws and
regulations. Such institutions give no cause for supervisory concern.
Rating-2:
Reflects satisfactory performance and risk management practices that consistently provide for
safe and sound operations. Management identifies most risks and compensates accordingly. Both
historical and projected key performance measures should generally be positive with any excep-
tions being those that do not directly affect safe and sound operations. Banks in this group are
stable and able to withstand business fluctuations quite well; however, minor areas of weakness
may be present which could develop into conditions of greater concern. These weaknesses are
well within the board of directors' and management's capabilities and willingness to correct.
These Banks are in substantial compliance with laws and regulations. The supervisory response
is limited to the extent that minor adjustments are resolved in the normal course of business and
that operations continue to be satisfactory.

Page | 38
Rating-3:
Represents performance that is flawed to some degree and is of supervisory concern. Risk man-
agement practices may be less than satisfactory relative to the credit union's size, complexity and
risk profile. Management may not identify and provide mitigation of significant risks. Both his-
torical and projected key performance measures may generally be flat or negative to the extent
that safe and sound operations may be adversely affected. Banks in this group are only nominally
resistant to the onset of adverse business conditions and could easily deteriorate if concerted ac-
tion is not effective in correcting certain identifiable areas of weakness. Overall strength and fi-
nancial capacity is present so as to make failure only a remote probability. These Banks may be
in significant noncompliance with laws and regulations. Management may lack the ability or
willingness to effectively address weaknesses within appropriate time frames. Such Banks re-
quire more than normal supervisory attention to address deficiencies.
Rating-4:
Refers to poor performance that is of serious supervisory concern. Risk management practices
are generally unacceptable relative to the credit union's size, complexity and risk profile. Key
performance measures are likely to be negative. Such performance, if left unchecked, would be
expected to lead to conditions that could threaten the viability of the credit union. There may be
significant noncompliance with laws and regulations. The board of directors and management
are not satisfactorily resolving the weaknesses and problems. A high potential for failure is pre-
sent but is not yet imminent or pronounced. Banks in this group require close supervisory atten-
tion.
Rating-5:
Performance that is critically deficient and in need of immediate remedial attention. Such per-
formance, by itself or in combination with other weaknesses, directly threatens the viability of
the credit union. The volume and severity of problems are beyond management's ability or will-
ingness to control or correct. Banks in this group have a high probability of failure and will likely
require liquidation and the payoff of shareholders, or some other form of emergency assistance,
merger, or acquisition.
5.1. Uses of CAMELS rating:
CAMELS has some very specific uses to be highlited.These are as follows;
• It helps BB to remain vigilant non-stop over the banks especially during the time interval
when on-site supervision becomes somewhat

Page | 39
• For assessing the degree/nature of supervision for the banks
• for entertaining the request of new branch license
• For determination of Net Open Position Limit
• For considering the appeal of opening exchange house in foreigh countries
• For entertaining banks’ request for issuance of subrdinated bonds
• for considering banks’ appeal for providing refinance facility.
5.2. Measurement scale and process of calculation of CAMELS Rating:[APPENDIX-D]
To evaluate the banks a numerical scale of “1 to 5” is used. Hare rating ‘1’ means best rating that
showes the finnancial soundness and stability in all respect.On the othe hand, rating ‘5’ means
the worst rating showes the worst financial condition of a perticular bank.
1 Strong
2 Satisfactory
3 Fair
4 Marginal
5 Unsatisfactory
Ratings:
6) If a bank is rated 1 ,it is considered sound in all respect ,resistent to outside shockes
and Bangladesh Bank need not to take any supervisory steps.
7) If a bank is rated 2 ,it is considered sound but may demonstrate modest and minor
weakness which are easily correctable and Bangladesh Bank need to take normal
supervisory concerne.
8) If a bnak is rated 3, it is considered vulnerable from financial, operational and
compliance perspect. it is required more than normal supervision.
9) If a bnak is rated 4, it is considered having serious problem with financial weekness
,solvency problem. it is required close supervision actions.this banks are treated as
problem vanks.
10) If a bnak is rated 5, it shows the probality of failure, severe weekness and require
assistance or even takenover by Regulatory Authority.

