Executive Summary Executive Summary The report is basically concentrated to the Hallmark scandal of Sonali Bank Limited. We have found out the scandal through researching this topic on newspaper, financial magazines and internet. Firstly, there is a brief review on the academic resources regarding our auditing course and then we move on directly to the case background. Then the report put light on the fraud mechanism and discovery regarding Hallmark scandal. It also focuses on the letter of credit issue as well. This scandal did not take place without the help of members of Sonali bank. The amount of Hallmark scandal is so big that it is easy to assign the contribution and involvement of managers and auditors. Then the report finishes screening the after effects and present situation of the bank regarding the Hallmark scandal case. There are lots of consequences of this scandal to thin bank and this report shows these in a very serious concern.
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1.1. Origin of the Report This report is prepared as an assignment for our Auditing Course (F-310) . While preparing the report, we gave our best effort to incorporate the theoretical aspect of the subject while
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emphasizing on the practical implementation of the various strategic valuation model that we learned in our course.
1.2. Objective of the report The Objective of our report are
To fulfill the partial requirement of our course of Auditing To achieve the deep knowledge about the Auditing. To gain practical knowledge of the Audit methodology
1.3. Scope of the Report The scope of the audit included an examination of all activities and its sub-components, including the management control framework.
1.4. Methodology In accordance with the audit objectives Internal Audit Standards, the audit was carried out in three phases: the planning phase, the conduct phase, and the reporting phase. During the planning phase, the auditors proceeded with a thorough review of documents provided by the department, to gain an understanding of the overall policy framework, as well as the processes relevant to the audit scope. The purpose of the planning phase was to develop a Risk-Based Audit Program that provides a basis for the orderly, efficient, and cost effective conduct of the audit as well as a criteria base for assessment. During the conduct phase, the audit team visited, as per the scope of the audit. From these visits, the audit team selected documents; conducted interviews, performed project file reviews, and debriefed management on preliminary findings.
1.4. Limitations of the study The limitations are
Lack of Experience
Lack of knowledge Page 3 of 42
Time management
Lack of information
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2.0
Company Limited.)
Overview
(Sonali
2.1 Mission
Extending a whole range of quality products. supporting divergent needs of people aiming at enriching their lives. Creating value for the stakeholders. Page 5 of 42
Bank
contributing towards socio-economic development of the country.
2.2 Vision Socially committed leading banking institution with global presence.
2.3 Financial History of Sonali Bank Sonali Bank was established in 1972 under the Bangladesh Banks (Nationalisation) Order, through the amalgamation and nationalisation of the branches of National Bank of Pakistan Bank of Bahawalpur and Premier Bank branches located in East Pakistan until the 1971 Bangladesh Liberation War. When it was established, Sonali Bank had a paid up capital of 30 million taka. In 2001, its authorised and paid up capital were Tk 10 billion and Tk 3.272 billion respectively. Presently, its authorised and paid up capital is Tk 10 billion and Tk 9 billion respectively The bank's reserve funds were Tk 60 million in 1979 and Tk 2.050 billion on 30 June 2000. In 2013, $250,000 was stolen from the bank by Cyber criminals using the Swift International payments network. In 2016 the Bank signed an Memorandum of Understanding with PayPal.
2.4 Objectives of Sonali Bank Sonali Bank believes that it will become a leading bank in the government sector. They believe that their aims and objectives can only be realized fully and sustained overtime by faithfulness to ethics that cannot always be built into sets of rules and regulations. In this belief in ethics that motivates the bank in its dealings with customer, regulators & employees, major objectives of this bank are commitment to clients of the bank, personal banking, rural credit, micro credit, international banking, import and export finance, industrial financing, social services etc.
2.5 Major Achievements
Cash recoveries from NPA This is one of the most notable achievements made by
Sonali Bank Ltd. in the overall performance indicators. The reduction in actual NPL level is attributed to various methods used for cash recoveries of NPL including write-offs, out of court settlements, rescheduling and appointment of private collection agents as well as bankwide efforts and introduction of an incentive scheme to reward employees for recovering non-performing loans. Against the recovery target of Tk. 500 crore in 2008, SBL realized Tk. Page 6 of 42
496 crore which represents almost 100% of the target and is the highest amongst SCBs in terms of amount recovered in cash. All these contributed to reduction of NPL level as a share of gross loans from 47 percent in 2007 to 33 percent in 2008. Despite the remarkable progress in 2008, the NPL level of Sonali Bank is still the highest among the three stateowned commercial banks (SCBs) and needs further reduction, including realization of loans from State-owned Enterprises (SOEs).
Business and revenue growth indicators and non-funded income is encouraging.
