banking risks and regulation. changes in indian banking
TRANSCRIPT
Banking Risks and Regulation
Changes in Indian Banking
Possibilities of Coping with Challenges
• Investing in state of the art technology to ensure reliable
service delivery
• Leveraging the branch network and sales structure to
mobilize low cost current and savings deposits
• Making aggressive forays in the retail advances segment
of home and personal loans
Possibilities of Coping with Challenges
• Implementing organization wide initiatives involving
people, process and technology to reduce the fixed costs
and the cost per transaction
• Focusing on fee based income to compensate for low
spread (trade services)
• Innovating products to attract customers
• Improving the asset quality as per Basel II norms
Possibilities of Coping with Challenges
Bank Nationalization
• After the independence the major historical event in
banking sector was the nationalization of 14 major banks
on 19th July 1969.
• The nationalization was deemed as a major step in
achieving the socialistic pattern of society.
• In 1980 six more banks were nationalized taking the total
nationalized banks to twenty.
Products and Services of Banks
• Value added services to customers• Emergence of strong investment and merchant banking
entities• Product innovation and creating brand equity for
specialized products • New products on the liabilities side such as
– Foreign exchange linked deposits– Investment linked deposits
Products and Services of Banks
• Investors with varied risk profiles demand better yields
• Consolidation of services between banks, corporate
clients and their retail outlets
• Sharing of common platform to increase revenue
through increased volumes
New Banking Products
• Risk managers to corporate and other entities
• Risk management of products
– Options
– Swaps
– Other aspects of financial management in a multi
currency scenario
• Development of derivative products
New Banking Products
• Offer of hedge products to the corporate sector and other
investors
– Commodity derivatives
• Sophistication in trading and specialized exchanges for
commodities
• Financial support to exchanges
• Better settlement systems
• Wider participation
Bancassurance
• Entry of banks / financial institutions in insurance
business.
• Offer of insurance products through network of bank
branches.
• Expansion of business through self-designed insurance
products after necessary legislative changes.
• Increased fee-based income of the banks.
Banking Risk
• Rising global competition
• Increasing deregulation
• Introduction of innovative products
• Changing delivery channels of banks
• Perfect market economy introduces market related risks
– Exchange risks
– Interest rate risks
– Operational risks
Banking Risk
• Growth of derivatives and off-balance sheet operations
• Diversification of banking operations
• Expansion in e-banking
• Continuous vigilance
• Revisions of regulations
Managing Banking Risk
• Centralized risk management functions • Risk management functions (independent from business
profit centers) • Integration of risk management functions into the
business process • Assessment of risk-return for new business opportunities • Incorporation of risk management in the design of new
products
Managing Banking Risk
• Combined assessment of credit, market and operations
• Reporting and managing on risks on an integrated basis
• Risk Adjusted Returns on Capital (RAROC) based
performance measures
• RAROC will be used to drive pricing, performance
measurement, portfolio management and capital
management
Managing Banking Risk
• Corporate office to branches or operating units
• Audit and supervision shifts to a risk based approach
rather than transaction orientation
• Increased risk awareness levels of line functionaries
• Technology related risks focusing more on vigilance of
operating staff
Managing Banking Risk
• Reputation risk – Maintain a high degree of public confidence for raising
capital and other resources • Risks to reputation could arise on account of
– Operational lapses – Opaqueness in operations – Shortcomings in services
• Management of reputation risk– Systems – Internal controls
Managing Banking Risk
• Advances in risk management and risk measurement • Transformation in capital and balance sheet
management • Dynamic economic capital management
– Create– Sustain – Maximize shareholders’ wealth
• Total risk enabled enterprise• Concerns of various stakeholders’ expectations
Managing Banking Risk
• Cooperation and sharing of experience among banks
• Common facilities for development of risk measurement and
mitigation tools
• Common facilities for training of staff at various levels
• Establishment of risk management systems
• Implementation of prudential norms of accounting and asset
classification
• Quality of assets
• Provisioning for impaired loans
• Significant decline in non performing asset levels
Role of Regulator
• Ensuring soundness of the system by fixing benchmark
standards for capital adequacy and prudential norms for key
performance parameters.
• Adoption of best practices especially in areas like risk
management, provisioning, disclosures, credit delivery, etc.
• Adoption of good corporate governance practices.
• Creation of an institutional framework to protect the interest of
depositors.
• Regulating the entry and exit of banks including cross-border
institutions.
Role of Indian Banks’ Association
• Self regulatory body
• Development of benchmarks on
– Risk management
– Corporate governance
– Disclosures
– Accounting practices
– Valuation of assets
– Customer contract
– Lenders’ liability
Role of Indian Banks’ Association
• Role of the Indian Bankers’ Association
– Lobbyist for getting necessary legislative enactments
– Changes in regulatory guidelines