Page | 40
Weight of the components:
Components weight
Capital Adequacy 20%
Assets 20%
Management 25%
Earnings 15%
Liquidity 10%
Sensitivity to market risk 10%
5.3. Description of the components:
5.3.1. Capital Adequacy :
A banking company is expected to maintain capital regarding the nature and the amount of risks
to the institution and the ability of management to identify , measure , monitor and control these
risks by implimenting the Core Risk Management Guidlines and following other Bangladesh
Bank Regulations & legislation.At the time of evaluating the Capital adequacy a bank should
consider Credit risk , Market risks and Operational risks.The amount of capital should be
maintained depends on the types and quantity of risk inharent in a bank’s activities.Here, bank
has to maintain a required minimum regulatory capital to fight with the possible adverse
consequences may arise and create risk on the bank’s capital.
Banks that maintain a level of capital fully commensurate with their current and expected risk
profiles and can absorb any present or anticipated losses are accorded a rating of 1 for capital.
Such Banks generally maintain capital levels at least at the statutory net worth requirements to be
classified as "well capitalized" and meet their risk-based net worth requirement. Further, there
should be no significant asset quality problems, earnings deficiencies, or exposure to credit or
interest-rate risk that could negatively affect capital.
A capital adequacy rating of 2 is accorded to a credit union that also maintains a level of capital
fully commensurate with its risk profile both now and in the future and can absorb any present or
anticipated losses. However, its capital position will not be as strong overall as those of 1 rated
bank. Also, there should be no significant asset quality problems, earnings deficiencies, or expo-
sure to interest-rate risk that could affect the credit union's ability to maintain capital levels at
least at the "adequately capitalized" net worth category. Banks in this category should meet their
risk-based net worth requirements .

Page | 41
A capital adequacy rating of 3 reflects a level of capital that is at least at the "undercapitalized"
net worth category. Such Banks normally exhibit more than ordinary levels of risk in some sig-
nificant segments of their operation. There may be asset quality problems, earnings deficiencies,
or exposure to credit or interest-rate risk that could affect the credit union's ability to maintain
the minimum capital levels. Banks in this category may fail to meet their risk-based net worth
requirements.
A capital adequacy rating of 4 is appropriate if the credit union is "significantly undercapital-
ized" but asset quality, earnings, credit or interest-rate problems will not cause the credit union to
become critically undercapitalized in the next 12 months. A 4 rating may be appropriate for a
credit union that does not have sufficient capital based on its capital level compared with the
risks present in its operations.
A 5 rating is given to a credit union if it is critically undercapitalized, or has significant asset
quality problems, negative earnings trends, or high credit or interest-rate risk exposure is ex-
pected to cause the credit union to become "critically undercapitalized" in the next 12 months.
Such Banks are exposed to levels of risk sufficient to jeopardize their solvency.
The capital Adequacy of a banking company is rated from ‘1’ to ‘5’ based uopn(but not limited
to) the following factors:
Capital Adequacy–major factors:
• The volume and trend of poor quality assets
• The banking company’s capital growth experience and future prospects
• The Banking company’s capital management process
• The ability of management to address emerging needs for additional capital
• Risk exposure in term of Off-balance sheet activities
• Balance sheet composition
Capital Adequacy- major Ratios:
• Capital to Risk Weighted Assets(CAR)
• Funded & Non-funded single borrower exposure
• Tire-1 capital/Risk Weighted Asset
• Most loans to a single subsector
• Tire-1 capital to total regulatory capital
• Total Off-balance sheet items to total regulatory capital

