A report regarding Bangladesh Shilpa Bank, its history and development. And an in depth overview on CAMELS rating system for banking institutions.

1. Report
Prepared for
Nusrat Farzana
Asst. Professor- Finance
School of Business & Economics
UIU
Prepared by
Serial No. Name ID
1 Shagufta Rahman 111 151 022
2 Somayra Afrose 111 151 152
3 Farhin Alam 111 151 348
4 Md. Taiyeb Ahmed Bhuiya 111 151 349
5 Tasnuva Numaira 111 151 497
24th
December, 2017

2. Table of Contents
Serial No. Contents Page No.
1 BANGLADESH SHILPA BANK 1-3
1.1 Formation 2
1.2 Basic Functions 2
1.3 Other Activities 2
1.4 Functional Department of Bangladesh Shilpa Bank 3
1.5 Transformation 3
2 CAMELS Ratings for Banking Institutions 4-15
2.1 What is CAMELS Rating 5
2.2 Background 5
2.3 Purpose 5
2.4 CAMELS: Components & Factors 5-7
2.5 CAMELS: Ratings of the Components 8-13
2.5.1 Capital Adequacy 8
2.5.2 Asset Quality 9
2.5.3 Management 10
2.5.4 Earning 11
2.5.5 Liquidity 12
2.5.6 Sensitivity to Market Risks 13
2.6 Composite Ratings 14

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Bangladesh Shilpa Bank

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1.1 Formation
Government of Bangladesh instituted a development financial institution named Bangladesh
Shilpa Bank on 31s December, 1972 under the presidential order no. 129 of 1972 with a mission
of speeding the process of industrialization of the country by providing financial support and
equity backing to the industrial projects. It has been extending long and medium term loan
facilities in local and foreign currencies to industrialize projects in the private and public sectors.
1.2 Basic Functions
 BSB extents term loan facilities in local and foreign currencies to industrial projects
(both new and BMRE) in the public sectors. Besides Bank also performs the
following activities:
 Provides working capital loans to industrial projects.
 Provides equity support in the form of underwriting and bridge finance to public
limited companies.
 Issues guarantees on behalf of borrowers for repayment of loan.
 Extends commercial banking services along with deposit mobilization.
 Purchases and sales shares or securities for BSB and on behalf of customers as
member of Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) for
capital market development; and
 Conducts project promotional activities along with preparation of various sub-
sectorial study reports.
1.3 Other Activities
Advisory services
The bank assists the interested entrepreneurs in selecting industrial projects having appropriate
technology and potential market by providing advisory services and information.
Training
For upgrading the professional competence and skills of its employees, the bank is continually
arranging training programs both at home and aboard. During FY-2002-03, 229 offices were
provided in-house and local training. Besides, 40 offices were sent aboard for the purposes.

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1.4 Functional Department of Bangladesh Shilpa Bank
Bangladesh Shilpa Bank has eight well-designed departments. The operational activities of
Bangladesh Shilpa Bank have been operated by these departments in different ways. Every
department has its own policies, procedure, and strategy to lending, and implementing credit.
Each of the department depends on each other for sanctioning loan for proposed industries.
1. Loan Operation Department
2. Documentation and Machineries Procurement Department
3. Project Implementation Department
4. Project Rehabilitation Department
5. Human Resource Management Department
6. Law Department
7. Loan Accounting Department
8. Central Recovery Department.
1.5 Transformation
With the decision of the Government, Bangladesh Development Bank Ltd. (BDBL) was
incorporated on 16 November, 2009 as a Public Company Limited by shares under the
Companies Act, 1994 by amalgamation of former Bangladesh Shilpa Bank (BSB) and
Bangladesh Shilpa Rin Sangstha (BSRS), two Development Financial Institutions (DFIs) in the
public sector.
Two Vendors’ Agreements were signed between the Government of the People’s Republic of
Bangladesh and the BDBL on 31 December, 2009 to acquire and take-over all of their (BSB &
BSRS) assets, benefits, rights, powers, authorities, privileges, liabilities, borrowings and
obligations and to carry on with the same business.
As a Public Limited Company, BDBL formally embarked its journey on January 03, 2010. It
extends financial assistance for setting up industries and provides all kinds of commercial
banking services to its customers through its branch network in Bangladesh.

