news letter sep 2013 vol 1

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Risk Management in Banking Sector

The growth in the banking sector business post liberalization

has thrown lot of challenges, be it in the areas of operations,

management, products, technology, expansion etc. Banks are

finding it difficult to cope up with the challenges and are

always prone to one or other sort of risk. Such risks are

somewhat acting as hurdles in their growth and the top priority

now a day for banking sector is to reduce and mitigate risk

through a proper Risk Management policy.

Post Globalization Challenges in Banking Sector

– A study on Risk Management

By CMA N Raveendranath Kaushik

Meaning of Risk

“Risk is Exposure to Uncertainty”. So, there are two importa

words one is exposure and the other Uncertainty in Risk.

Meaning of Risk Management

ISO 3100 – “Risk Management is the identification, assessment an

prioritization of risks followed by coordinated and economic

application of resources to minimize, monitors, and controls th

probability and/or impact of unfortunate events or to maximize th

realization of opportunities”.

The recent experience of 2007-08 financial crisis in which majo

banks like Layman Brothers, Global Trust Bank and AIG had close major part of its global business because of not having a prop

risk management policy.

Risks in Banking Sector

As per RBI guidelines issued in 1999, there are basically three typ

of risks encountered in Banking Sector and these are Credit Ris

Market Risk and Operational Risk. The changes in busine

dimension and competition has resulted in further more addition

risks in the form of Liquidity Risk, Regulatory Risk, Environment

risk, Technology risk and Governance Risk.

September,2013

Credit Risk and Risk Management

Credit Risk is a risk which arises due to default of borrower not

repaying the debt according to agreed terms. According to

BCBS (Basel Committee on Banking Supervision) defines

credit risk as the potential that a borrower or counter party will

fail to meet its obligation in accordance with the agreed terms.

Credit Risk is most common risk which occurs in banking

business, these are somewhat which is known and if proper

care is taken risk can be minimized.

MACAURO

NEWSLETTE

Vol. I / Issue No. 1

NEWSLETTER TO EDUCATE AND EMPOW

MACAURO 1

stTO 15

thSEPTEMBER 2013 Volum

‘Post Globalization challenges

in Banking Sector – A study on

Risk Management’

By CMA N Raveendranath Kaushik



Credit Risk and Risk Management

Credit Risk is a risk which arises due to default of borrower not

repaying the debt according to agreed terms. According to BCBS

(Basel Committee on Banking Supervision) defines credit risk as the

potential that a borrower or counter party will fail to meet its

obligation in accordance with the agreed terms. Credit Risk is most

common risk which occurs in banking business, these are some what

which is known and if proper care is taken risk can be minimized.

Risk Management for Credit Risk can be done by

following ways:

1. Ceiling Credit Limits of customers – Extending loans based on

the credit worthiness of customers will help in reducing the risk.

Each and every customer is rated on different parameters and

accordingly credit limits are fixed. Rating agencies like

CRISIL, ICRA, CARE etc. can provide vital financial

information about the customers which can be used for fixing

credit limits.

2. Portfolio Management – Diversifying the lending process will

help in spreading over the credit to different channels. To some

extent risk gets spread over and controls can be envisaged in

right directions.

3.

Risk Rating Model – Setting up of Risk rating system on a scaleand frequent monitoring and reviewing the ratings on the scale

will help in understanding the risk and preemptive decisions can

be taken before the Risk triggers and causes maximum loss.

4. Credit Monitoring – Lending norms differs with types of banks.

Commercial banks have their own sort of lending norms and

Non-commercials banks follow their own norms. This is

resulting in lot of confusion in finding the approaches for fixing

credit and evaluating customers. Strengthening Credit

monitoring system at different levels in banking structure would

Market Risk and Risk Management

Market Risk in simple means the possibility of loss to bank cau

by the changes in market variables. Market variables are int

rates, foreign exchange, prices of equity and commodity. This

is something which is caused or influenced by external factors

which the Banks don’t have control.

Liquidity Risk and Management – It is

financial risk from the possible loss of liquidity. There

be either Specific Liquidity Risk which is applicable

specific bank or it may be Systematic Liquidity risk w

will affect all the participants in markets. Credit

Monitory Policy announced by RBI caters to manage

Risk. Timely control on credit and deposits by chan

SLR and CRR will help in managing the risk to sextent. But, internally each Banks can have a proper A

–Liability Management Policy which aims at having

to time matching of Assets and Liabilities. It is v

difficult to foresee and predict the behaviors of custom

and managing liquidity risk is a very challenging task s

is advisable to have a tolerance level fixed for each

every maturities based on the asset-liability mix.

Interest Rate Risk – This risk arises when the f

and floating interest rates of Banks is not so sensitiv

variations in market interest rates. Banks can manage

risk by first valuing returns on their portfolios held w

that of market rates. Duration Gaps shows the indica

for interest rate risk needs to be assessed at reg

intervals and this can be used for taking up strat

decisions. In this process of identifying the duration g

bank can look-in to the various dimensions of resu

risks like Yield curve risk, , reinvestment risk, reprice

etc..