Page | 42
Capital Adequacy -major concentration on questionnaire:
• Capital management plan
• Sufficency of capital
• Dividend policy
• Capital & RWA Growth
• Withdrawls of capital in the form of related party transection
5.3.2. Asset quality:
Asset quality of a banking company is primarily assessed on the basis of its ability to recover the
outstanding loans and advances made in due time. Hence, percentage of classified loan to total
loan granted is considered as the principal ratio for judging the quality of the assets. Loans and
advances are the major components in the asset composition of all commercial banks. The high
concentration of loans and advances increases the vulnerability of assets to credit risk.
Asset quality is high loan concentrations that present undue risk to the banks;
• The appropriateness of investment policies and practices;
• The investment risk factors when compared to capital and earnings structure; and
• The effect of fair (market) value of investments vs. book value of investments.
The asset quality rating is a function of present conditions and the likelihood of future deteriora-
tion or improvement based on economic conditions, current practices and trends. The examiner
assesses banks’ management of credit risk to determine an appropriate component rating for As-
set Quality. Interrelated to the assessment of credit risk, the examiner evaluates the impact of
other risks such as interest rate, liquidity, strategic, and compliance.
The quality and trends of all major assets must be considered in the rating. This includes loans,
investments, other real estate owned (ORE0s), and any other assets that could adversely impact a
banks' financial condition.
Ratings:
A rating of 1 reflects high asset quality and minimal portfolio risks. In addition, lending and in-
vestment policies and procedures are in writing, conducive to safe and sound operations and are
followed.

Page | 43
A 2 rating denotes high-quality assets although the level and severity of classified assets are
greater in a 2 rated institution. Banks that are 1 and 2 rated will generally exhibit trends that are
stable or positive.
A rating of 3 indicates a significant degree of concern, based on either current or anticipated as-
set quality problems. Banks in this category may have only a moderate level of problem assets.
However, these banks may be experiencing negative trends, inadequate loan underwriting, poor
documentation, higher risk investments, inadequate lending and investment controls and moni-
toring that indicate a reasonable probability of increasingly higher levels of problem assets and
high-risk concentration.
Asset quality ratings of 4 and 5 represent increasingly severe asset quality problems. A rating of
4 indicates a high level of problem assets that will threaten the institution's viability if left uncor-
rected. A 4 rating should also be assigned to banks with moderately severe levels of classified
assets combined with other significant problems such as inadequate valuation allowances, high-
risk concentration, or poor underwriting, documentation, collection practices, and high-risk in-
vestments. Rating 5 indicates that the banks' viability has deteriorated due to the corrosive effect
of its asset problems on its earnings and level of capital.
Major Factors to be considered:
• Classified loan level ,its severity and trend
• Rescheduled,restructured and non performing loans
• Risk identification practice
• Risk admonistration precess
• Credit risk arising from OBS transection
• Degree of concentration of credits
• Asset management procedures
• Internal compliance and control
• Management information system
Major ratios to be considered :
• Classified loans / Total loans
• Actual provision / Required provission
• Rescheduled & restructured loans to total loans and advances
• Concentration of advances by economic purpose
• Concentration of advances to industry
• Concentration of advances to trade services

Page | 44
• Total Off-balance sheet items / total assets
Major questionnaire regarding the Asset quality:
• CL and SMA loans trend
• Credit policy
• Credit Risk Grading
• Limit on loan growth
• Allowable types of collateral
• Limit on loans to single borrower
• Internal loan review
5.3.3. Management:
Management is the most forward-looking indicator of condition and a key determinant of wheth-
er a bank possesses the ability to correctly diagnose and respond to financial stress. The man-
agement component provides examiners with objective, and not purely subjective, indicators. An
assessment of management is not solely dependent on the current financial condition of the
banks and will not be an average of the other component ratings.
Reflected in this component rating is both the board of directors' and management's ability to
identify, measure, monitor, and control the risks of the banks' activities, ensure its safe and sound
operations, and ensure compliance with applicable laws and regulations. Management practices
should address some or all of the following risks: credit, interest rate, liquidity, transaction, com-
pliance, reputation, strategic, and other risks.
The management rating is based on the following areas, as well as other factors as discussed be-
low:
Business Strategy / Financial Performance
The banks' strategic plan is a systematic process that defines management's course in assuring
that the organization prospers in the next two to three years. The strategic plan incorporates all
areas of a bank's operations and often sets broad goals, e.g., capital accumulation, growth expec-
tations, enabling banks management to make sound decisions. The strategic plan should identify
risks within the organization and outline methods to mitigate concerns.
As part of the strategic planning process, banks should develop business plans for the next one or
two years. The board of directors should review and approve the business plan, including a
budget, in the context of its consistency with the banks' strategic plan. The business plan is eval-