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CAMELS Ratings
For
Banking Institutions

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2.1 What is CAMELS Rating
CAMELS rating is applied to every bank and credit union in U.S. (approximately 8,000
institutions) and also implemented outside U.S. by various banking supervisory regulators.
CAMELS rating is the rating system wherein the bank regulators or examiners (generally the
officers trained by RBI) evaluates an overall performance of the banks and determine their
strengths and weaknesses. This rating is based on a ratio analysis of the financial statements of
the banks’ profit and loss account, balance sheet and on-site examination by the bank regulators.
In this Rating system, the officers rate the banks on a scale from 1 to 5, where 1 is the best and 5
is the worst.
2.2 Background of CAMELS rating
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
Reserve. This rating system was adopted by National Credit Union Administration in 1987. 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 (S) sensitivity to
Market Risk.
2.3 Purpose of CAMELS Rating
The ratings are assigned based on the financial statements of the bank or financial institution.
This system helps the supervisory authorities to identify banks that need maximum amount of
regulatory concern. It is used to measure risk and financial stability of a bank. It determines the
banks overall conditions in the areas of financial, managerial and operational aspects.
2.4 CAMELS: Components & Rating Factors
The abbreviation CAMEL, reflecting five assessment areas: capital, asset quality, management,
earnings, liquidity and sensitivity. Through CAMELS rating, the overall financial position of the
bank is evaluated and the corrective actions, if any, are taken accordingly.
1. Capital Adequacy
The capital adequacy measures the bank’s capacity to handle the losses and meet all its
obligations towards the customers without ceasing its operations. This can be met only on the
basis of an amount and the quality of capital, a bank can access.

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Rating factors
 Nature and volume of problem assets in relation to total capital and adequacy LLR and
other reserves.
 Balance sheet structure including off balance sheet items and market and concentration
risk.
 Growth experience and prospects of assets and capital.
 Capital requirement and compliance with regulatory requirement.
 Access to capital market and sources of capital.
2. Asset Quality
An asset represents all the assets of the bank, current and fixed loans, investments, real estates
and all the off-balance sheet transactions. Through this indicator, the performance of an asset can
be evaluated.
Rating Factors
 Volume of problems of all assets
 Volume of overdue and reschedule loans
 Large concentrations of loans and insiders loans and diversification of investments
 Ability of management to administer all the assets of the banks and to collect the
problem loans
3. Management Quality
The board of directors and top-level managers are the key persons who are responsible for the
successful functioning of the banking operations. Through this parameter, the effectiveness of
the management is checked out such as, how well they respond to the changing market
conditions, how well the duties and responsibilities are delegated, how well the compensation
policies and job descriptions are designed, etc.
Rating Factors
 Quality of the monitoring and support of the activities by the broad and management and
their ability to understand and respond to the risk associated with this activities in the
present environment and to plan for future.
 Development and implementations policies and procedures, MIS, risk monitoring system,
reporting and contingency plans and compliance with law and regulation controlled by
the a compliance officers.
 Compensation policies and job description
 Concentration or delegation of authority
 Overall performance of the bank and its risk profile.
4. Earnings
Income from all the operations, non-traditional and extraordinary sources constitute the earnings
of a bank. Through this parameter, the bank’s efficiency is checked with respect to its capital
adequacy to cover all the potential losses and the ability to pay off the dividends.

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Rating Factors
 Composition of net income, volume and stability of components.
 Sufficient earning to cover potential losses, provide adequate capital and pay a reasonable
dividends
 Levels of expenses in relation to operations.
 Adequacy of budgeting, forecasting, control MIS of income and expenses.
 Earning exposed to market risks, such as interest rate variation, foreign exchange
fluctuation and price risk.
5. Liquidity
The bank’s ability to convert assets into cash is called as liquidity.
Rating factor
 Sources and volume of liquid fund available to meet the short term obligation
 Interest rate and maturities of the assets and liabilities
 Diversification of funding sources
 Contingency plan
 Access to money market and other sources of funds.
6. Sensitivity to Market Risk
Through this parameter, the bank’s sensitivity towards the changing market conditions is
checked, i.e. how adverse changes in the interest rates, foreign exchange rates, commodity
prices, fixed assets will affect the bank and its operations.
Rating Factors
 Ability of management to identify, measure and control the market risks given the bank
exposure to these risks.
 Sensitivity to adverse changes in interest rate, foreign exchange rate, commodity prices,
fixed assets
 Natures of the operations of the bank
 Trends in the foreign currencies exposure
 Changes in the value of fixed assets of the bank.

