Banking System of Bangladesh Bank

This Term paper is about Bangladesh Bank. Bangladesh Bank is the central bank of the country. It was
established as a body corporate bide the Bangladesh Bank Order, 1972. The main objective of term paper
is partial requirement of the course “Banking & Insurance” to gather knowledge to our work associated
fields.

Bangladesh Bank in Brief

Bangladesh Bank, the central bank of the country, was established as a body corporate vide the
Bangladesh Bank Order, 1972 (P.O. No. 127 of 1972) with effect from 16th December, 1971. The
general superintendence and direction of affairs and business of the Bank are entrusted to a nine-member
Board of Directors which consists of the Governor as chairman, a Deputy Governor, three senior
government officials and four persons having experience and proven capacity in the fields of banking,
trade, commerce, industry or agriculture – all nominated by the government.

The board, which is the highest policy making body, meets at least six times a year and at least once every
quarter under the chairmanship of the Governor. The Governor, appointed by the government as the chief
executive officer, directs and controls all the affairs of the Bank on behalf of the Board.

The broad objectives of Bangladesh Bank are:

 To regulate the issue of the currency and the keeping of reserves

 To manage the monetary and credit system of Bangladesh with a view to stabilizing domestic
monetary value
 To preserve the par value of the Bangladesh Taka
 To promote and maintain a high level of production, employment and real income in
Bangladesh; and to foster growth and development of the country’s productive resources for the
national interest

Machineries of Bangladesh Bank for Inspection

1. Department of Banking Inspection (DBI)

2. Financial Institution Department (FID)
3. Money Laundering Prevention department (MLPD)
4. Department of off-site supervision (DSO)

Department of Banking inspection (DBI)-1

Department of Banking Inspection-1 (DBI) conducts comprehensive inspection of the private commercial
banks including Islami Banks and Foreign Commercial Banks according to a predefined annual
inspection program. Branches of a foreside banks which are authorized to carry on foreign exchange
business, designated as Authorized Dealers also come under the purview onsite inspection of DBI-1.
Onsite inspection of banks including authorized dealers are carried out according to the annual inspection
program chalked out by the department well ahead of the beginning of each calendar year. DBI-1 has also
the responsibility to follow up inspection reports of the banks including authorized dealers and to enforce
implementation of the recommendations contained therein and rectification of irregularities.

Financial institution department (FID)

Financial institution department was created under financial institution act, 1993. Major functions are:

 Issuance of license for non-banking financial institution

 Formulation of policies relating to functions of NBFIs
 Monitoring relevant compliance issues through on site and off-site supervision

Presently FID supervises 28 NBFIs of which 1 is fully government owned, 2 are public sector join
ventures, 10 are private sector joint ventures and the rest 15 are locally owned private sector financial
institutions.

Money Laundering Prevention department (MLPD)

As per money laundering act (act 7 of 2002) the responsibility and power of Bangladesh Bank for
prevention of money laundering activities are as follows:

In order to abate and prevent money laundering activities or crimes related there to Bangladesh Bank
(Anti money laundering department) will;

 Investigate offence relating to money laundering

 Supervise and observe the activities of banks, financial institutions, and other organizations
involved in financial activities.
 Call banks, financial institutions and other organizations involved in financial activities for
submission of reports on any subject related to money laundering
 Review the report received under (3) above and take proper steps on the basis of those
 Arrange training for the offices and employees of banks, financial institutions and other
organizations in financial activities.

Department of off site supervision (DOS)

This department supervises and monitors the functions of the schedule banks in Bangladesh through off
site surveillance. Through off site supervision the bank continuously analyses the overall position
particularly financial condition of the scheduled banks on the basis of five crucial indicators of banking
operation, capital adequacy, asset quality, management efficiency, earning power and liquidity position.
Ratings are done on a scale of 1 to 5 in ascending order of performance deficiency. A bank is identified as
problem bank if it has a CAMEL composite score of 4 or 5. Such problem banks are then brought under
the fold of problem bank monitoring department for closer and more intensive supervision.

