RISK MANAGEMENT

OCTOBER,2013

BANKING RISK
What it is ?
The process of transferring funds from the savers to the entrepreneurs is called Intermediation and the essence of this intermediation is Risk Management. Broadly, the risks faced by Banks can be attributed to their businesses which is concerned with sourcing of funds and their profitable deployment, as also to their control functions.
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TYPES OF RISKS
Business Risks :
i. ii. iii. iv. v. vi. Credit Risk Market Risk Country Risk Business Strategy & Environment Risk Operational Risk Group Risk

Control Risks :
i. Internal Control Policies & Procedures ii. Organisation & Management iii. Compliance with Laws, Rules & Regulations
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CREDIT RISK
Banks control credit risks at two levels : Portfolio level
by deciding on Mix of retail & wholesale credit, Exposure to trade, industry, sector specific etc., Industry wise limits, Group wise limits, Rating based exposure, Acceptable levels of exposure to countries

Account level

by prescribing the Appraisal procedures, Approval process, Documentation process, Disbursement process, Monitoring process, Delinquency management process etc.

MARKET RISK
This may take the following forms : Liquidity Risk arises due to unexpected withdrawal of funds, nonrenewal of FDs, performing loans turning NPA, devolvement of contingent liabilities etc.

Interest Rate Risk arises due to mis-match viz. short term deposit
invested in long term security, pressure on NIM etc.

Foreign Exchange Risk due to fluctuation in currency rates Equity Price Risk arises due to Banks exposure to capital market Commodity Price Risk due to movement in commodity prices
which are traded in secondary market.

OTHER RISKS
Country Risk
risk etc. viz. currency transfer risk, political risk, sovereign

Business Strategy & Environment Risk

arises due to identification of target markets, products etc. without proper planning and studying business environment

Operational Risk

resulting from inadequate or failed internal processes, people, systems / procedures or from external events.

Group Risk

arising from banks other domestic / overseas subsidiaries dealing in various businesses such as MFs, Insurance, Gilt securities, Lease / HP etc. which are not doing well & incurring losses.
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CONTROL RISK
Internal Control Policies & Procedures arises due to
poor house keeping, casual approach to audit / inspection, fraud, vigilance cases

Organisation & Management Risk due to lack of

proper organizational set up particularly with respect to asset liability management, credit administration & risk management

Compliance Risk arising due to non-compliance with

various legal & statutory and prudential requirements and supervisory directives & guidelines issued by RBI & Govt.
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HOW TO MANAGE RISK

For effective management of various banking functions and associated risks, it is important to have a well-defined organisation and dynamic management. Like in any other organisation, in Banks also, the roles, responsibilities and authorities of various departments & Managerial persons are well defined. As a supervisory body, RBI has also issued broad guidelines advising banks to create a set up for management of various risks faced by them
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STRUCTURE FOR MANAGING RISKS IN A BANK

Board of Directors
it is having overall responsibilities for management of various banking risks.

Risk Management Committee (RMC)

RMC devises suitable policies including techniques for risk identification,risk measurement, risk grading & policies & procedures for their effective management & co-ordinating with various RMCs.

RBI has advised banks to set up

- an ALCO to manage Market risk including Liquidity risk - A Credit Risk Management Committee (CRMC) to manage Credit risk
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ASSET LIABILITY MANAGEMENT COMMITTEE (ALCO)

ALCO
is responsible for ensuring adherence to the limits set up by the Board & deciding on the strategy in line with banks budget & risk management objectives.

Main Role :
Product pricing for deposits & advances Deciding on desired maturity profile & mix of incremental assets & liabilities Articulating interest rate view of the bank Reviewing funding policy Deciding on transfer pricing policy Reviewing economic & political impact on the B/sh of the Bank
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BANKS PERFORMANCE
Evaluating Banks Performance by RBI Moving from CAMELS TO RBS : Capital Adequacy, Asset Quality, Management, Earning, Liquidity, System & Control (CAMELS) Risk Based Supervision (RBS)

BANKS PERFORMANCE
Instead of examining only the past performance, move towards the path & passage of risks early identification of risks and enabling appropriate supervisory intervention. Preparing the supervisory apparatus to focus not only on compliance but also on finding out riskiness of a bank, its preparedness to adopt risk lines. Adapting risk based business conduct with indicative time lines. Devising rating methods to capture fair, transparent and nondiscriminatory pricing to customers.

THANK YOU

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