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2.5 CAMELS: Ratings of the Components
2.5.1 Capital Adequacy
Capital Adequacy rating “1” is characterized by capital levels and ratios exceed all regulatory
requirements, strong earnings performance, well managed and controlled growth, competent
management able to analyze the risks associated with the activities in determining appropriate
capital levels, reasonable dividends and ability to raise new capital, keep low volume of problem
assets.
Rating “2” is similar criteria as “1”, but experiences weaknesses is one or more of the factors.
For example: Capital and solvency ratios exceed regulatory requirements, but Problem assets are
relatively high and management is relatively unable to maintain sufficient capital to support
risks.
Rating”3”of capital adequacy indicates that the bank complies with capital adequacy and
solvency regulatory requirements, but has major weaknesses in one or more factors:
 High level of problem assets in excess of 25% of total capital
 Bank fails to comply with regulatory regulations
 Poor earnings
 Inability to raise new capital to meet regulatory requirements and correct deficiencies
 It requires regulatory oversight to ensure management and shareholders address the
issues of concern.
Rating “4” implies that the bank is experiencing severe problems resulting in inadequate capital
to support risks associated with the business and operations. For example, high level of problems
generating losses in all area of activities, problem loans in excess of 50% of total capital,
insufficient capital, non-compliance with regulatory requirements. In the cases, management
needs to take immediate action to correct deficiencies to avoid going into bankruptcy.
Rating”5” indicates that the bank is insolvent.
 Strong regulatory oversight is needed to mitigate the loss to depositors and creditors
 Very slight possibility that actions from management will prevent the demise of the bank
 Only shareholders may be able to prevent the failure.

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2.5.2 Asset Quality
Asset quality rating “1” is characterized by
 Ratio of troubled assets to capital is less than 2% or 3%
 Past due and extended loans kept under control by a specific unit, in accordance with the
law
 Concentrations of credits and loans to insiders provide minimal risk
 Efficient loan portfolio management, close monitoring of problem loans
 Adequate Loan Loss Reserves in accordance with CBI’s regulations
 Non credit assets pose no loss threat.
Asset quality rating “2” is assigned to banks that display similar characteristics as “1”, but are
experiencing non-significant weaknesses, and the management is able to address these issues
without close regulatory oversight. Problem assets do not exceed 10% of total capital. It also
implies that there are weaknesses in the management underwriting standards and control
procedures, loans to insider pose some regulatory concern, but can be easily corrected — Return
on non credit assets is low.
Asset quality rating “3” indicates that a bank displays weaknesses in one or more of the “2”
factors. Regulatory oversight is required to ensure that management is able to address the
problems. Other characteristics includes that bank is experiencing high level of past due and
rescheduled credits, poor underwriting standards, policies and procedures are not properly
implemented, inappropriate loans to insiders, non-credit assets display abnormal risks and may
pose a threat of loss.
Asset quality rating “4” indicates a bank with severe problems resulting in inadequate capital to
support risks associated with the bank business and operations. Rating “4” also includes high
volume of loss making loans, level of problem credits continues to increase and could result in
insolvency, doubtful and loss credits exceed LLR and pose a threat to capital, non-credit assets
pose major threat of loss of capital and may result in bank’s insolvency and lack of proper
policies and procedures.
Asset quality rating”5” displays a high level of problem assets credit and non-credit that impairs
the capital or results in a negative capital. In rating “5”, problem assets to capital ratio goes
above 50%, slight possibility that management actions can improve the quality of the bank,
strong regulatory oversight is needed to prevent further capital erosion and protect depositors and
creditors.

