Department of Finance

University of Dhaka

A Report on different risks measurements of EXIM

Bank Limited ( Year 2012 to 2016)

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 A Report on different risks measurement of EXIM
Bank Limited ( Year 2012 to 2016)

Course Name: Management of Financial Markets and

Instititions
Course Code: F-501

Submitted to:
Dr. Gazi Mohammad Hasan Jamil
Associate Professor
Department of Finance
Faculty of Business Studies
University of Dhaka

Submitted by:
Mohammad Habibur Rahman
M.B.A – 19th batch
B.B.A Roll No.: 19-191
Department of Finance
Faculty of Business Studies
University of Dhaka
Date of submission: 11th December, 2017

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 Letter of Transmittal
11th December, 2017

Dr. Gazi Mohammad Hasan Jamil

Associate Professor
Department of Finance
University of Dhaka

Subject: Submission of a Report on EXIM Bank Ltd.

Dear Sir,

I am submitting the report on the topic “different risks measurements of EXIM Bank Ltd.
(Year 2012 to 2016)”. The topic was assigned by you as a partial requirement of my MBA
curriculum.

I have tried my best to prepare this report by following the formal report writing guidelines. I
have studied the annual reports of the bank and used all the relevant information for this analysis.
I have done the job of preparing the report sincerely as I know that it is a great opportunity to
gain some real knowledge about the strategies which can be used to minimize capital risk of
Banking Business.

I hope you will find the reflection of my hard work in this report and will pardon me if there is
any unwillingly done mistake.

Sincerely Yours,

Mohammad Habibur Rahman

M.B.A – 19th batch

B.B.A Roll No.: 19-191, MBA Roll: 19-337

Department of Finance

Faculty of Business Studies

University of Dhaka
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 Table of Contents
Chapter-01: Introduction ............................................................................................................................... 5
1.1 Origin of the report ............................................................................................................................. 6
1.2 Objective of the report ....................................................................................................................... 6
1.3 Methodology ....................................................................................................................................... 6
1.4 Limitation ............................................................................................................................................ 6
Chapter- 2: Financial system of Bangladesh and its regulations .................................................................. 8
Chapter-03: EXIM Bank Overview ............................................................................................................ 16
Corporate Culture: .................................................................................................................................. 17
Capital ..................................................................................................................................................... 18
Corporate Information (EXIM BANK) At a Glance: ............................................................................. 19
Chapter-4: Interest Rate Risk I.................................................................................................................... 20
Chapter-5: Interest Rate Risk II .................................................................................................................. 22
Chapter-6: Market Risk............................................................................................................................... 23
Chapter-7: Credit Risk ................................................................................................................................ 24
Chapter-8: Liquidity Risk ........................................................................................................................... 26
Chapter-9: Conclusion & References ......................................................................................................... 27
Conclusion ............................................................................................................................................... 27
References .............................................................................................................................................. 27

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 Chapter-01: Introduction

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1.1 Origin of the report
This report was assigned to us to evaluate our understanding of risk of financial sector arising out
of different economic internal factors and as well as practical impact of it in a listed Bank. It was
assigned as a significant part of MBA program of Department Of Finance which is under Faculty
of Business Studies. It was assigned to us by the course teacher, Dr. Gazi Mohammad Hasan
Jamil, Department Of Finance, University Of Dhaka.

1.2 Objective of the report

 To become familiar with the potential risk factors of banking industry
 To determine the impact of individual risk factors on capital adequacy ratio
 To determine the financial strength and resilience of a particular bank
 To explore the actions plans to be taken on each scenario

1.3 Methodology
I have followed the guidelines about the methodology provided by our honorable course
instructor which are:

 Studying the Guidelines on Stress Testing from Bangladesh Bank and the Annual
Reports (2012 to 2016) of EXIM Bank Ltd. properly.
 Collecting required data from the financial statements and the notes provided in the
annual reports.