Revenue targets were met with "good loan" portfolio having a robust growth of 46% in 2008. Meanwhile, conversion of Bangladesh Petroleum Corporation (BPC) loan into government bond and increased market competition has seriously affected Sonali Bank's net interest income and some of the operating efficiency indicators due to the larger share of BPC loan in the bank's portfolio relative to other SCBs. Although net interest income is still negative, increased business activity from remittances, letter of credit facilities, other fees and commissions contributed to 29% growth in non-funded income in 2008, surpassing the target. Strong inflow of remittances has helped increase deposits compared to 2007. Nonetheless, the Bank performed comparatively better under this category with all indicators meeting the target, but narrowly missing (69% in place of 70%) the target for low cost deposit as percentage of total deposit.
Operating efficiency indicators Sonali Bank Limited (SBL) has achieved the net
spread & net interest margin targets. But it could be better enough which is missed because of its larger share of low-yielding BPC bonds and concessional interest rates and this position is indicating that banking sector is becoming more competitive. The target for net operating income to total assets and cost to income ratio have not been achieved largely due to increased operating expenses on amortization of intangible assets by Tk. 350 crore and salary. Recent interest controls imposed by Bangladesh Bank will reduce the net spread in the banking sector, but Sonali Bank would have to make extra efforts to enhance its revenue generation ability in the face of escalating competition in the banking sector. SBL has the scope to enhance its revenue generation by improving the Advance-Deposit ratio (AD ratio).
Profitability As per audited financial statements, SBL made net income before
provision and tax of Tk.161.6 crore in 2008, compared to Tk.424.6 crore in 2007. This decline in profit has been caused mainly by increase in operating expenses (e.g., salary and allowances increased by more than double in a year and amortization of intangible assets by Page 7 of 42
Tk.350 crore in 2008). Though this reduction in net profit before tax had affected its ROA, it has improved to 0.47 percent in 2008 from a negative 6.17 percent in 2007.
Staffing The target set for staff rationalization could not be materialized due to delays
in implementation of VRS scheme. Staff cost as percentage of total operating cost reduced to 52.7% in 2008 from 75.6%o in 2007. Income per staff has also improved from 0.11 to 0.12 in 2008. However, staff expenses to total income has increased due to increase in staff benefits. Current figures may further deteriorate when Sonali Bank adopts a new pay scale without any adjustments in the total number of staff via a VRS scheme. The number of staff has been reduced by 703 in 2008, as a result of natural attrition and this trend will continue.
The Net Worth of the bank continued to improve under the review period. Given the
systematic importance of Sonali bank as the largest state-owned commercial bank, the capital position needs to be further strengthened. The amount of actual provisioning for loan losses remained higher than required provisioning in 2008.
Computerization Target on computerization of branches has been met with 56% of
deposits and 74% of loans procedures automated as of end 2008.
Disclosure requirements have been met with financial statements both for annual
statement and quarterly provisional (within one month) completed within the prescribed time frame.
2.6 Performance Indicators for Sonali Bank Limited The Implementation Support Mission of the World Bank visited the Bank recently on 16 November, 2009 and review the overall progress of implementation of the project with particular focus on the sustainability of banking reforms and placed its comment as follows:A significant achievement under this project has been the improvement in the financial condition largely due to the Management Team that have been hired under this project. The Management Team have not only turned the bank into operationally profitable organization, but have also: improved customer services; introduced new products; developed policies and manuals for effective and efficient operations of the bank; revised the organizational structure of the bank; embarked on a comprehensive training program for staff; introduced incentives for better staff performance; and are going ahead with the computerization of the bank’s operation. The bank has maintained an increasing trend in deposits, loans, income, operating
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profits and net worth. Remarkable achievements have been made in recovering bad and doubtful loans and reducing the ratio of non-performing loans to total loans. Moreover, the Management Team is successfully meeting most of the Key Performance Indicators (KPIs) agreed for the bank.
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3.1 Involved Branch: The Ruposhi Bangla branch. It found proof of massive irregularities in lending by state-owned Sonali Bank's Ruposhi Bangla Hotel branch from 2010 to May this year. The officials of the bank's Ruposhi Bangla Hotel branch breached the bank rules by giving loans beyond their permitted limits.
3.2 Involved Parties: Page 10 of 42
There are some involved parties directly involved with this embezzlement is given below Sonali Bank high-ups, including a deputy managing director, a general manager and the branch manager, were directly involved in the scam. The BB investigation found that Sonali Bank's Ruposhi Bangla Hotel branch lent Hallmark Group and five other companies Tk 3,547 crore between 2010 and May this year on fake documents. The businesses embezzled the whole amount that belongs to depositors
in
collusion
with
some
bank
officials.