This department also performs the following functions:

 Asses the overall credit and liquidity position of the banking system
 Approves large loans extended by the scheduled banks.
 Monitors maintenance of reserve requirement by scheduled banks.
 Review approval procedures and techniques followed by the scheduled banks in approving loans
amounting to taka. 10 million and above to ensure proper compliance of standard practices.
  Monitors capital adequacy of the scheduled banks, position of non-performing assets and
performance of top 20 defaulters.
 Maintains accounts of the liquidated banks and deals with the movable and immovable properties
of the liquated banks as liquidator.
 Prepare and submits quarterly memorandum detailing financial conditions of the nationalized
commercial banks to the board of directors of Bangladesh bank.

Provisions for inspection lay down in certain statutes:

 Bangladesh Bank Order, 1972

 Bank Company Act, 1991
 Foreign Exchange Regulations Act, 1947
 Financial Institutions Act, 1993
 Financial Institutions Regulations, 1994
 Co-operative Society Ordinance, 1984

Provisions under which Bangladesh Bank conducts inspections:

Provisions Institutions subject to inspections

· Scheduled Banks and all branches

· Investment Corporation of
(a)Under section 44(i) of the Bangladesh
Bank Company Act-1991
· Grameen Bank

· Ansar VDP Bank Ltd.

(b) Under Article 55 of the Scheduled Banks, all branches of
Bangladesh Bank Order, Scheduled Banks & other financial
1972 institutions
· International Department (ID)

· Authorized dealer branches

· International hotels
(c) Under section 19A of the
Foreign Exchange · Indenting firms
RegulationsAct-1947
· Money Changers

· Air lines

· General sales agent etc.

(d) Under 82(i) (B) of the
· Thana Central Co-operative
Co-operative societies
Association (TCCA)
Ordinance-1984
 · Sugarcane Growers Co-operative
Societies (SGCS)
· Bangladesh Samabaya Bank Ltd,
(BSBL)

· Central Co-operative Bank Ltd.

(CCBL)
(e) Under Article 3 of the
Bank Company Act-1991
· Central Co-operative Land
Mortgage Bank Ltd. (CCLMBL)

· Others viz. Aziz Co-operative

Bank Ltd. etc.
· Financial Institutions

· Industrial Dev. Leasing Company

(f) Under section 5 and 20 of (IDLC)
the Financial Institutions
Act-1993 and the Financial · United Leasing Company (UIC)
Institution Regulations-1994 UAE

· Bangladesh Investment Co. Ltd.

(BICL)

Objectives of Inspection/Supervision:

SL. No. Points

Asses the financial soundness bank and financial
a.
institutions
Dig out procedural defects/lapses/deficiencies
b. and functional irregularities and to incorporate the same in
the inspection reports
Bring out the various irregularities incorporated and
recommendations made in the report to the notice of the top
c.
management of the organization concerned in order to put it
on sound footing&
d. Develop sound banking practice in Bangladesh.

Type of inspection:

 Comprehensive
 Special
  Summary

Policies / Procedures followed for Inspection:

Comprehensive: Branches covering normally 70%-75% of outstanding loans once in every year. Rest of
the branches once in every three years.

Special: As and when any allegations received or published in national/local dailies.

Points subject to inclusion in branch inspection report:

 Compliance of last inspection report

 Cash verification & security arrangements
 Statement of assets & liabilities
 Deposits
 Profit & loss accounts
 Liquid assets
 Loans and advances
 Examination of F.E issues
 Other assets
 Frauds and forgeries
 Miscellaneous irregularities
 Inter branch transactions
 Customer services
 Internal audit & inspection
 Branch management
 Discussions
 Conclusions & recommendations

Schedules / pages to be prepared & points to be included in the Head Office inspection report:

Inspectors Statement of assets and liabilities:

Banks which have branches in foreign countries must have a balance sheet and profit and loss statement
on a fully consolidated on the date of inspection as prescribed by the banks of inspection. This date of the
inspection will be used for the completion of all official returns. The primary purpose is to provide an
accurate description on a uniform basis of each asset, liabilities & capital account segregation. Among the
adjustments which will be necessary are the followings:

Cash and due from banks: Balances due from closed banks should be shown as “other Assets” rather than
as “cash and due from banks” This adjustment maintains the “quick assets” liquidity which should
necessarily characterize “cash and due from banks”