1.4 Limitation
Despite the limitations of my knowledge, thinking power and skills, I have tried to give my best
effort to analyze the data and prepare the report as properly as possible. I have faced the
following problems during the preparation of this report:

 I had to make some assumptions for some interest rate, repricing period etc. because of
unavailability of information in the annual reports.
 Calculations are done in the way I have thought perfect but my thinking may not be
right.
 There was some confusion regarding some data and calculation process where I have
used my own opinion and judgments to take decision.

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 Chapter- 2: Financial system of Bangladesh and its
regulations

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Different kind financial institutions in Bangladesh. The major
characteristics of each category of financial institutions.

Banks
After the independence, banking industry in Bangladesh started its journey with 6 nationalized
commercialized banks, 2 State owned specialized banks and 3 Foreign Banks. In the 1980's
banking industry achieved significant expansion with the entrance of private banks. Now, banks
in Bangladesh are primarily of two types:

 Scheduled Banks: The banks which get license to operate under Bank Company Act,
1991 (Amended upto 2013) are termed as Scheduled Banks.
 Non-Scheduled Banks: The banks which are established for special and definite objective
and operate under the acts that are enacted for meeting up those objectives, are termed as
Non-Scheduled Banks. These banks cannot perform all functions of scheduled banks.

There are 57 scheduled banks in Bangladesh who operate under full control and supervision of
Bangladesh Bank which is empowered to do so through Bangladesh Bank Order, 1972 and Bank
Company Act, 1991. Scheduled Banks are classified into following types:

 State Owned Commercial Banks (SOCBs): There are 6 SOCBs which are fully or
majorly owned by the Government of Bangladesh.
 Specialized Banks (SDBs): 2 specialized banks are now operating which were
established for specific objectives like agricultural or industrial development. These
banks are also fully or majorly owned by the Government of Bangladesh.
 Private Commercial Banks (PCBs): There are 40 private commercial banks which are
majorly owned by the private entities. PCBs can be categorized into two groups:
 Conventional PCBs: 32 conventional PCBs are now operating in the industry. They
perform the banking functions in conventional fashion i.e interest based operations.
 Islami Shariah based PCBs: There are 8 Islami Shariah based PCBs in Bangladesh and
they execute banking activities according to Islami Shariah based principles i.e. Profit-
Loss Sharing (PLS) mode.

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  Foreign Commercial Banks (FCBs): 9 FCBs are operating in Bangladesh as the branches
of the banks which are incorporated in abroad.

There are now 6 non-scheduled banks in Bangladesh which are:

 Ansar VDP Unnayan Bank,

 Karmashangosthan Bank,
 Grameen Bank,
 Jubilee Bank,
 Probashi Kollyan Bank,
 Palli Sanchay Bank

FIs
Non Bank Financial Institutions (FIs) are those types of financial institutions which are regulated
under Financial Institution Act, 1993 and controlled by Bangladesh Bank. Now, 33 FIs are
operating in Bangladesh while the maiden one was established in 1981. Out of the total, 2 is fully
government owned, 1 is the subsidiary of a SOCB, 15 were initiated by private domestic
initiative and 15 were initiated by joint venture initiative. Major sources of funds of FIs are Term
Deposit (at least three months tenure), Credit Facility from Banks and other FIs, Call Money as
well as Bond and Securitization.
The major difference between banks and FIs are as follows:

 FIs cannot issue cheques, pay-orders or demand drafts.

 FIs cannot receive demand deposits,
 FIs cannot be involved in foreign exchange financing,
 FIs can conduct their business operations with diversified financing modes like
syndicated financing, bridge financing, lease financing, securitization instruments, private
placement of equity etc.