Of Tk 3,547 crore, Hallmark Group alone took away Tk 2,686.14 crore, T and Brothers Tk 609.69 crore, Paragon Group Tk 146.60 crore, Nakshi Knit Tk 66.36 crore, DN Sports Tk 33.25 crore and Khanjahan Ali Tk 4.96 crore. Of the six borrowers, Hallmark has been found to be the biggest fraudster.
3.3 The Process Of Misappropriation Hallmark Group, has embezzled around Tk 1,492 crore from Ruposhi Bangla Hotel branch of Sonali Bank by creating 804 letters of credit in a single day, according to Anti-Corruption Commission
probe
findings.
The commission investigators said that the Hallmark Group in liaison with bank officials opened 2.3 LCs a minute, as usually it needs minimum 1.3 to 2 hours for creating a new LC. They said that the probe team found that it was a lone example in the country’s history that so many
LCs
were
opened
in
a
day.
The officials said they collected a bank’s total LC opened in all branches statistic for a day but have no instance of such record of 804 LCs opened in a single day. The officials said that the team found that the Hallmark Group opened 804 LCs on December 29, 2011 worth Tk 1,492,15,25,477.80 while the Group embezzled Tk 1,568.39 crore creating LCs out of total swindled money of about Tk 2,686 crore from 2010 to 2012. The commission also found that the Sonali Bank Ruposhi Bangla Hotel branch on March 29, 2012 accepted Tk 450.34 crore Inland Bill Purchase from Hallmark Group while the Bank’s head office issued an order on February 29, 2012 to all its branches as if any branch manager are deputy general manager he/she will allow maximum Tk 30 crore IBP and if he /she are assistant
general
manager
maximum
Tk
10
crore
IBP
in
a
year.
But the then branch manager AKM Azizur Rahman, who also was a deputy general manager,
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gave acceptance of Tk 450.34 crore’s IBP to the Hallmark Group violating the rules, ACC said. The Hallmark Group sister concern Max Spinning Mills and Anwar Spinning took the acceptance from the Bank while the companies were already defaulters of around Tk 150 crore
loan,
ACC
findings
said.
Bank undertake obligation Special oder given Open 804 L.C. in a single day Bank accepted inland bill Branch manager give acceptance This is the process how the fund transferred by the Sonali Bank. Here we have seen it takes short time to do the fraud, even the embezzlement takes within a short period. The matter help other concerned parties to find that fault.
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4.0 Role of Management Nepotism or favoritism of any responsible authority is considered corruption. The stuffs of Sonali Bank with association of one of influential bureaucrats from government held the capital market into a huge liquidity crisis through this scam.
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Top management of Sonali Bank is primarily and mainly responsible for the Hall-Mark Fraud. Sonali Bank Ltd suspended 17 of its officials for their alleged involvement in the loan scam. The officials have been held responsible for unethical disbursement of loans to the textile company Hallmark Group and some other firms, according to an investigation by the central bank. Earlier, Sonali Bank suspended three of its officials accused in the fraud. They are general manager of Ruposhi Bangla Hotel branch AKM Azizur Rahman, assistant general manager Saiful Hasan and executive officer Abdul Matin. The Anti-Corruption Commission investigated state-run Sonali bank's illegal lending of Tk 3,547 crore to little-known Hallmark Group and five other companies and the people involved in the scam. A central bank probe found that Sonali Bank high-ups, including a deputy managing director, a general manager and the branch manager, were directly involved in the scam. The BB report said a general manager responsible for monitoring the branch's activities completely failed to carry out his duties. The report also found involvement of Md Mainul Haque, deputy managing director (international business), in the scam.
Involvement of management in Sonali Bank Scam: Bangladesh Bank found proof of massive irregularities in lending by state-owned Sonali Bank's Ruposhi Bangla Hotel branch from 2010 to May 2012. 1. Breaching rules and regulations: According to bankers, a bank has to follow certain procedures before giving a loan to businesses or individuals. The bank did not follow the rules in giving the loans. But common people have too much hassle while borrowing only Tk 50,000.The loan was disbursed even though none of the borrowers put their signatures yet. This is unprecedented in the history of our banking sector because the borrower is neither a well-known nor a well-established company. It is in the air that this huge amount of money has been given to the company by Sonali Bank, Ruposhi Bangla branch, in completely irregular way which has been misused by the company. 2. Fake documentation:
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Before rendering credit facilities bank has to create charge over the securities through a number of agreements, papers etc. which are called documents. The documents should correctly be taken and examined by the bank in order to create required charges on the securities in favour of the bank. The proper and correct documentation is essential from the point of view of the safety of the banks interest. Managing director of Sonali Bank said that dishonest officials of the bank disbursed the loans without proper documentation. They did not verify the documents properly but lent Hallmark Group and five other companies Tk 3,547 crore between 2010 and May 2012 on fake documents. 3. Letter of credit: There is an obligation of having minimum 10% margin of the total Letter of Credit (LC) amount. If the client is unknown to the bank then cash margin should be 100%. In case of LC, banks deal with papers not goods. So banks need to verify those documents. When the documents of LC come to the bank, it must pay the LC amount to the exporter on account of the client/importer. At the behest of a garments producer, a bank provides a fabric supplier with a LC that guarantees payment either at the time of delivery or at some later date. On March 28 2012, Hallmark opened local letters of credit worth Tk 500 crore in favour of Anwara Spinning Mills, Max Spinning Mills and Star Spinning Mills which were shown as recipients of the LCs. These companies submitted falsified paperwork reporting deliveries of fabric to Hallmark, which were then paid for by the LCs from Sonali Bank’s Ruposhi Bangla branch. Because the fictitious companies and Hallmark had their accounts at the Ruposhi Bangla branch, on paper it looked like the branch’s assets and liabilities were balanced out. It means that Sonali Bank guaranteed LCs of three fictitious companies and also made payments to them which reflect the fraudulent activities of the bank officials.