Detailed Statement of Assets Subject To Adverse Classification

Any loan that represents 1% of the total capital and reserves of the bank should be listed separately. Small
loan can be shown in group totals. And the inspector in charge to decide what loans will be shown and
what will be listed individually. Large branch loans representing 1% of the total capital and reserves of
the bank should be shown separately.
Large Lines and Concentrations of Credit: This schedule is for the purpose of displaying all unduly
large direct and indirect of credit to the same of the related interests, regardless of whether adversely
classified in whole or in the part or of whether shown elsewhere in the inspection report. Loans of all
types, overdrafts and all other forms of credit extensions are to be considered in determining a
concentration.

Large Lines: Large line are objectionable if they violate a basic principle of sound banking, adequate risk
diversification. The schedules sound includes only lines which are large in relation to the capital structure
of the bank. The schedule is not intended to include small lines which are large in the sense that they are
disproportionate to the borrower’s resources. All lines that represent 15% or more of the Capital and
Reserve of the bank should be listed. Other large lines that represent a significant portion of the Capital
and Reserves of the bank may be listed. This will be at the discretion of the inspector.

Concentrations of Credit: A line to an individual firm or obligor which is large in relation to the
banker’s total capital structure is obviously a concentration, are extensions to two or more obligors, the
repayment of which is based upon the same kind of collateral or the same type of production or business.
In scheduling a concentration of credit which is composed of extensions to several different individuals or
firms, the relationship between the advances should be made clear. The same is true of extensions to
closely allied interests, the repayment of whose obligations is inter-dependent by reason of affiliated
ownership or control. It is nearly impossible to list all types of concentrations which might exist. And an
Inspector should use their informed judgment in deciding the extent of investigation necessary to disclose
report of examination. The handling of concentrations in the report of examination is flexible and requires
some degree of inspector judgment. A guideline for listing concentrations in the inspection report should
be 25% or more of the bank’s capital structure.

Check – Up:

 Has a policy been adopted which specifically addresses concentrations of credits?

Have controls been instituted to monitor the following types of concentrations:

 Loans and other obligations of one borrower?

 Loans predicated on the collateral support afforded by a debt or equity issue of a corporation?
 Loans dependent upon one crop or herd?
 Loans dependent upon one industry group?

Extension of Credit to Directors, Shareholder and Their Interests and Executive Officers:

Indebtedness as used in this schedule includes all direct and indirect extensions of credit regardless of
form. In general, a person may be said to be substantially interested in a concern, or if he is an active
officer, or director of that concern, or if he has a substantial ownership interest. A substantial ownership
interest need not be voting control, but it should not be interpreted as the ownership of only few shares.

Comments in this schedule with respect of management loans should be extremely brief. If a line is
adversely classified or otherwise subject to comment, it will have been toughly discussed in other
schedules of the report, to which reference may be made for supporting information. The total line and its
classification are all that are necessary at this point. If a loan is not subject to adverse classification only
the total line need be shown, since other details would be superfluous.
Analysis of Aggregate Management Indebtedness:

Whenever there is evidence of self serving upon the part of a bank’s management credits is large and their
quality questionable certain computations, in addition to the recapitulation at the head of the schedule,
will be useful in illustrating the situation. Accordingly, a summarization of the classification of all
management items at the conclusion of the schedule will at times prove valuable. It is difficult to set any
maximum percentage ratio beyond which management loans should not expand. There is no basis for
saying that management loans should not exceed 10%, 50%, 100% or some other particular percentage of
book capital. Nor is there any basis of assuming that management loans should never exceed a certain
percentage of total assets or total loans. It can be said, however, that all management loans should be of
high quality. Ratios designed to point out the general quality of such loans are therefore more practical
than ratios comparing their aggregate with some other balance sheet segregation.