Regulators of financial system

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Central Bank

Bangladesh Bank acts as the Central Bank of Bangladesh which was established on December
16, 1971 through the enactment of Bangladesh Bank Order 1972- President’s Order No. 127 of
1972 (Amended in 2003).
The general superintendence and direction of the affairs and business of BB have been entrusted
to a 9 members' Board of Directors which is headed by the Governor who is the Chief Executive
Officer of this institution as well. BB has 45 departments and 10 branch offices.
In Strategic Plan (2010-2014), the vision of BB has been stated as, “To develop continually as a
forward looking central bank with competent and committed professionals of high ethical
standards, conducting monetary management and financial sector supervision to maintain price
stability and financial system robustness, supporting rapid broad based inclusive economic
growth, employment generation and poverty eradication in Bangladesh”.
The main functions of BB are (Section 7A of BB Order, 1972) –

1. to formulate and implement monetary policy;

2. to formulate and implement intervention policies in the foreign exchange market;
3. to give advice to the Government on the interaction of monetary policy with fiscal and
exchange rate policy, on the impact of various policy measures on the economy and to
propose legislative measures it considers necessary or appropriate to attain its objectives
and perform its functions;
4. to hold and manage the official foreign reserves of Bangladesh;
5. to promote, regulate and ensure a secure and efficient payment system, including the
issue of bank notes;
6. to regulate and supervise banking companies and financial institutions.

Core Policies of Central Bank

Monetary policy
The main objectives of monetary policy of Bangladesh Bank are:

 Price stability both internal & external

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  Sustainable growth & development
 High employment
 Economic and efficient use of resources
 Stability of financial & payment system

Bangladesh Bank declares the monetary policy by issuing Monetary Policy Statement (MPS)
twice (January and July) in a year. The tools and instruments for implementation of monetary
policy in Bangladesh are Bank Rate, Open Market Operations (OMO), Repurchase agreements
(Repo) & Reverse Repo, Statutory Reserve Requirements (SLR & CRR).

Reserve Management Strategy

Bangladesh Bank maintains the foreign exchange reserve of the country in different currencies to
minimize the risk emerging from widespread fluctuation in exchange rate of major currencies
and very irregular movement in interest rates in the global money market. BB has established
Nostro account arrangements with different Central Banks. Funds accumulated in these accounts
are invested in Treasury bills, repos and other government papers in the respective currencies. It
also makes investment in the form of short term deposits with different high rated and reputed
commercial banks and purchase of high rated sovereign/supranational/corporate bonds. A
separate department of BB performs the operational functions regarding investment which is
guided by investment policy set by the BB's Investment Committee headed by a Deputy
Governor. The underlying principle of the investment policy is to ensure the optimum return on
investment with minimum market risk.

Interest Rate Policy

Under the Financial sector reform program, a flexible interest policy was formulated. According
to that, banks are free to charge/fix their deposit (Bank /Financial Institutes) and Lending
(Bank /Financial Institutes) rates other than Export Credit. At present, except Pre-shipment
export credit and agricultural lending, there is no interest rate cap on lending for banks. Yet,
banks can differentiate interest rate up to 3% considering comparative risk elements involved
among borrowers in same lending category. With progressive deregulation of interest rates,
banks have been advised to announce the mid-rate of the limit (if any) for different sectors and
the banks may change interest 1.5% more or less than the announced mid-rate on the basis of the
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comparative credit risk. Banks upload their deposit and lending interest rate in their respective
website.

Capital Adequacy for Banks and FIs

Basel-III has been introduced with a view to strengthening the capital base of banks with the goal
of promoting a more resilient banking sector. The Basel III regulation will be adopted in a
phased manner starting from the January 2015, with full implementation of capital ratios from
the beginning of 2019. Now, scheduled banks in Bangladesh are required to maintain minimum
capital of Taka 4 billion or Capital to Risk Weighted Assets Ratio (CRAR) 10%, whichever is
higher. 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. Besides the minimum
requirement all banks have a process for assessing overall capital adequacy in relation to their
risk profile and a strategy for maintaining capital at an adequate level.

For FIs, full implementation of Basel-II has been started in January 01, 2012 (Prudential
Guidelines on Capital Adequacy and Market Discipline (CAMD) for Financial Institutions).
Now, FIs in Bangladesh are required to maintain Tk. 1 billion or 10% of Total Risk Weighted
Assets as capital, whichever is higher.

