Risk Management Alm Npas 2008

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Risk Management & Compliance

with RBI Guidelines

PGP Jan 2008-10

Oct 4, 2008

Prof Chowdari Prasad


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Commercial Banking PG Risk Management & Compliances 2

Risk Management


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Components of a Bank B/S

1. Cash & Balances with

RBI

2. Bal. With Banks &

Money at Call and

Short Notices

3. Investments

4. Advances

5. Fixed Assets

6. Other Assets

1. Capital

2. Reserve & Surplus

3. Deposits

4. Borrowings

5. Other Liabilities

AssetsLiabilities

Contingent Liabilities


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What is Risk?


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What is Risk? (2)

A Ship is very safe in ashore.

But, it is not meant for that.

A Ship has to sail bytaking RISK.

Banking too is no exception.

A Bank has to carryBusiness by taking

(Informed & calculated) RISK


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What is Risk? (3)

The threat that an event or action will

adversely affect an organization's ability to

achieve its business objectives and

execute its strategies successfully.


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Sources of Risk

Decision, Indecision Business cycles/Seasonality

Economic/Fiscal

changes Policy Changes

Market movements

Events

Political compulsions Regulations

Human resources,skill sets

Competition

Technology

Non-availability of

information


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Different Types of Risks

Banks and Financial Institutions, in the process ofcarrying their businesses, face various kinds of financial

and non-financial risks -

Credit Risk

Liquidity Risk

Interest Rate Risk

Market Risk

Off-Balance Sheet Risk

Foreign Exchange Risk

Country or Sovereign Risk .................


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Different Types of Risks (2)

Operational Risk

Technology Risk

Compliance (Regulatory) Risk

Legal Risk

Reputation Risk

Insolvency Risk


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Inter-dependence of Risks

These risks are highly interdependent and

events that affect each other

One area of risk can have ramifications for

a range of other risk categories.


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What is Risk Management?

A system by which an organization

- evaluates, deals with and monitors risk

-to achieve its strategies successfully. It is the art of approximation

It is a planned method of dealing with

uncertainties of possible danger of loss


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Why Risk Management?

All transactions undertaken have one or moreRisks. Risks are attached to Portfolio too.

Aggregated Risk determines Capital needs of a

Bank / Financial Institution Hence, one of the objectives of Risk

Management is to enhance Risk Adjusted

Return on Capital (RAROC)

RM facilitates implementation of Risk and

Business Policies simultaneously in a consistent

manner


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Risk Management Framework

Risk ProfilingRisk Identification

Risk Measurement

Risk PricingRisk Monitoring, Compliance and Control

Risk MitigationComprehensive Risk Management should address all

the risks faced by an organization and their interlinkages


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Risk Identification

Identifying various Risks associated at the

Transaction Level and

Examining its impact on the Portfolio and Capital

requirement. Risk identification helps Head Office of a Bank to

approve Products and their screening

procedures and appropriate safeguards; Fixing

Limit exposure - product-wise and amount wise

and provide necessary risk taking guidelines.


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Risk Measurement

Uses Quantitative measures of Risk

Seek to measure variations in Earnings,

Market value, Losses due to default, etc.

Quantitative Measures used are :

Sensitivity

Volatility

Downgrade potential


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Risk Pricing

Implies factoring risks into pricing

Pricing should take into account besides

Profit Margin, the following:

Cost of Funds

Operating Expenses

Loss Probabilities

Capital Charge


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Risk Monitoring and Control

Adequate internal control system formonitoring compliance of internal policiesand reporting risk exposures

Conduct periodic reviews, periodic

supervision and inspections Identification of large exposures and Risk

concentrations Top Management involvement - review

reports on Risk Profile and Capital needsregularly and evaluate to make necessaryadjustments to Banks Business Plans


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Risk Mitigation

Achieved by adopting strategies that

eliminate or reduce various risks

Uses variety of Financial Instruments and

techniques to mitigate risks Collateralizations, third party guarantee

Insurance cover, Institutional Credit

Guarantee Schemes Hedging and

Securitisation


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RISK MANAGEMENT ORGANISATION

The Board of Directors

The Risk Management Committee

Integrated Committee / RespectiveCommittees

The Middle Office / Support Groups


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RISK MANAGEMENT FRAMEWORK

OF BANKS IN INDIA

The broad parameters of risk managementfunction encompass: Board approves risk management policies in

consonance with the

broader business strategies capital strength management expertise and overall willingness to assume risk

guidelines to govern risk including detailed structure ofprudential limits

Periodical review and evaluation


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RISK MANAGENET- COMMITTEE

Risk Management Committee with the top Executives as

members - reports directly to the Board of Directors RMC will evaluate

overall risks faced by the bank and determining the level of risks which will be in the best

interest of the bank . The Risk Management Committee will:

identify, monitor and measure the risk profile ofthe bank

develop policies and procedures

identify new risks Fixing the quantitative prudential limits on various

segments of banks operations


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RISK MANAGEMENT COMMITTEES

Asset - Liability Management Committeedeals with different types of market risks

Credit Policy Committee (CPC) deals with

credit / counter party risk and country risk Market and Credit risks are managed in a

parallel two-track approach in banks

Risk Management Alm Npas 2008

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