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2.5.3 Management
Management rating “1” indicates a strong and committed management showing a thorough
understanding of the risks associated with the bank’s activities, a strong financial performance in
all areas, appropriate understanding and response to changing economy, planning, control,
implementation of internal policies, appropriate audit function, strong cooperation and
interaction between the Board of Directors and the management and successful delegation of
authority, competent and trained staff at all levels.
Management rating “2” has the general characteristics of “1” but possesses some deficiencies in
rating factors that can be easily corrected without regulatory supervision. Careful consideration
should be given to the financial condition of the bank.
Management rating “3” displays major weaknesses in one or more of the rating factors. It needs
regulatory supervision to ensure that management and Board takes corrective actions. The
problems are:
 Significant insider abuse
 Disregard for regulatory requirements
 Poor assessment of risks and planning
 Inappropriate reactions to economic adversities and corrective actions
 Poor financial performance
 Lack of proper written policies and procedures.
Management rating “4” indicates major weaknesses in several areas. Strong regulatory action is
needed, Board of Directors should consider replacing or strengthen management due to insider
abuse, disregard for regulatory requirements, lack of proper policies, damaging actions. Poor
financial performance may lead to insolvency in rating “4”.
Management rating “5” requires immediate and strong supervisory actions because bank displays
strong weaknesses in all areas, poor financial performance, and insolvency very likely. Rating
“5” considers replacing management.

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2.5.4 Earnings
(All income from operations, non-traditional sources, extraordinary items) .The quality and trend
of earnings of an institution depend largely on how well the management manages the asset and
liabilities of the institution. An FI must earn reasonable profit to support asset growth, build up
adequate reserves and enhance shareholders value. It can be measured as the return on asset
ratio.
Earnings rated “1” are projected to be, sufficient to fully provide for loss absorption and capital
formation with due consideration to asset quality, growth, and trends in earnings.
An institution with earnings that are positive and relatively stable may receive a “2” rating,
provided its level of earnings is adequate in view of asset quality and operating risks. The
examiner must consider other factors, such as earnings trends and earnings quality to determine
if earnings should be assigned a “2” rating.
A “3” rating should be accorded if current and projected earnings are not fully sufficient to
provide for the absorption of losses and the formation of capital to meet and maintain
compliance with regulatory requirements. The earnings of such institutions may be further
hindered by inconsistent earnings trends, chronically insufficient earnings or less than
satisfactory performance on assets.
Earnings rated “4” is characterized by erratic fluctuations in net income, the development of a
severe downward trend in income, or a substantial drop in earnings from the previous period, and
a drop in projected earnings is anticipated. The examiner should consider all other relevant
quantitative and qualitative measures to determine if a “4” is the appropriate rating.
Credit unions experiencing consistent losses should be rated “5” in Earnings. Such losses may
represent a distinct threat to the credit union's solvency through the erosion of capital. A “5”
rating would normally be assigned to credit unions that are unprofitable to the point that capital
will be depleted within twelve months.

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2.5.5 Liquidity
Liquidity (asset liability management) an FI must always be liquid to meet depositors’ and
creditors’ demand to maintain public confidence. Cash maintained by the banks and balances
with central bank, to total asset ratio is (LQD) an indicator of banks liquidity. In general, banks
with larger volume of liquid assets are perceived safe, since these assets would allow banks to
meet unexpected withdrawals.
Liquidity rating “1” indicates a management having a thorough understanding of the bank’s
balance sheet. it includes Sufficient liquid assets to meet loan demand and unexpected deposit
reduction , Little reliance on inter-bank market , Strong and sophisticated planning, control and
monitoring , Existence of an contingency plan.
Liquidity rating “2” has the same basic characteristics as a “1” but is experiencing some
weaknesses in one or more of the rating factors. These weaknesses can be corrected promptly.
This rating includes Bank meets its liquidity requirements, but management lacks proper
expertise for planning, control and monitoring, Bank experienced liquidity problems.
Management reacted appropriately but failed to take action to prevent a recurring risk,
Management is unaware of negative trends & Management did not address liquidity problems.
Liquidity rating”3” indicates a bank has major weaknesses in several factors. Those are
Regulatory supervision is usually required to assure management is taking care of the problems,
Poor liquidity management resulting in frequent liquidity concerns, Management needs to
address negative trends immediately to prevent a crisis in daily obligations
Liquidity rating “4” shows a bank is experiencing severe liquidity problems. Such as requires
immediate attention and regulatory control, Actions must be taken to strengthen liquidity
position to meet current obligations, Management must engage in extensive planning to deal with
the situation.
Liquidity rating”5” shows a bank requires outside financial assistance to meet current liquidity
requirements to prevent failure of the bank due to the inability to meet creditors and depositors
needs.