Insurance Authority

Insurance Development and Regulatory Authority (IDRA) was instituted on January 26, 2011 as
the regulator of insurance industry being empowered by Insurance Development and Regulatory
Act, 2010 by replacing its predecessor, Chief Controller of Insurance. This institution is operated
under Ministry of Finance and a 4 member executive body headed by Chairman is responsible
for its general supervision and direction of business.
IDRA has been established to make the insurance industry as the premier financial service
provider in the country by structuring on an efficient corporate environment, by securing
embryonic aspiration of society and by penetrating deep into all segments for high economic
growth. The mission of IDRA is to protect the interest of the policy holders and other
stakeholders under insurance policy, supervise and regulate the insurance industry effectively,

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ensure orderly and systematic growth of the insurance industry and for matters connected
therewith or incidental thereto.

Regulator of Capital Market Intermediaries

Securities and Exchange Commission (SEC) performs the functions to regulate the capital
market intermediaries and issuance of capital and financial instruments by public limited
companies. It was established on June 8, 1993 under the Securities and Exchange Commission
Act, 1993. A 5 member commission headed by a Chairman has the overall responsibility to
administer securities legislation and the Commission is attached to the Ministry of Finance.
The mission of SEC is to protect the interests of securities investors, to develop and maintain
fair, transparent and efficient securities markets and to ensure proper issuance of securities and
compliance with securities laws. The main functions of SEC are:

 Regulating the business of the Stock Exchanges or any other securities market.
 Registering and regulating the business of stock-brokers, sub-brokers, share transfer
agents, merchant bankers and managers of issues, trustee of trust deeds, registrar of an
issue, underwriters, portfolio managers, investment advisers and other intermediaries in
the securities market.
 Registering, monitoring and regulating of collective investment scheme including all
forms of mutual funds.
 Monitoring and regulating all authorized self-regulatory organizations in the securities
market.
 Prohibiting fraudulent and unfair trade practices in any securities market.
 Promoting investors’ education and providing training for intermediaries of the securities
market.
 Prohibiting insider trading in securities.
 Regulating the substantial acquisition of shares and take-over of companies.
 Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of
securities, the Stock Exchanges and intermediaries and any self-regulatory organization
in the securities market.
 Conducting research and publishing information.

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Regulator of Micro Finance Institutions

To bring Non-government Microfinance Institutions (NGO-MFIs) under a regulatory framework,

the Government of Bangladesh enacted "Microcredit Regulatory Authority Act, 2006’" (Act no.
32 of 2006) which came into effect from August 27, 2006. Under this Act, the Government
established Microcredit Regulatory Authority (MRA) with a view to ensuring transparency and
accountability of microcredit activities of the NGO-MFIs in the country. The Authority is
empowered and responsible to implement the said act and to bring the microcredit sector of the
country under a full-fledged regulatory framework.
MRA’s mission is to ensure transparency and accountability of microfinance operations of NGO-
MFIs as well as foster sustainable growth of this sector. In order to achieve its mission, MRA has
set itself the task to attain the following goals:

 To formulate as well as implement the policies to ensure good governance and

transparent financial systems of MFIs.
 To conduct in-depth research on critical microfinance issues and provide policy inputs to
the government consistent with the national strategy for poverty eradication.
 To provide training of NGO-MFIs and linking them with the broader financial market to
facilitate sustainable resources and efficient management.
 To assist the government to build up an inclusive financial market for economic
development of the country.
 To identify the priorities in the microfinance sector for policy guidance and dissemination
of information to attain the MRA’s social responsibility.

According to the Act, the MRA will be responsible for the three primary functions that will need
to be carried out, namely:

 Licensing of MFIs with explicit legal powers;

 Supervision of MFIs to ensure that they continue to comply with the licensing
requirements; and

Enforcement of sanctions in the event of any MFI failing to meet the licensing and ongoing
supervisory requirements.

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 Chapter-03: EXIM Bank Overview

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EXIM Bank Limited is a bank of 21st century. The founders of EXIM Bank Limited are committed to
make it a little more different and a bit special qualitatively. This bank has a new vision to fulfill and a
new goal to achieve. The bank has been manned with experienced executives equipped with modern
technology so as to make it most efficient to meet the needs of 21st century.