Loans Not Supported By Adequate Credit Information:

In here the documentation expectations should be listed under comments. Only large loans should be
reported here. A guideline is 1 corer and above. Examples of technical expectations that should be listed
include:

 Missing or State Financial Statement

 Missing or State Guarantees Or State Financial Statements For Guarantors
 Missing or Stale Cash Flow And Income Information
 Stale or Missing Borrowing Resolutions/Partnership Agreements
 Missing Security Agreements
 Unrecorded Lines on Collateral
 Inadequate or Missing Appraisals
 Missing or Expired Hazard Insurance
 Missing Rent Rolls/Tenant Listing

Lending Policies and Asset Quality:

With respect to specific policies, inspectors should review loan, investment and significant operating
policies relating to asset quality. These policies should be in written from, approved and reviewed
periodically by the board of directors, and communicated to all appropriate bank personnel. When
assessing loan policies consideration should be given to the following:

 Internal loan approval, review and monitoring and control procedures;

 Loan reports used by management to monitor lending practices;
 Loan processing procedures and controls;
 Adequacy of staffing, including number, competence, reporting lines, and compensation schemes;
 Individual lending authorities;
 The organization and completeness of the credit files;
 Collateral administration and evaluation procedures;
 Procedures for evaluating credits;
 Collection and workout procedures;
 Procedures for renewing or extending loans;
 The accrual and capitalization of past due interest and prepaid interest;
 Any other unfavorable practice that may result in poor asset quality.
Asset Quality: An accurate assessment of asset quality is critical to evaluating the overall condition of
the bank. Analysis should be straight – forward and, if all conditions are satisfactory, a brief statement to
this effect addressing each factor listed below.

In assessing the quality of assets, the LEVEL of classified credits refers to their total volume and amount
in relation to off-balance sheet items.

SEVERITY refers to the relative distribution of credits subjects to classification among the substandard,
doubtful, or loss classifications and the effect on the bank’s financial condition.

TREND refers to whether or not the overall asset quality has been improving or deteriorating over time or
since the previous examination.

Capital Account Analysis:

Totals book capital as defined by Bangladesh Bank is shown here plus provisions made for adversely
classified loans and provisions made for other classified assets.

Deducted from the above sub-total amount are the following:

 Shortfall in provision requirement against classified assets.

 Shortfall in the 1% General Provision against unclassified loans.
 Liabilities not shown on the bank’s books.
 Other deductions that may be classified by the inspector.

Following the above deductions, the inspector arrives at the bank’s adjusted capital position. There is not
any question that a bank’s adjusted capital position is one of the most important indicators of the health of
a financial institution. A bank’s losses accumulated over a number of years and sometimes carried in
Other Assets should be classified loss and deducted from the bank’s capital. In reviewing the bank’s
statement of Assets and Liabilities, the inspectors should review carefully all accounts to determine if any
losses exist and classify them accordingly.

Comparative Statement of Income and Expenses and Changes in Equity capital Page 5

The comparative report of income and expenses should reflect the trend of a bank’s operations over the
past four fiscal years of operation. The recurring, current operating earnings less recurring, current
operating expenses should be shown separately to reflect the current operating earnings of the bank as
distinguished from non-recurring profits, recoveries, and charge-offs, as well as dividends and income-
taxes. Income furnishes a year to year and bank to bank comparison which is a more accurate measure of
the bank’s earning capacity than its net increase to capital account.

It is essential that a bank’s earning capacity be known, for out of such earnings the bank must provide for
losses and furnish a fair return to its stock holders. Earnings are necessary for any growing bank which
seeks to attract new investment capital.A reconciliation of the changes show in the aggregate capital
accounts should be included in a schedule 5(A) for the years covered on page 5. The non-recurring items
of Profits, Recoveries, Losses and Charge-offs are shown in respective totals for the year on page

Comments on Capital and Earnings Page 5(B):

Capital adequacy is evaluated against the factors listed in the heading of page 5(B).

Inspectors should explicitly evaluate capital in relation to the volume and trend of classified assets. Weak
and/or deteriorating asset quality increases the bank’s need for capital. An assessment of growth in capital
should include consideration of growth form the various sources of capital such as retained earnings, new
capital stock issue and capital injections by the shareholders, and should be compared to growth in total
assets, other balance sheet categories and off-balance sheet items.