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2.5.6 Sensitivity to Market Risk
The main concern for FIs is risk management, reflects the degree to which changes in interest
rates, foreign exchange rates, commodity prices, or equity price can adversely affect a financial
institutions earning’s .the major risk to be examined include:
 Equity risk: The risk that stock or stock indices prices or their implied volatility will
change.
 Interest rate risk: The risk that interest rates or their implied volatility will change.
 Currency risk: The risk that foreign exchange rates or their implied volatility will change.
 Commodity risk: The risk that commodity prices or their implied volatility will change.
 Margining risk: Rresults from uncertain future cash outflows due to margin calls
covering adverse value changes of a given position.

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2.6 Composite Ratings
The composite rating is not an arithmetic average of the component ratings, but is based on a
qualitative analysis of the factors comprising each component, the interrelationship between
components, and the overall level of supervisory concern about the bank.
Composite ratings are predicted upon the evaluation of the specific performance dimensions of
the banks. Composite ratings are also based upon a scale of 1 to 5 in ascending order. These
numerical ratings will be assigned with terms accordingly:
Strong: Indicative of performance that is significantly higher than average.
Satisfactory: Reflects performance that is average or above.
Fair: Represents performance that is flawed to some degree.
Marginal: Reflects performance that is significantly at below average.
Unsatisfactory: Indicative of performance that is critically deficient and in need of immediate
remedial attention.
To decide the composite ratings, the below mentioned weights of CAMELS component rating is
considered:
Capital Adequacy 20%
Asset Quality 20%
Management 25%
Earnings 15%
Liquidity 10%
Sensitivity to market risk 10%
 Composite Rating 1 (Strong)
Banks with a composite rating of 1 are sound in all aspects, generally have components rated 1
or 2 and are in substantial compliance with laws and regulations. Any weaknesses are of minor
nature and can be handled routinely by the board of directors and management. Banks are
considered stable, well managed and capable of withstanding all but the most severe economic
and financial downturns. Risk management practices are strong and minimal supervisory
oversight is required to ensure the continuation and validation of the bank’s fundamental
soundness. Banks rated 1, give no cause for concern.
 Composite Rating 2 (Satisfactory)
Banks with a composite rating of 2 are fundamentally sound; generally no component is rated
higher than 3, and is in substantial compliance with laws and regulations. Only moderate
weaknesses are present and these are within the capabilities of the board of directors’ and
managements’ to correct, depending on their willingness. These banks are stable and can
withstand most economic downturns and business fluctuations. Overall risk management
practices are satisfactory and there are no material supervisory concerns. Supervisory response
for 2 rated banks should be informal and limited.

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 Composite Rating 3 (Fair)
Banks rated 3 generally have weaknesses in one or more component areas that if not corrected
within a reasonable time frame could result in significant solvency or liquidity concerns. Risks
range from moderately severe to unsatisfactory. Management may lack the ability or willingness
to effectively address weaknesses in a timely manner and these banks generally are less capable
of withstanding business fluctuation and are vulnerable to outside influences and adverse
business conditions. Risk management practices may be less than satisfactory and banks in this
group may be in significant noncompliance with laws and regulations. Unlikely failure appears
though they are given overall strength and financial capacity. These banks can easily deteriorate
if actions are not effective in correcting weaknesses. More than normal supervisory concern is
needed to address deficiencies.
 Composite Rating 4 (Marginal)
Banks rated as 4 indicate serious unsafe and unsound practices and serious financial or
managerial deficiencies that result in unsatisfactory performance. These banks have immoderate
volume of serious financial weaknesses. The weaknesses and problems are not being
satisfactorily resolved by the board of directors and management. Risk management practices are
generally unacceptable and maybe there are significant violations with laws and regulations.
Problems range from severe to critically deficient. Without corrections, these conditions could
develop further and impair future viability. So close supervision and specific remedial action is
required. The overall solvency of the bank is threatened if immediate and specific supervisory
surveillance action for correcting deficiencies is not taken. These banks have high potential for
failure.
 Composite Rating 5 (Unsatisfactory)
Banks rated 5 exhibit extremely unsafe and unsound practices or conditions, critically deficient
performance. Their risk management practices are inadequate. The volume and severity of
problems are beyond management’s ability to control or correct. Failure is highly probable.
Severity of weaknesses is so critical that immediate aid from stockholders and outside financial
sources is needed. On-going supervision is necessary. Otherwise bank will likely require
liquidations, merger or acquisition.