Vision

The gist of EXIM Bank Limited vision is “Together towards Tomorrow”. EXIM Bank Limited
believes in togetherness with its customer, in its march on the road to growth and progress with services.
To achieve the desired goal, there will be pursuit of excellence at all stages with a climate of continuous
improvement, because, EXIM Bank Limited believes the line of excellence is never ending. Banks
strategic plans and networking will strengthen its competitive edge over others in rapidly changing
competitive environment. Its personalized quality service to the customers with the trend of improvement
will be cornerstone to achieve our operational success.

Mission

The Bank‘s mission gives emphasize to:

 to provide quality financial services especially in Foreign Trade

 to continue a contemporary technology based professional banking environment
 to maintain corporate & business ethics and transparency at all levels
 Sound capital base
 To ensure sustainable growth and establish full value to the honorable stakeholder
 to fulfil its social commitments and
 Above all, to add positive contribution to the national economy

Corporate Culture:
Organizational culture is considered as an essential component of business corporations as it has the
ability to bind organizational members together. The culture and values of our bank have been proved as a
source of competitive advantage for us and are acting as a key component to establish the relationship
between the bank and our employees and , in turn , between our employees and our customers. Our
culture and values also encourage customers and employees to join us and stay with us.

EXIM Bank has also been able to improve organizational performance via improving the performance of
individual contributors and also recognizes existing talents to fill up the higher vacancies within the
organization or place them in the right position, wherein the best use of their abilities can be ensured. Our

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culture promotes sharing of common goal which ensures harmonious relationship in the working
environment.

Capital
The bank is started with an authorized capital of TK. 1000 million while its initial paid up Capital was
TK. 225.00 million subscribed by the sponsors in the year 1999. The Capital and Reserve of the Bank as
on 31st December 2011 stood at Tk. 16,109.56 million including paid up capital of Tk. 9223.56 million.
The Bank also made provision an unclassified investment which is amounted to Tk. 99699.63 million.

Products and services of EXIM bank

Retail banking

– Deposits – Investments – Cards – Internet Banking – SMS Banking – Locker Services

Corporate banking

– Investments – Foreign Exchange & Trade Finance – Correspondent Banking – Import Finance
– Export Finance

SME Banking (Small and medium enterprises)

– EXIM Uddyog– EXIM Abalamban

Agricultural banking

– EXIM Kishan

Remittance

Foreign Remittance – Exim Exchange Company (UK) Ltd. – Exim Exchange Company
(Canada) Ltd. – Exim (USA) Inc. – Exim Exchange (Australia) Pty. – SWIFT – International
Operation

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Corporate Information (EXIM BANK) At a Glance:
(Information as per last Annual Report 2016)

Name of the bank: EXIM Bank of Bangladesh Limited

Status: Private Limited Company

Date of Incorporation: 2nd June, 1999

Inauguration of the first branch: 3rd August, 1999

Authorized Capital: Tk. 20,000.00 Million

Paid-up-capital: Tk 11,566.35 Million

Investment (General): 143,847.38 Million

Deposits: 165,733.25 Million

Number of Shareholders: 154,398

Chairman: Mr. Md. Nazrul Islam Mazumder.

Managing Director: Dr. Md. Haider Ali Miah

Number of Branches: 80 (Including SME/Agriculture)

Number of Employees: 2229

Head Office: SYMPHONY, Plot No.SE (F)-9, Road No-142

Gulshan Avenue, Dhaka-1212, Bangladesh

Credit Rating: Long Term: ‘A+‘(Adequate Safety)

Short Term: ‘ST-2’ (High Grade)

Credit Rating Agency: Credit Rating Information and Services Limited (CRISL)

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 Chapter-4: Interest Rate Risk I

Repricing Model

The repricing gap is a measure of the difference between the dollar value of assets that will
reprice and the dollar value of liabilities that will reprice within a specific time period, where
reprice means the potential to receive a new interest rate. Rate sensitivity represents the time
interval where repricing can occur. Rate-sensitive assets are those assets that will mature or
reprice in a given time period. Rate-sensitive liabilities are those liabilities that will mature or
reprice in a given time period.