Balance sheet composition refers to changes in the make-up of the bank’s assets and liabilities. A bank’s
capital growth may keep pace with growth in total assets; however, a change in asset composition, by
decreasing relatively low-risk assets and increasing relatively high-risk assets, can increase the risk
exposure of the bank and thereby necessitate higher capital ratios.

 Overall financial condition?

 Growth experience and future growth prospects?
 The retention of earnings for capital needs?
 Plans for maintaining adequate capital and correcting any deficiencies?
 Compliance with regulatory capital directives?

Investment Policies Page 6:

The investment securities records and subsidiary records of the bank should be reviewed carefully. If the
bank has an investment committee, the minutes of the investment committee should be read carefully.

Investment Securities and Shares Page 6(A):

The securities section on this page is a supporting schedule of the inspection report’s page 1 which is the
Inspector’s statement of Assets and Liabilities. The breakdown should show book value, market value and
appreciation of depreciation. The total book value should agree with page 1 for total
investments.

Fixed Assets Page 7:

 Insurance Coverage on banking house; furniture and Fixtures;

 Any appreciable increase in book value of banking house or furniture ankh fixtures since the
previous inspection;
 If the bank has written up the value of its building at any time over cost, or if it is not regularly
depreciating the book value, comments should made by he inspector.

Other Real Estate:

Immovable property owned by the bank is real asset which is obtained against security for bad and
doubtful loans. Since it has less liquidity banks should not hold this for long time and the amount of this
asset should not cross the amount of loan. The real estate can be hold maximum 5 years and if the book
value of real estate is not nominal figure then inspector should comment on page 2. Brief description of
property must be shown in the schedule of other real estate and excess of book value over appraised value
of real estate is classified as loss.

Other Assets:
Other assets are listed or classified in the schedule on page 1 and the grouping of theses assets should be
scheduled according to the order listed on page 1.Inspector should review the classifications of totally
supervision assets and the losses incurred due to other assets should be maintained as loss. Inspector
should classify “goodwill” shown in other asset and the classification of other assets should be shown on
page 3A.

Liquidity/ asset liability management:

Liquidity for a bank means the ability to meet its financial obligations as they come due. Bank lending
finances investments in relatively illiquid assets, but it fund its loans with mostly short term
liabilities. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable
conditions

Interest Sensitivity page 9 (A):

It refers to the effect in total earnings due to changes in market interest rate. Interest rate risk exposure is
the consequence of mismatching maturities of rate sensitive assets and rate sensitive liabilities. Here rate
sensitive means interest rate can be changed within less than one year. There are several methods to
measure the risk of interest rate, but gap analysis is mainly used in examination report which is to
evaluating the net interest rate exposure of asset and liability in several time periods to determine the
absolute size of gap. The positive gap raises a bank’s earnings if interest rate rises and vice versa. On the
other hand, negative gap causes decline in earnings if rates rise and vice versa. Examiners must carefully
analyze the changes in bank’s earnings due to interest rate, and page 9 (A) will assist examiner to measure
the risk. High gap positions which may exceed +10% or -10% must be commented on page 2 inspection
conclusion and recommendation.

Trend of Deposits and Sector wise distribution of deposits:

Inspector should know the stability and source of various deposits. Change in the deposit or liability mix
should be mentioned in the report. Inspector should compare the rate of deposits with the rate offered by
competitors and he should determine the reasons why premium rates are paid since it indicates disability
of bank raising funds. In page 9B the schedule of the growth trend of deposits over the past 4 years must
be included.

Large Deposits Page 9C:

While assessing the stability of deposits, the concentration of large deposits should be discussed in the
report.

Contingent Liabilities 9D:

The off balance sheet items are contingent liabilities which are discussed in this page to determine
whether the bank has sufficient liquid assets or not to cover these items and the classification of these
liabilities is also included in this page.

Borrowings page 10:

Borrowings must be included in schedule and these are verified by form of borrowing, amount, date of
loan, interest rate, due date of loan and security pledged.
Liabilities not shown on bank’s book page 11:

Liabilities which are not shown in bank’s book are included in this schedule. Inspector should verify these
liabilities and give comments. Large amount of past due bills are the common non book liabilities which
are encountered from time to time. The inspector should not adjust in this schedule due to inaccurate
accruals. If bank’s record overstate due to inaccurate accruals then the use of this schedule is necessary.

