CORE RISKS MANAGEMENT

Introduction: Risk is a part of human life. Banking is also a risk bearing industry.
There are numerous risks in banking activities. Bankers have to achieve their
objectives by managing these risks.
Present banking industry expects that Banks equity holders will receive value
along with profit of their shares; depositors money will remain safe and the
organization, as a whole will confirm strength & transparency in all respect. To
achieve this objectives Core Risks Management guidelines are the prime issue in
the present-day banking activities. Identification, measurement and mitigation of
risks and acquiring strength to cover these risks are the mandatory issues to be
maintained in the banking organization. Sonali Bank Limited has already
introduced risk management guidelines in accordance with Bangladesh Bank
guidelines.

As per Bangladesh Bank guidelines there are five core risks in Banking Sector
These are:
i) Credit Risks
ii) Asset and Liability / Balance Sheet Risks
iii) Internal Control & Compliance Risks
iv) Money Laundering Risks and
v) Foreign Exchange Risks

Now a days Information Technology is also treated as one of the important area
of risks in Banking. However risks in the banking system are discussed in brief
under broad head of risk areas.

1) CREDIT RISKS:

Credit risks are associated with credit activities of Sonali Bank Limited. Asper
business position of Sonali Bank Limited upto 30 June, 2009 Tk. 6870.94
crore out of 23159.63 crore loans and advances are classified. Sonali Bank
Limited is thus bearing 29.67% classified loans.

Credit activities have developed a Risks Management system as follows:

i. Policy Guidelines
1.1 Lending guidelines include industry and business segment focus, loan
limits, lending caps, discourage business types, loan facility parameters, cross
border risks etc.

1.2 .1 Credit Assessment considers related borrower, industry, supplier, financial

ability, past performance, account conduct, regulatory as well as organizational
guidelines, risk mitigating capacity etc.

1.2.2 Risk Grading conducted to measure the intensity of risk rating in eight
categories -Superior, Good, Acceptable, Marginal, SMA, Sub -standard, Doubtful
& Bad loss.

1.3. Approval Authority must be experienced and capable to assess the merit of
the proposal and due service in time.

1.3 Segregation of duties should be separated amongst approval authority,

relationship manager and credit administration.

1.5 Internal Audit of different tiers should perform their duties as per guidelines.

2. Organizational Structure & Responsibilities:

There are seven organizational / administrative tiers in Sonali Bank Limited

where Board of Directors is at the top and Branch as area of operation is in the
bottom.

Branch should deploy:

Relationship manager for the marketing of loan products.

Credit administration for operation & return / statements.
Recovery unit for recovery of loans & advances.
 Audit / Inspection unit to detect weaknesses of loans and advances.

Mitigating measures be taken accordingly. Duties & responsibilities of each tier

must be specific and compliance must be ensured.

3.00 Procedural guidelines:

Implementation of credit policy through the set organizational structure should

follow the following procedural guidelines:

3.01. Approval process should be done with in business discretionary power.

3.02 Credit administration should ensure proper and complete documentation
and compliance of sanction letter.

3.2.1 Credit disbursement after proper documentation and fulfillment of

regulatory guidelines

3.2.2 Custodial duties performed by credit administration

3.2.3 Compliance requirement comply standing instructions regarding return

statements and review of related services like insurance, clearing agent etc.

3.2.4 Shall activate continuous monitoring system for smooth operation of the
accounts.

Early Alert System:

Identification of probable weakness & risks, taking corrective measures by

relationship manager. Report to authority within seven days from detection of
weaknesses.
Credit Recovery as part of NPL management should maintain at least 20-
defaulter borrowers list. Recovery unit should take all out efforts to recover the
loans. Account transfer procedure must be observed strictly. Bank should
maintain provision against classified loans, should take measures for write- off
loan A/Cs. At the same time incentive programs for better performance be
ensured.
2. Asset and Liability / Balance Sheet Risks:
Asset and liability management is the most important function of Bank
management. Asset Liability Management ensure balanced fund mobilization and
their deployment with respect to their maturity profile, cost, yield as well as risk
exposure.

ALM policy statement through ALCO paper Indicates as follows:

i) Loan Deposit Ratio
ii) Whole - sale Borrowing Guidelines
iii) Commitments
iv) Medium Term Funding Ratio
v) Maximum Cumulative Out- flow
vi) Liquidity Contingency Plan
vii) Loan Regulatory Compliance

ALM also discusses the following issues:

i) Balance sheet Risk

ii) Liquidity Risk
iii) Interest Rate Risk and
iv) Capital Adequacy Risk

3. Internal Control & Compliance Risks

As part of ensuring internal control & compliance risk management Sonali Bank
Limited have formed a high level MANAGEMENT COMMITTEE
( MANCOM) headed by CEO & Managing Director.

The committee comprised of:

01.

CEO & Managing Director

Chairman
02.