The repricing model focuses on the potential changes in the net interest income variable. In
effect, if interest rates change, interest income and interest expense will change as the various
assets and liabilities are repriced, that is, receive new interest rates. There are two advantages of
repricing model. First, it is easily to be understood. And it works well with small changes in
interest rates. One of its disadvantages is it ignores market value effects and off-balance
sheet cash flows. Next, it is over-aggregative, which distribution of assets and liabilities within
individual buckets is not considered. Mismatches within buckets can be substantial. Besides that,
it ignores the effects of runoffs.

When Rate Sensitive Assets (RSA) are greater than Rate Sensitive Liabilities (RSL), then there
is a positive gap which indicates the FI to have a reinvestment risk. In other words, there will be
a fall in interest rate that reduces the net interest income of the FI. On the other hand, when RSA
are lower than RSL, there is a negative gap which indicates the FI to have a refinancing risk. In
other words, there will be a rise in interest rate that leads to a reduction in the net interest income
of the FI as it has more RSL. Repricing model is easy to understand and even small changes in
interest rates can be measured with this.

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Repricing gap of Exim bank limited

2016 2015 2014 2013 2012

(6,516,324,766 (11,022,797,44 (15,135,069,51 (3,977,813,625 2,287,270,49

CGAP ) 8) 3) ) 2
Gap
ratio (0.03) (0.06) (0.09) (0.03) 0.02

Here the repricing gap of Exim bank is negative for first four years. Whereas repricing gap is
positive only in 2012. So, if the repricing gap is positive then a rise in interest rate will reduce
net interest income of the bank. In contrary, a fall in interest rate will rise net interest income
when the repricing gap is negative.

Limitations of repricing model

 It does not consider the market value effect

 It over aggregates the cash flow or mismatches the maturity bucket
 It does not consider pre-cash flow or cash flow from interest income which is known as
problem of runoffs
 It does not consider cash flows from off-balance sheet activities

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 Chapter-5: Interest Rate Risk II

Duration Model

The duration gap is a financial and accounting term and is typically used by banks, pension
funds, or other financial institutions to measure their risk due to changes in the interest rate. This
is one of the mismatches that can occur and are known as asset liability mismatches. Another
way to define Duration Gap is: it is the difference in the price sensitivity of interest-yielding
assets and the price sensitivity of liabilities (of the organization) to a change in market interest
rates (yields). The duration gap measures how well matched are the timings of cash inflows
(from assets) and cash outflows (from liabilities). When the duration of assets is larger than the
duration of liabilities, the duration gap is positive. In this situation, if interest rates rise, assets
will lose more value than liabilities, thus reducing the value of the firm's equity. If interest rates
fall, assets will gain more value than liabilities, thus increasing the value of the firm's equity.

Conversely, when the duration of assets is less than the duration of liabilities, the duration gap is
negative. If interest rates rise, liabilities will lose more value than assets, thus increasing the
value of the firm's equity. If interest rates decline, liabilities will gain more value than assets,
thus decreasing the value of the firm's equity. By duration matching, that is creating a zero
duration gap, the firm becomes immunized against interest rate risk. Duration has a double-facet
view. It can be beneficial or harmful depending on where interest rates are headed.

Duration of Exim bank limited

Weighted Average Duration

of Assets 1.81
Weighted Average Duration
of Liabilities 0.91

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 Total Assets
232,409,858,595.00
Total Liabilities
209,306,566,948.00
Leverage 0.900592463
Leverage Adjusted Duration
Gap 0.98

Here the duration gap of Exim bank limited is positive. In this situation, if interest rates rise,
assets will lose more value than liabilities, thus reducing the value of the firm's equity. If interest
rates fall, assets will gain more value than liabilities, thus increasing the value of the firm's
equity.