Audit and Internal controls page 12:

An inspector will evaluate a bank’s internal controls by including effectiveness of internal auditing and
implementation internal control questionnaire. Inspector should not eliminate the internal or external audit
functions satisfactorily performed. The inspector should review and evaluate independence and
competency of the internal auditors and verify whether the audit program is effective or not.

Supervision by Directors page 13:

The inspector should include in this section the answers to questions shown on page 13 of the report,
based on findings during the course of his inspection.

Fidelity and other insurance page 14:

Describe surely protection provided by bank against officer and employee defalcation.

Foreign Exchange position page 15 A:

This page shows the foreign exchange position of various currencies held by the bank.

Key ratio analysis page 16:

Inspector analyzes the key ratios of bank to decide whether the banks are performing well or not. By
analyzing inspector can project the future and predict possible problems.

Guidelines and Procedures for the Uniform Evaluation and Rating of Banks (CAMEL)

The rating system is based on an evaluation of five vital dimensions of a bank’s operations that reflect in
a broad manner, an institutions financial condition, compliance with banking regulations and acts and
overall operating soundness. The specific dimensions that are to be evaluated are the following;

1. Capital Adequacy = C
2. Asset quality =A
3. Management =M
4. Earnings =E
5. Liquidity =L

Each of the dimensions is to be rated on a scale of one through five in ascending order of performance
deficiency. Thus 1 represents the highest and 5 the lowest level of operating performance.

Each bank is agreed a composite rating that is predicated upon the evaluations of the specific performance
dimensions. The composite rating is also based upon a scale of 1 through 5 in ascending order of
supervisory concern. Furthermore, at a composite rating each financial dimension must be considered and
due consideration given to the interrelationships among the various aspects of a bank’s operations.

Composite Rating

The five composite ratings are defined and distinguished as follows:

Composite 1:

Banks in this group are sound institutions in almost every aspect; any critical findings are basically of a
minor nature and can be handled in routine manner. Such banks are resistant to external economic and
financial disturbances and capable of withstanding the vagaries of business conditions more ably than
banks with lower composite ratings.

 Basically sound in every respect

 Findings are of a Minor Nature and can be handled routinely
 Resistant to external economic and financial disturbance
 No cause for supervisory concern

Composite 2:

Banks in this group are also fundamentally sound institutions but may reflect modest weaknesses
correctable in the normal course of business. Such banks are stable and also able to withstand business
fluctuations quite well. Areas of weakness could develop into conditions of greater concern. To the extent
that the minor adjustments are handled in the normal course of business, the supervisory response is
limited.

 Fundamentally sound
 Findings are of a minor nature and can be handled routinely
 Stable and can survive business fluctuations well
 Supervisory concerns are limited to the level that are corrected

Composite 3: Banks in this group exhibit a combination of weaknesses ranging for moderately severe to
unsatisfactory. Such banks are only nominally resistant to the onset of adverse business conditions and
could easily decline if concerted action is not effective in correcting the areas of weaknessFinancial,
operational, or compliance weakness ranging from moderately severe to unsatisfactory

 Weak to the onset of unfavorable business conditions

 Easily decline if actions are not effective in correcting weaknesses
 Supervisory concern and more than normal supervision to address deficiencies

Performance Evaluation: As already noted that the five key performance dimensions Capital adequacy,
asset quality, management, earnings and liquidity are to be evaluated on a scale of one to five.

Rating no. 1: Indicates strong performance. It is the highest rating and is indicative of performance that is
significantly higher than average.

Rating no. 2: Reflects satisfactory performance. It reflects performance that is average or above. It
includes performance that adequately provides for the safe and sound operation of the bank.
Rating no. 3: Represents performance that is flawed to some degree. As such is considered fair. It is
neither satisfactory nor unsatisfactory but is characterized by performance of below average quality.

Rating no. 4: Refers to marginal performance and is significantly below average. If it left unchecked,
such as performance might evolve into weaknesses or conditions that could threaten the viability of the
institution.