Deputy Managing Director -1

Member
03.

Deputy Managing Director -2

Member
04.

All General Managers from Head Office

Member
05.

Deputy General Manager, Board Division, Head Office

Member
06.

Deputy General Manager, M & R Division, Head Office

Member
07.
Deputy General Manager, MDs Secretariat

Member Secretary

The Main functions of MANCOM are to:

i) Assess / Identify Risks

ii) Measurement / evaluation of Risks
iii) Control function & duty allocation in all tiers
iv) Develop Management Information System (MIS)
v) Supervision / Monitoring function & rectification of irregularities
vi) Functions of external auditors
vii) Compliance of regulations imposed by regulatory Authority, etc.

The MANCOM achieves its objectives through 3 separate units, namely:

i) Compliance unit : ensures compliance of Banks rules & regulations.

ii) Monitoring unit: Identification / evaluation of risks through MIS at
each level
iii) Audit & Inspection Unit: Conducts Audit & Inspections at regular
interval.

These 3 separate units formed in the tier of HO /Divisn. / PO/RO level.

Internal control system is achieved through:
I) Internal Control Function Checklist (Daily, Weekly, Monthly,
Quarterly)
II) Quarterly Operations Report

MONEY LAUNDERINGS:
It is the process by which proceeds from a criminal activity are dis-guised to
conceal their illicit origins. Basically, money laundering involves the proceeds of
criminally derived property rather than the property itself. Money launderers
send illicit funds through legal channels in order to conceal their criminal origins.

Money laundering prevention Act-2009 has defined Money Laundering as:

z) nix zivfL (Predicate offience) nQOesbv mfLAsm iaf A_ hf nidv zShL

{n ofib hf zfVft jdvhfv sswA rfv rfv, vifv, dhslsw iavB hf dhslw
rsk hfQtfslsw iavB hf zfbqb jvf hf hL W zShL ifsq zduGk zKG hf nid dhslsw
ifyfv |
zf) jfb zfdKGj tbslb viHfsh ni jvf hf ni jdvhfv yf jvf pfrfsk AvBbi
zLDb rf dvsifeG jdvhfv iasqfub rsh bf |
) vi jfb jfpG jvf pfrfv fvf vi zKG hf nidkv zShL {n ofib hf zfVft jvf rq
hf vi jfpGniflsbv yf jvf hf zbcvi jfpGniflsb nfsb nrfqkf hf NVp jvf |

Laundering is not a single act but a process accomplished in 3 basic stages,

which may comprise numerous transactions, by the launderers that could alert a
financial institution to criminal activity-
Placement- the physical disposal of the initial proceeds derived from illegal
activity.
Layering- separating illicit proceeds from their source by creating complex layers
of financial transactions designed to disguise the audit trail and provide
anonymity.
Integration- the provision of apparent legitimacy to wealth derived criminally. If
the layering process has succeeded, integration schemes place the laundered
proceeds back into the economy in such a way that they re-enter the financial
system appearing as normal business funds.

The three basic steps may occur as separate and distinct phases. They may also
occur simultaneously or, more commonly, may overlap.

The Money Laundering Prevention activities in banking includes:

Obtention of KYC, TP forms & maintenance

Record keeping
Reporting -STR, CTR, Quarterly report etc.
 Staff training regarding AML activities
Communication with requlatory Authority
Compliance of AML guidelines by bank authority
Bank BOD Commitment towards AML guidelines.

FOREIGN EXCHANGE RISKS:

The globalization process has made the foreign exchange market a worldwide
network. The market is open around the clock and follows the sun around the
globe with the help of communication satellites. There is none statutory
international body that regulates the activities of foreign exchange market.
Therefore, it has been emerged as a self regulated market, regulated by 'The
Model Code' developed by Association Cambistle Internationale - The Financial
market Association (ACI - FMA). These are the professional association of global
traders with the sole objective of the enhancement of the professionalism.

MARKET INSTRUMENT COVERED BY THE MODEL CODE:

Foreign Exchange Dealing- Spot, Forward and Future

Forward Rate Agreements
Exchange rate Options
Interest rate options
Foreign Exchange Options
Interest Rate Options
Interest Rate and Currency Swaps
Money Market Dealing
ORGANIZATIONAL STRUCTURE:

Centralized Foreign Exchange and Money Market

The functions of an ideal treasury would be that an organizations Foreign
Exchange and Money Market activities are to be centralized at a single treasury
reporting to the head of that department.
Separate Treasury Operation Unit-i.e Front, Mid & Back Office with
appropriate staffing.

TYPES OF EXCHANGE POSITION:

Overbought (Long)
Total Purchase exceeds total Sales
Currency outlook-expected appreciation
Risk-If depreciates
Oversold (Short)
Total Sales exceeds total Purchase
Currency outlook-expected depreciation
Risk-If appreciates

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