Limitations of duration model

 Duration matching is a costly process

 Immunization is a dynamic problem
 Large interest rate change and convexity

Chapter-6: Market Risk

Market Risk

Market risk is the risk of loss due to the factors that affect an entire market or asset class. Market
risk is also known as undiversifiable risk because it affects all asset classes and is unpredictable.
An investor can only mitigate this type of risk by hedging a portfolio. There are four primary
sources of risk that affect the overall market: interest rate risk, equity price risk, foreign
exchange risk and commodity risk.

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Market risk of Exim bank limited

DEAR 48,455,570 32,695,336 28,431,811 25,489,142 13,713,935

VAR (N=5 days) 108,349,950 73,108,995 63,575,463 56,995,455 30,665,293

Here the table shows the daily earnings at risk and value at risk calculation of Exim bank limited.

Chapter-7: Credit Risk

Credit risk

A credit risk is the risk of default on a debt that may arise from a borrower failing to make
required payments. In the first resort, the risk is that of the lender and includes
lost principal and interest, disruption to cash flows, and increased collection costs. The loss may
be complete or partial. In an efficient market, higher levels of credit risk will be associated with
higher borrowing costs. Because of this, measures of borrowing costs such as yield spreads can
be used to infer credit risk levels based on assessments by market participants.

An imaginary scenario of Exim bank’s return and risk

Return and risk on Loan 1

Return (R1) 6.25%
Risk (Sigma 1) 4.265%
Return and risk on Loan 2
Return (R2) 5.60%
Risk (Sigma 2) 2.80%

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 Return on the portfolio (Rp) 5.99%
Risk of the portfolio (Sigma p) 0.0006369

Here the table shows the risk and return of Exim bank from holding two loans. However, the
details calculations are shown in excel. Here, the risk and return both are higher for loan 1. The
bottom section of the table shows the risk and return of the portfolio. This model is applied for
loan portfolio.

RAROC model

Risk-adjusted return on capital (RAROC) is a risk-based profitability measurement framework

for analyzing risk-adjusted financial performance and providing a consistent view
of profitability across businesses. The concept was developed by Bankers Trust and principal
designer Dan Borge in the late 1970s. Note, however, that more and more return on risk adjusted
capital (RORAC) is used as a measure, whereby the risk adjustment of Capital is based on
the capital adequacy guidelines as outlined by the Basel Committee, currently Basel III.

RAROC of Exim bank limited

2016 2015 2014 2013 2012

RAROC 28% 31% 31% 26% 25%

So, the above table shows the RAROC for Exim bank limited. Here, loan should be extended to
the bank if the RAROC is sufficiently high than a benchmark. RAROC model is applied for
individual loan.

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 Chapter-8: Liquidity Risk

Liquidity risk

Liquidity risk is the risk that a company or bank may be unable to meet short term financial
demands. This usually occurs due to the inability to convert a security or hard
asset to cash without a loss of capital and/or income in the process. Liquidity risk occurs when an
individual investor, business or financial institution cannot meet short-term debt obligations. The
investor or entity may be unable to convert an asset into cash without giving up capital and/or
income due to a lack of buyers or an inefficient market.

Liquidity requirement of Exim bank limited

2016 2015 2014 2013 2012

Liquid
Assets 41,098,416,816 38,248,451,580 38,319,333,464 22,950,335,016 14,216,693,741
Liquid
Liabilities 200,747,205,324 167,283,245,253 144,669,657,157 111,331,205,901 96,601,668,002
Net
liquidity
gap (159,648,788,508) (129,034,793,673) (106,350,323,693) (88,380,870,885) (82,384,974,261)

Here, the net liquidity position of the bank is negative. So, the bank is in risk that it may be
forced to sell its assets below their market value to meet the liquidity need.
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 Chapter-9: Conclusion & References

Conclusion

In fine it can be said that the report is an effective way to gather practical knowledge regarding
what we have learned from our courses. Throughout this report, I have analyzed how different
risks components affect the value of a financial institution. Some of those risks are interest rate
risk, market risk, credit risk, off-balance sheet risk, and liquidity risk.

References

 Financial institutions management by Anthony Saunders & Marcia Millon Cornett

 https://en.wikipedia.org/wiki
 http://www.eximbankbd.com/
 Financial statements of Exim bank limited

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