4. Lending beyond limits: Page 15 of 42
The officials of the bank's Ruposhi Bangla Hotel branch breached the bank rules by giving loans beyond their permitted limits. According to the bank's rules, a deputy general manager can buy a maximum of Tk 30 crore as acceptance bill from a group or organisation. But branch Manager AKM Azizur Rahman bought acceptance bill worth Tk 500 crore that was given to Hallmark Group on a single day. According to sources, under tremendous pressure from influential quarters, the Hotel Rupashi Bangla branch of Sonali bank violated the central bank rules and approved and paid out loans amounting to four times higher (multiplied to) than the actual deposits (security/mortgage) submitted by Hallmark Group. High-ups of the Sonali Bank collaborated in approving the loans. 5. Inadequate mortgage: While lending depositor’s money, there should be guarantee of returning the funds. Bank should exercises the lending function only when it is safe and that the risk factor is adequately mitigated and covered. Safety depends uponi.
The mortgage offered by the borrower; and
ii.
The repaying capacity and willingness of the debtor to repay the loan with interest.
Even though there were also not adequate mortgages offered by Hall-Mark and T and Brothers, Sonali Bank accepted the loan proposals and disbursed the amount to them.. The Hall-Mark mortgaged 24.81 acre land while taking the loans of 2686.14 Crores between 2010 and 2012 and another 21.77 acre after the scam was detected in May. Similarly, T and Brothers took nearly Tk 673 crore by mortgaging only 192.40-decimal land. After the scam was detected, it mortgaged another 502.88 decimal. 6. Lack of governance and overall control This fraud reflects the lack of governance and overall control of the Banks Board of Directors, because they should have exercised their supervision and control over such a huge amount of loan. It is important to look into how the Board of Directors as well as the
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management led by the managing director supervised the process of providing such a huge amount to a single company. Generally, the monitoring and control by the bank's Board of Directors and its Audit Committee and the Asset Liability Management Committee (ALCO) are imperative in such a big transaction. These activities were absence in this case. This is an instance of an amazing combination of lack of supervision, control, unwillingness to take action, failure of policy direction, greed, forgery and corruption.
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5.0 Role of Auditors Page 18 of 42
Several inspections had been conducted to see which parties like the management or the auditors are responsible for this forgery. Most of the inspection revealed that the management of the Sonali Bank was mostly responsible for hallmark scandal. There was no evidence about the involvement of auditors with this forgery. During the period between 2010 to 2012 two audit firms were appointed as auditors for the Sonali Bank and they were-
Syful Shamsul Alam & Co. Hoda Vasi Chowdhury & Co.
In 2011 and 2012, the auditors had given qualified opinion about the Sonali Bank's financial statements becauseIn 2011, the basis for qualified opinion was1. Loans and Advances aggregating to Tk. 2,880 million have been identified as Nonperforming. Had provision been made on such non-performing loans and advances, profit for the year would have been decreased by Tk. 2,405 million (Tk. 2,275 million on account of additional provision and Tk. 130 million on account of transfer of interest income to interest suspense account). 2. Interest receivable from Government against the exemption of loan is aggregated to BDT 5,375 million. Neither any provision has been kept nor has any amount so far received from the Government since 1994- 95. In 2012, the basis for qualified opinion was1. Loans and Advances amounting to Tk. 9,383 million were found to be nonperforming as per Bangladesh Bank guidelines. In addition the base for provision was found to be understated by overvaluing the collateral security of some bad loss parties amounting to Tk. 2,169 million. Had provision been made on such non-performing loans & advances, and the base for the provision were properly calculated the loss for the year would have been increased by Tk. 7,886 million. (Tk. 5,414 million on account of additional provision, Tk. 303 million on account of transfer of interest income to interest suspense, Tk. 2,169 million on account of additional provision for the understated base for provision). 2. Interest receivable from Government against loan exemption under jute sector reform project 94-95 is aggregated to Tk. 5,362 million. Neither any provision has been kept nor has any amount so far received from the government since 1994-95.
