Banking in india and risk management

1. Banking in India and risk management

2. Definition• In India, the definition of the business of banking has been given
in the Banking Regulation Act, (BR Act), 1949 a banking company is a company
which transacts the business of banking in India., accepting, for the purpose of
lending or investment, of deposits of money from the public, repayable on
demand or otherwise, and withdrawable, by cheque, draft, order or otherwise.
3. Banking Structure in india
4. Funtions Of A bank(i) maintaining deposit accounts including
currentaccounts,(ii) issue and pay cheques, and(iii) collect cheques for the
banks customers.
5. What is Risk Management?The four letters „RISK‟ indicates that risk is an
unexpected event or incident, which needs to be identified, measures
monitored and control.• R = Rare (Unexpected)• I = Incident (Outcome)• S =
Selection (Identification)• K = Knocking (measuring, monitoring, controlling)
6. Different Types of Risks?Broadly speaking the risk can be divided into four
main categories.• Market Risk: Market Risk can be defined as the risk of losses
in and off balance sheet positions arising from adverse movement of market
variables.• OPERATION RISK: “Operational Risk” is defined as the risk of direct
or indirect loss resulting from inadequate or failed internal process , people
and system or from external events.• COUNTRY RISK: Country Risk is the
possibility that a Country will be unable to service or repay its debts foreign
lenders in a timely manner Risk relating to dealing with other countries such as
sovereign risk, political risk,• Credit risk: It is a risk of potential loss arising out
of inability or un- willingness of a customer or counter party to meet its
commitments in relation to lending. Hedging, settlement and other financial
transactions.
7. TOOLS FOR CREDIT RISK MANAGEMENT• Operations in the account• Stock
Statements• QIS/QMR• Review of account and financial statements• ASCROM
and PSR• Audit and inspections: concurrent audit, annual audit, Stock audit,
periodical inspection, ZIC inspection, etc.• Discretionary Lending power and
„Cap”• Exposure ceiling- Single, Group, and activity exposure.• Insurance and
Credit rating• Credit rating – CRISIL RAM
8. Risk Based Supervision• The Reserve Bank of India is supervising the banks
on CAMELS model which covers Capital Adequacy, Asset Quality, Management,
Earnings, Liquidity and Systems & Control.• All other Schedule Commercial
banks are encouraged to migrate to these approaches under Basel-II in
alignment with them, but, in any case not later than March 31, 2009. RBI has
also specified that banks would have to maintain a minimum Tier-I ratio of 6 %,
while continuing to maintain CAR of 9 %.
9. Credit Risk Mitigation (CRM) Techniques• 1. Collateralised Transactions -
Certain securities are eligible to be considered for Basel-II purpose. The
securities may be either prime securities or collateral securities like cash
margin, Bank‟s own deposit, NSC, Indira Vikas Patras & Kisan Vikas Patra, LIC
policies, Gold, etc i.e. cash or near cash securities are considered as security for
Basel-II purpose. In respect of Standard Assets Basel-II does not recognize land
and building, Plant and Machinery as Collateral for risk mitigation purposes.•
2. On balance sheet netting - It is confined to loans / advances and deposits,
where banks have legally enforceable netting arrangement, involving specific
lien with proof documentation. Loans and advances are treated as exposure
and deposits as collateral. Exposure may be offset against eligible collateral
credit.•• 3. Guarantees - The eligible guarantors are Sovereign, sovereign
entities, ECGC, PSEs, Banks, primary dealers with a lower risk weight than the
counter party (borrower), other entities rated AA or better External Credit
10. Mitigation Of Risks• 1. Credit Concentration Risk – Concentration risk may
be used in a broader sense to include concentration by sector, Concentration
by Industry, geographical location and concentration of risk mitigant
measures.• 2. Country Risk – The exposure to various countries are in terms of
rating categories as specified by the ECGC guidelines on Country risk
management in terms of percentage to Tier 1 and Tier 2 Capital.• 3. Interest
Rate Risk in the Banking Book – Interest rate risk is taken to be the current or
prospective risk to both the earning and capital of the bank arising from
adverse movements in interest rates. In the context of pillar 2, this is to be
estimated for banking book only, given that the interest rate risk in the trading
book is already covered under Pillar 1 market risk regulation.
11. Mitigation Of Risks• 4. Liquidity Risk - Liquidity risk occurs when an
institution is unable to fulfil its commitment in time when commitment falls
due. The liquidity risk for the bank will be monitored and measured as per the
ALM Policy. It is not mandatory to maintain capital for liquidity risk.• 5.
Reputation Risk - Reputation risk is the current or prospective indirect risk to
earnings and capital from adverse perception of the image of the bank on the
part of customers, shareholders and regulator. Reputation risk may originate in
lack of compliance with industry service standards and regulatory standards,
failure to deliver on commitments, lack of customer friendly service and fair
market practices, a service style that does not harmonize with customer
expectation.• 6. Business and Strategic risk - Business risk means current or
prospective risk to earnings and capital arising from changes in the business
environment and from adverse business decisions.