Page | 45
uated against the strategic plan to determine if it is consistent with its strategic plan. Examiners
also assess how the plan is put into effect. The plans should be unique to and reflective of the
individual banks. The banks' performance in achieving its plan strongly influences the manage-
ment rating.
Information systems and technology should be included as an integral part of the banks' strategic
plan. Strategic goals, policies, and procedures addressing the banks' information systems and
technology ("IS&T") should be in place. Examiners assess the banks' risk analysis, policies, and
oversight of this area based on the size and complexity of the banks and the type and volume of
e-Commerce services' offered. Examiners consider the criticality of e-Commerce systems2 and a
service in their assessment of the overall IS&T plan.
Prompt corrective action may require the development of a net worth restoration plan ("NWRP")
in the event the bank becomes less than adequately capitalized. A NWRP addresses the same
basic issues associated with a business plan. The plan should be based on the banks' asset size,
complexity of operations, and field of membership. It should specify the steps the banks will take
to become adequately capitalized. If a NWRP is required, the examiner will review the banks'
progress toward achieving the goals set forth in the plan.
Internal Controls
An area that plays a crucial role in the control of a bank's risks is its system of internal controls.
Effective internal controls enhance the safeguards against system malfunctions, errors in judg-
ment and fraud. Without proper controls in place, management will not be able to identify and
track its exposure to risk. Controls are also essential to enable management to ensure that operat-
ing units are acting within the parameters established by the board of directors and senior man-
agement.
Seven aspects of internal controls deserve special attention:
A. Information Systems. It is crucial that effective controls are in place to ensure the in-
tegrity, security, and privacy of information contained on the banks' computer sys-
tems. In addition, the banks should have a tested contingency plan in place for the
possible failure of its computer systems.
B. Segregation of Duties. The banks should have adequate segregation of duties and
professional resources in every area of operation. Segregation of duties may be lim-
ited by the number of employees in smaller banks.

Page | 46
C. Audit Program. The effectiveness of the banks' audit program in determining com-
pliance with policy should be reviewed. An effective audit function and process
should be independent, reporting to the Supervisory Committee without conflict or in-
terference with management. An annual audit plan is necessary to ensure that all risk
areas are examined, and that those areas of greatest risk receive priority. Reports
should be issued to management for comment and action and forwarded to the board
of directors with management's response. Follow-up of any unresolved issues is es-
sential, e.g., examination exceptions, and should be covered in subsequent reports. In
addition, a verification of members' accounts needs to be performed at least once eve-
ry two years.
D. Record Keeping. The books of every bank should be kept in accordance with well-
established accounting principles. In each instance, a bank's records and accounts
should reflect its actual financial condition and accurate results of operations. Records
should be current and provide an audit trail. The audit trail should include sufficient
documentation to follow a transaction from its inception through to its completion.
Subsidiary records should be kept in balance with general ledger control figures.
E. Protection of Physical Assets. A principal method of safeguarding assets is to limit
access by authorized personnel. Protection of assets can be accomplished by develop-
ing operating policies and procedures for cash control, joint custody (dual control),
teller operations, and physical security of the computer.
F. Education of Staff. Banks staff should be thoroughly trained in specific daily opera-
tions. A training program tailored to meet management needs should be in place and
cross-training programs for office staff should be present. Risk is controlled when the
banks is able to maintain continuity of operations and service to members
G. Succession Planning. The ongoing success of any banks will be greatly impacted by
the ability to fill key management positions in the event of resignation or retirement.
The existence of a detailed succession plan that provides trained management person-
nel to step in at a moment's notice is essential to the long-term stability of a bank. A
succession plan should address the Chief Executive Officer (or equivalent) and other
senior management positions (manager, assistant manager, etc.).
Other Management Issues
Other key factors to consider when assessing the management include, but are not limited to:

Page | 47
• Adequacy of the policies and procedures covering each area of the bank’s operations
(written, board approved, followed);
• Budget performance compared against actual performance;
• Effectiveness of systems that measure and monitor risk;
• Risk-taking practices and methods of control to mitigate concerns;
• Integration of risk management with planning and decision-making;
• Responsiveness to examination and audit suggestions, recommendations, or require-
ments;
• Compliance with laws and regulations;
• Adequacy of the allowance for loan and lease losses account and other valuation re-
serves;
• Appropriateness of the products and services offered in relation to the banks' size and
management experience;
The board of directors and management has a fiduciary responsibility to the members to maintain
very high standards of professional conduct:
i. Compliance with all applicable state and federal laws and regulations. Management
should also adhere to all laws and regulations that provide equal opportunity for all mem-
bers regardless of race, color, religion, sex, national origin, age, or handicap.
ii. Appropriateness of compensation policies and practices for senior management. Man-
agement contracts should not contain provisions that are likely to cause undue hardship
on the banks. The board needs to ensure performance standards are in place for the
CEO/Manager and senior management and an effective formal evaluation process is in
place and being documented.
iii. Avoidance of conflict of interest. Appropriate policies and procedures for avoidance of
conflicts of interest and management of potential conflicts of interest should be in place.
iv. Professional ethics and behavior. Management should not use the banks for unauthorized
or inappropriate personal gain. Banks property should not be used for anything other than
authorized activities. Management should act ethically and impartially in carrying out ap-
propriate banks policies and procedures
Ratings
A management rating of 1 indicates that management and directors are fully effective. They are
responsive to changing economic conditions and other concerns and are able to cope successfully
with existing and foreseeable problems that may arise in the conduct of the banks' operation.
For a management rating of 2, minor deficiencies are noted, but management produces a satisfac-
tory record of performance in light of the institution's particular circumstances.

Page | 48
A 3 rating in management indicates that either operating performance is lacking in some
measures, or some other conditions exist such as inadequate strategic planning or inadequate re-
sponse to NCUA supervision. Management is either characterized by modest talent when above
average abilities are needed or is distinctly below average for the type and size of the banks.
Thus, management's responsiveness or ability to correct less than satisfactory conditions is lack-
ing to some degree.
A management rating of 4 indicates that serious deficiencies are noted in management's ability or
willingness to meet its responsibilities. Either management is considered generally unable to
manage the banks in a safe and sound manner or conflict-of-interest situations exist that suggest
that management is not properly performing its fiduciary responsibilities. In these cases, prob-
lems resulting from management weakness are of such severity that management may need to be
strengthened or replaced before sound conditions can be achieved.
A management rating of 5 is applicable to those instances where incompetence or self-dealing
has been clearly demonstrated. In these cases, problems resulting from management weakness
are of such severity that some type of administrative action may need to be initiated, including
the replacement of management, in order to restore safe and sound operations.
Management rating shall be calculated in the following way:
• Core risk assesment -60%
• Rating from questionnaire-40%
Mnagement rating calculation process:
particulars weight in percent
Core risk rating 35%
Questionnaire rating 20
Avrage rating of C,A,M,E,L 15
Risk managemet paper rating 15
SME financing performane rating 05
Agri finanaceing performance rating 05
Green banking CSR performance rating 05

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