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There are some other issues to be considered which are
According to the functional audit report prepared by Syful Shamsul Alam and Co, a chartered accountant and consultancy firm, in 2010, May, an amount of Tk 3,547 crore was disbursed as loans to Hallmark Group and other entities from the bank’s Ruposhi Bangla Hotel branch.
In the functional audit report, it was stated that a mysterious delay in starting the internal probe into a loan scam of the state-owned Sonali Bank had created a scope for the bank to unethically disburse Tk 3547 crore as loan.
On the other hand, "Syful Shamsul Alam & Co." and "Hoda Vasi Chowdhury & Co." are two reputed audit firms in Bangladesh because
More than two decades of the Firm’s operations, "Syful Shamsul Alam & Co." has maintained successfully its reputation for professional competence, excellence in assisting its clients and upholding professional standards and ethics in Bangladesh. According to Bangladesh Bank listed Chartered Accountancy firms based on their parameters this firm has been awarded the 2nd position in its latest ranking published on 31/12/2013 based on our strengths.
Hoda Vasi Chowdhury (HVC) is one of the leading and oldest professional services firms in Bangladesh. For about 50 years, HVChas provided high-quality financial, taxation and management services to a diverse and successful client base operating across various industry and business segment.
So, it can be said that, the auditors are not directly related to the forgery of the Sonali Bank's hallmark scam. But Despite the violations of financial rules between 2007 and 2011, a probe by the parliamentary committee noted that the Ruposhi Bangla branch was certified as a “low-risk” branch by the inspection and audit team.
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6.1 Impact of hallmark scam on general investors Page 21 of 42
All banks collect money from investors or depositors and provide loan to business entities and other borrowers. After this huge amount of money was taken out of Sonali Bank common people might lose their trust in the banks. The general people will not find it secure to keep their money in the banks. Maximum people of our country may even be tempted to withdraw their deposits in fear of a collapse of the banking sector like the share market collapse. If common people shy away from the banks this may cause a shortfall of money in our banking sector as well as other financial sectors like investment, trade and commerce. If people withdraw money from banks, then entrepreneurs would not get money from banks to invest in productive sectors. As a result banks have fallen into a liquidity crisis and in the future banks will be facing a lot of problems. Banks are the final destination of the investors and depositors.
Since banks are very important institutions in financial intermediation in
economic activities, the lack of trust in banks has a prevailing effect on the whole economy. Now we will see how Sonali Bank scam affects general investors to invest in the bank and how it affects this bank’s investment in different sources also. Impacts on company’s deposits: In the following table we can see Sonali Bank’s deposits of two years before and after the fraud was revealed in 2012. Here we can see over the years the deposit has increased. But their growth rate fluctuates. After the disclosure of the massive fraud of Hallmark in 2012 we can see that the deposit growth rates have increased but at a rate which is below the rate prevailing in the year 2010 (before the fraud occurred). It means before the fraud company’s deposits increased at 17.72% in 2010 and after the fraud this rate had reduced to 13.44%. This is the result of investor’s reduced faith in this bank. Name of Bank
Sonali Bank 2010
2011
2012
2013
2014
478134 17.72%
533,123 11.50%
599208 12.34%
685,755 14.44%
777,947 13.44%
Total Deposits (TK in Millions) Growth rates
Table : Deposits and its growth rates of Sonali Bank Here we can see the negative impact of the fraud of the scam in graphical manner. It clearly shows the drop of people’s investments in the bank.
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Deposit Growth rate 21.00% 17.72% 18.00% 14.44%
15.00% 11.50%
12.00% Percentage
12.40%
13.44%
9.00% 6.00% 3.00% 0.00% 2010
2011
2012
2013
2014
Figure : Deposits growth rates of Sonali Bank
Impacts on company’s loans and advances: In the following table we can see Sonali Bank’s loans and advances of two years before and after the fraud was revealed in 2012. Here we can see over the years the deposit has shown drastic fluctuations. After the disclosure of the massive fraud of Hallmark in 2012 we can see that the growth rate of loans and advances had decreased sharply from 9.36% to -9.17%.This means Sonali Bank’s investment had decreased due to financial shortfalls resulted from the scandal. In 2014 Sonali bank was able to reduce its negative growth rate but could not even able to increase it at a positive rate. Table : Loans and advances and its growth rates of Sonali Bank Name of Bank
Sonali Bank
Total loans and advances
2010 286098
2011 348,091
2012 380,670
2013 345768
2014 339766
(TK in Millions) Growth rates
23.83%
21.67%
9.36%
-9.17%
-1.74%
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Here we can see the negative impact of the fraud of the scam on the growth of loans and advances given by the bank in graphical manner. It clearly shows the drop of the bank’s capability to give loan which is a prime function of any bank.