Rating no. 5: Reflects unsatisfactory performance. It is the lowest rating and is indicative that
performance is critically deficient and in need of immediate remedial attention. Such performance by
itself, or in combination with other weaknesses, threatens the viability of the institutions.

Bank Analysis Checklist (CAEL)

Capital Adequacy:

 Is level of capital high enough?

 Is capital growing comfortably?
 Can additional debt be raised if needed?
 Does there appear to be pressure to maintain an abnormally high dividend rate?

Asset Quality:

 Are high charge offs predicted for next year?

 Is the bank house cleaning and is reserve level adequate?
 Is management slow to charge off bad loans?

Earnings:

 Adequate level and trend?

 Valid reporting?

If poor, ascribable to one or more of the following:

 Low asset yields

 High cost of funds & High overhead
 Loan losses & mismanaging taxes
 Poor other income level

If strong, ascribed to:

 Strong asset yields

 Low cost of funds & low overhead
 Low loan losses & adequate tax planning
 Significant other income

Liquidity:

 Is bank dependent on borrowed money?

 Is asset growth:

 Founded by core deposit growth?

 Supported by capital growth?
 Funded by borrowed money?
 Capital Adequacy: Capital is rated 1 through 5 in relation to the volume of risky assets, the
volume of marginal and inferior quality assets, bank growth experience, plans, and
prospects and, the strength of management. In addition, consideration should be given to banks
capital ratios relative to its peer group, its earnings retention and its access to capital markets or
other appropriate sources of financial assistance. The bank’s policy statement must also be taken
into account.
 Asset Quality: Asset quality is rated 1 through 5 in relation to the level, distribution and severity
of classified assets, the level and distribution of non accrual and reduced rated assets, the
adequacy of valuation reserves, and demonstrated ability to administer and collect problem
credits.
 Management: Management’s performance must be evaluated against virtually all factors
considered necessary to operate the bank within accepted banking practices and in a safe and
sound manner. Thus, management is rated 1 through 5 with respect to technical competence,
leadership and administrative ability, compliance with regulations and statutes, ability to plan and
respond to changing circumstances, adequacy of and compliance with internal policies, and depth
and succession. The assessment of management also takes into account the quality of internal
controls, operating policies, and the involvement of the directors and shareholders.
 Earnings: Earnings will be rated 1 through 5 with respect to the ability to cover losses and provide for
adequate capital, earnings trends, peer group comparisons and quality and composition of net income.
Consideration should also be given to the interrelationships that exist between the dividend payout
ratio, the rate of growth and retained earnings and the adequacy of bank’s capital

Asset Classification
Usually 3(three) categories of banking assets are classified. These are as under:
 Loans and advances including bills purchased & discounted.
 Securities ( Bank’s Investments)
 Other assets

Importance & Objects of Assets Classification:

 Help to find out Net worth (N.W)/ Adjusted capital
 Help to assess financial sound footing in order to develop sound banking practice in Bangladesh
 Help to strength Credit discipline
 Help to improve loan recovery position
 Help to calculate the required provision & the amount of interest suspense
 Help to make planning for future course of action

Type of loans to be classified:

 Continuous Loans
 Demand Loans (DL)
 Fixed Term Loans (Repayable within 5 years)
 Fixed Term Loans (Repayable within more than 5 years)
  Basis for Loan Classification
1. Objective Criteria (OB)
2. Qualitative Judgment (QJ)
Status of Loan Classification
 UC
 Standard
 SPECIAL Mention Account
 SS – Sub-Standard
 DF – Doubtful
 B/L – Bad & Loss

Conclusion
The departments of banking inspection and off-site supervision are accountable for the inspection of
schedule banks and other financial institutions. This inspection is very vital because it measures the
financial soundness of bank’s assets. Through this inspection any sort of irregularities in following
banking rules and norms, violations of laws and regulations can be found out. These significant noted
issues are noticed to the top management so that they can take necessary measures in right time. As
banks and financial institutions are liable and accountable for the safety of public money, so this
inspection is important to find out whether the banks are properly doing their responsibilities. If the
banks’ performance does not seem well, the supervision of onsite and off-site supervision department
of Bangladesh bank make the banks on sound footing and it assist the banks to develop good banking
practice.