Growth rate of Loans & Advances 30.00% 23.83% 25.00% 20.00%
21.67%
15.00% Percentage
10.00%
9.36%
5.00% 0.00% 2010 -5.00%
-1.74% 2011
2012
2013 -9.17%
2014
-10.00% -15.00%
Figure : Deposits growth rates of Sonali Bank Sonali Bank confronted serious financial and leadership challenges after the fraud. It had to cancel a Tk. 800 million loan in fall due to financial shortfalls, and it has had to borrow heavily from other banks to stay afloat. Meanwhile, the Sonali Bank suffered from fund crunch and could not finance the import payments of those already the bank taken responsibility. This type of mismanagement hampered the scopes for real businessmen to have loan and impact negatively overall production.
6.2 Impact of hallmark scam on company
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After the Hallmark scam, Sonali Bank seems to be sinking into a quagmire following relentless political troubles. The bank is facing problems associated with its operation. Moreover, the bank is suffering from an image crisis due to the Hallmark loan scam. The whole situation caused a huge downturn in the Sonali Bank's overall conditions. It had decreased the revenue as well as increased the overall costs. On the other hand, it had a great effect on the banking industry and investors as well. The consequences of fraudulent on the Sonali Bank Limited is given below-
Income from import: From table 1, we can see that the income from import has been increased from 2010 to 2012 but the Sonali Bank had experienced a sharp decrease in 2013. Revenues from financing imports declined to Tk 1552 million in 2013 from Tk 2556 million in 2012 and this had occurred due to the reveal of hallmark scam. Year
Income from import
2010
1,436,254,869
2011
2,861,559,542
2012
2,556,964,601
2013
1,524,260,175
2014
1,17 4,530,294 Table- 1 Income from import
The chart showing the trend of income from import is given below-
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Income from Import (million) 3500
2861
3000
2556
2500 2000 1436 1500
Income from Import
1524 1174
1000 500 0 2010
2011
2012
2013
2014
In 2011, the bank had the highest income from import, but there had been a huge decline in 2013 The bank was still trying to recover from that situation, but due to this unfavorable situation and political turmoil the income was decreased further from that of 2013 which was around 1174 million.
Operating income: In the table 2, we can see the operating profits over the years from 2010 to 2014. In 2010 and 2011 the growth of operating profit is quite stable. But a drastic change in the operating profit can be seen between 2012 and 2013. In 2013, the bank's operating profit had been a sharp declined by -32.90% from the previous year. Year
Operating profit
2010
20,588,351,730
2011
23,714,984,019
2012
22,620,415,897
2013
15,177,625,068
2014
21,723,612992 Table- 2 Operating Income
The chart showing the trend of operating income is given below-
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Operating Income (billion) 23.7
25 20.5 20
21.7
22.6 15.2
Operating Income
15 10 5 0 2010
2011
2012
2013
2014
Despite the sharp decline in the operating profit, Sonali Bank was succeeded to recover their loss by the year 2014 and the operating income was increased by around 6.5 billion.
Total expenditure: In table 3 it can be seen that though the expenditure was higher in 2010, it was lower in 2011 and 2012. But due to hallmark loan scam, the total expenditure was increased by 5.17% than 2012. Year
Expenditure
2010
14,962,361,986
2011
11,237,253,965
2012
11,556,897,345
2013
12,154,359,104
2014
13,1121853,735 Table- 3 Total Expenditure
The chart showing the trend of total expenditure is given below-
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Total Expenditure (billion) 14.9 16 13.2 14 12.1 11.2 11.5 12 10 Expenditure 8 6 4 2 0 2010 2011 2012 2013 2014
Total Expenditure
The company was trying to recover from this situation by 2014, but it was not in favor of the bank because the total expenditure had been increased by 7.90%.
Investment: There had been a great impact on the investments of Sonali Bank. Because of the scandal, the investment was also negatively affected. Although the investment by the government was increased over the years, investment in other sectors was decreased drastically because of the unfavorable situation occurred in 2012. The table showing the investment in other sectors from 2010-2014 is given below-
Year
Investment by government
Investment in other sectors
Total investment
2010
96,838,566,107
14,906,529,354
132,089,167,727
2011
119,359,837,845
12,729,329,882
147,018,999,055
2012
129,999,474,754
17,019,524,301
270,411,184,260
2013
253,779,613,829
16,631,570,431
270,411,184,260
2014
300,525,808,400 22,497,636,773 Table- 4 Total Investment
323,023,445,173
The chart showing the trend of total investment is given below-
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Total Investments (billion) 12 10
22 17 16
814 12 6 Government
4
25 20 15 10 Other Sectors
2
5
0
0
Other Sectors Investment in government
By this chart, we can see that, the situation of 2012 did not affected the investment in government and though the investment in other sectors affected, it was recovered by the year 2014.
LC (Letter of Credit) Because of the hallmark scam, the bank’s income from opening LCs (letter of credits) came down as the import activities of the Hotel Sheraton branch decreased. This is because a lot of foreign banks refused to accept LCs issued by Sonali Bank.
Earnings per share From table 5 it can be seen, the EPS was greatly affected by the hallmark loan scam and for that reason the EPS for the year 2012 showed a huge negative value. Year
EPS
2010
30.42
2011
108.65
2012
(222.04)
2013
30.64
2014
31.72 Page 29 of 42
The chart showing the trend of earnings per share is given below-
Earnings per Share 150
108.65
100 30.42 50 EPS
0 2010 -50
2011
2012
30.64
31.72
2013
2014
EPS
-100 -150 -200
-222.04
-250
Though the EPS showed a negative balance in the year 2012, in 2013 and 2014 it recovered from drastic decline and showed the positive balances of 30.64 and 31.72 respectively.
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6.3 Impact of hallmark scam on economy
Shortfall of money
Collapse in banking sector
Cause insufficient investment
1) Shortfall of money: Money scarcity is the phenomenon of insufficient liquidity in the economy to finance all possible trades. After sonali bank’s scam ,if common people shy away from the banks this may cause shortfall of money in banking sector as well as other financial sectors like investment ,trade and commerce. This results in depressed economies. 2) Collapse in banking sector: Usually, banks collect money from depositors and provide loan to business entities and other borrowers. After this huge Sonali Bank scam common people might lose their trust in the banks. They will not find it secure to keep their money in the banks. Many of them may even be tempted to withdraw their deposits in fear of a collapse of the banking sector like the share market collapse. This results in negative impact on economy. 3) Cause insufficient investment: Since banks are very important institution in financial intermediation in economic activities, the lack of trust in banks has a pervasive effect on the whole economy. As a result , a great insufficient occurs in investment sector.
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7.0 Changes in Regulations due to hallmark scam: Changes in Regulations due to hallmark scam are Page 32 of 42
a) Tax is implied over local LC after Hallmark scam. b) Most of the commercial banks are now maintaining a cautious policy in purchasing in c) d) e) f) g) h)
land bills. They are putting emphasis on enforced regulation Now a day’s one banking staff must inspect the inventory of the applicant company. Internal audit has been increased. Documentation has increased Regulation has been made to transfer each employee after certain period. Inspection of Bangladesh Bank has increased.
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The state-owned Sonali Bank has written off the loans embezzled by the Hallmark Group, as there is no hope of getting the money back. The executive committee of Sonali Bank recently approved a proposal to write off a Tk2,086 crore loan in favour of 23 clients, including the scam-hit Hallmark.
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Apart from Hallmark, the committee has also written off the bad loans of 13 other clients from various branches of the bank. Of the loan amount, around Tk1,700 crore has been written off against the loans of the Hallmark Group from the Ruposhi Bangla Hotel branch, and 13 other clients from other branches. The approval came at the 35th EC meeting of Sonali Bank. The board made the decision at a time when the bank is running with a capital shortfall of Tk394 crore. Expressing concern over the large loan write off, Bangladesh Bank has undertaken a move to check whether the required provisions were followed before writing off the loans. The BB investigation had earlier found that Sonali Bank's Ruposhi Bangla Hotel branch lent the Hallmark Group and five other companies Tk3,547 crore between 2010 and 2012, using fake documents. Of the Tk3,547 crore, the Hallmark Group alone swindled Tk2,686.14 crore. Later on, Sonali Bank filed cases against Hallmark Group as it failed to get buyers for the mortgaged assets of the company. The bank fell into capital shortfall, while the large loans, taken through irregularities, went into default. Then, the government injected around Tk2,000 crore in 2013, and Tk710 crore in 2014, for the survival of the bank. However, despite large loans being written off, the bank showed high profits in 2014. In fact, the bank bagged an operating profit of Tk855 crore and net profit of Tk492 crore. The actual profits of the bank could be ascertained just after the visit of the Bangladesh Bank investigation team, said a BB review report on Sonali Bank. The bank also showed that capital shortfall was reduced to Tk394 crore last year, after the recapitalisation of large amounts by the government, from Tk895 crore in 2013, but this figure might be higher than the bank's claim after the investigation was carried out by the central bank, said the BB report. Sonali Bank has written off loans worth Tk2,946 crore during the last year and rescheduled loans of total Tk2,756 crore in 2013 and 2014. Page 35 of 42
The bank's default loan rate came down to 28.54% last December due to the rescheduling and writing off of large loans. It could have even crossed 40% had there been no rescheduling and writing off, said Bangladesh Bank in its review report. The position of the state-owned bank slipped to five from its previous marginal level of four, in its CAMELS rating during last year as the bank's financial health was considered unsatisfactory.
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9.0 Suggestions In the backdrop of one of the banking scandals, the following steps may be considered: 1
The monitoring system of Bangladesh Bank should be strengthened further and its
2
audit and inspection teams should be empowered to work independently. People who have experiences in finance, economics, management of financial institutions, not loan defaulters, and people with honesty and integrity should be nominated to the Boards of all the state owned banks as well as in the private banks. Page 37 of 42
3
Significant reforms are necessary in financial and banking management which, have
4
been long overdue. A finance and banking reforms commission may be set up; Bangladesh Bank's capacity for effective, objective, transparent and accountable bank supervision may be enhanced, including enlargement of professional staff, and
5
extension of its authority over the NCBs. In appointing the NCB and DFI Boards, there may be a reservation of some quota for
6
non-political professionals. Duties, responsibilities and powers of the Board and the management of a bank must be clearly delineated and enforced.
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10.0 Conclusion Conclusion Sonali bank is a renowned name in the banking industry for a long time. It has witnessed so much succession project during the past years. But it also confronts scandal regarding Hallmark in recent years which is very crucial for the banking industry. The scandal resulted from collusion between officials of Hallmark and Sonali Bank, in particular between Tanvir Mahmud, Managing Director of Hallmark Group, and Azuzur Rahman, Manager of Sonali Bank’s Ruposhi Bangla branch. Hallmark management exploited the Letter of Credit (LC) system of financing trade. Hallmark is accused of establishing fictitious companies, such as Anwara Spinning Mills, Max Spinning Mills, Star Spinning Mills, which were shown as recipients of the LCs. These companies submitted falsified paperwork reporting deliveries of fabric to Hallmark, which were then paid for by the LCs from Sonali Page 39 of 42
Bank’s Ruposhi Bangla branch. Because the fictitious companies and Hallmark had their accounts at the Ruposhi Bangla branch, on paper it looked like the branch’s assets and liabilities were balanced out. Inland Bill Purchases was then used to spread some of the bad loans throughout the banking system. Because the still outstanding LCs were guaranteed by Sonali Bank, the fictitious textile companies were able to sell the LCs to other banks before maturity at a discounted price. As such, portions of the bad loans were passed on to twentyseven other banks. The Hall-Mark had massively forged papers when taking out loan from the bank. The bank’s officials are alleged to have colluded with this fraud. Bangladesh Bank's investigation team identified the bank scams as a major crime. Bangladesh Bank found massive corruption at Sonali Bank in 2010. At that time the BB did not take major steps against Sonali Bank. The BB should demand fair probe into the Sonali Bank scam and exemplary punishment to those involved in the scandal in the Sonali Bank. The BB knew that something had happened like fraudulence in Sonali Bank, a state-owned bank. It reveals the weakness in bank management and audit. The consequences of such a massive scandal are very disastrous for the whole banking sector of the country. Sonali Bank confronted serious financial and leadership challenges for this issue. It had to cancel a Tk. 800 million loan in Fall due to financial shortfalls, and it has had to borrow heavily from other banks to stay afloat. We may conclude the report by providing recommendations in respect of this situation.
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11.0 Bibliography http://print.thefinancialexpressbd.com/old/index.php? ref=MjBfMTJfMjNfMTJfMF8xODBfMTU0MDA3&feature=c3BlY2lhbHNOZXdz&na=Q W5uaXZlcnNhcnkgSXNzdWUgMjAxMiAoUGFydCBUd28 https://www.google.com.bd/url? sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjM37Xl4LR AhVFa7wKHRTxBUsQFgghMAA&url=http%3A%2F%2Ffraudresearchcenter.org%2Fwpcontent%2Fuploads%2F2014%2F06%2FThe-True-Impact-of-Fraud-Proceedingshttp://www.assignmentpoint.com/business/financial-performance-analysis-of-sonali-banklimited.html
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http://archive.dhakatribune.com/bangladesh/2014/oct/29/%E2%80%98state-owned-banksplace-false-anti-fraud-control-measures%E2%80%99 http://www.sonalibank.com.bd/PDF_file/financialreport/2014/SBL-Fin&AdtRep-2014.pdf ttp://www.sonalibank.com.bd/PDF_file/financialreport
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