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Basel’s New Capital Accord – New

Dimension to Risk Management

Bank of International Settlement (BIS) set up Basel

Committee on banking supervision in 1988. The guidelines

issued by Basel Committee brought standardization and

universalization among the global banking system for risk

management. In 1988 it came out with a Capital accord which

provided an option for measuring appropriate capital in to

risk weighted assets. The Basel II accord which was released

in 2004 made clear distinction between credit risk, market

risk and operational risk the main objectives of Basel II

accord is –

1. Make International Banking System more robust and

strong.

2. International Banks to be given more visibility and

structured guidelines for its operations.

3. Give more importance to Risk Management.

3 Pillars given in new Basel II Accord –

a) 1 Pillar Focus area is Minimum Capita

Requirement

b) 2 Pillar Supervisory Review process

c) 3 Pillar Market Discipline

As regulated by RBI, all Indian Banks are advised to keep a

minimum capital adequacy of 9% of Risk Weighted Assets

Table 2 below shows the Minimum regulatory capital of

some of the major banks as envisaged under Basel Disclosure

for March 2011.Regulatory capital is that % of capital which

the Banks are asked to maintain by the Regulator, here it is

RBI.

Exchange Risk – This is a risk caused due to

potential loss in exchange rates. Such risk can be

managed by going for future contracts and agreeing for a

limit based rates. Policy with respect to exchange rates

should be clear cut and out of the market experience and economic situation exchange rates should be agreed at

time of setting terms.

Operational Risk and Risk Management

BCBS defined Operation Risk as the risk of loss resulting from

inadequate or failed internal process, people and systems or from

external events. Such risk is in the form of avoidable risk and if

preemptive plan of action is designed then such risk can be

minimized.

.Risk Management for Operation Risk

1 Backups – Just like how the financial service industries have

BCP in its business modules even Banks can have similar

type of Backups for its operations. So, when ever there is a

system breakage or persons affected then immediately their

backups can jump up in to action.

2 Internal Controls and Checklists – Having well designed

internal controls and a system designed checklists will help

in accomplishing the task according to set guidelines and

procedures. Monitoring and reviewing the controls from time

to time will act as a good Risk management process.

3 Internal Audit – Carrying on Internal Audit will help in

detection of fraud and other issues before it does huge

damage to the Banking sector.

4 Effective Corporate Governance – Corporate Governance is

one of the effective and efficient tools which bring together

management and other stake holders under one platform. A

Strong Corporate Governance will help in bridging better

relationships between different stakeholders and also it will

help in resolving issues at initial stages.

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Conclusion

If we try to analyse the last decade of Banks performance w

coming year then one can find that the last decade was the peri

of transformation of banking sectors to meet global needs w

greater integration, adoption of core banking solutions and to som

extent transparency in its operation but, the coming decade whi

is very important and even more challenging as the Banking sec

will see enormous increase in its volume of operation mirrored

increase in use of Information Technology in its operation to ca

customer demand and needs. This will give more space for inviti

risks and it becomes important that banks take up well planned r

management policy in order to reduce or mitigate when ever r

occurs. Banking Sector should stop showing “Off Balance Sh

items” while reporting and it should shows all the risk assets a

should be more transparent when it comes to items pertaining

internal reporting. Risk is inevitable in business and it cannot

mitigated but, at least a proper risk management policy will help

minimizing the risk. Post liberalization growth and rec

recession impact on the financial sectors should act as an e

opener for financial sector especially banking sector and th

should come up with innovative ideas and systems to face a

challenges caused due to risk. Coming days will not be so easy ffinancial sectors and that too banking sector which are exposed

frequent risk need to take up some vital challenges in order

survive in market and also to gain more and more custome

Unless and until banks takes this has a key area of manageme

risks and losses are certain and coming years can witness ma

more cases like Global Trust Bank, Layman Brothers, AIG etc. a

in technology part they need to face challenges in form of hacki

of software, stealing of ATM machines, lack of technolo

knowledge, Data warehouse management etc.. So, the adventGlobalization has given less time to plan activities it

transformation which is the biggest challenges which is need

this hour and the banks should look forward to implementing t

changes at less risk.

Enterprise Risk Management (ERM)

ERM includes the methods and process used by the banking sector

to manage risk and seize the opportunities related to the

achievement of their objectives. The framework of ERM involvesidentifying particular event or circumstance relevant to the

objectives, assessing them, impact study; develop strategy and

monitoring the progress. Integration of risk within and among the

groups is possible under ERM. It focuses on strategy, operations,

financial reporting and compliances.

Risk Based Supervision (RBS)

RBI with a view to see that all the banks self access their risk has

introduced RBS where in it came out with a risk profile template

and the banks are asked to populate the relevant period data in the

template and do their own assessments and see to where they stand

in terms of risk. This process has opened doors for new

dimensional audit which is Risk Based Audit and it goes by the

concept that self introspection and assessment is the best judgment

which is available for the banking sector risk management.

Internal Capital Adequacy Assessment Process

(ICAAP)

ICAAP is a self regulatory document of banks which is

propounded by RBI for each of the Banks. Based on the

availability of data Banks are asked by RBI to prepare ICAAP

document with the involvement and approval of their Board of

Directors. This documents indicates the areas which are risk prone

and also suggests with the control and process adopted by banks in

risk management. Since it involves all the levels of management it

is more participatory and transparent and also more effective tool

to manage risk.

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NEWS AND EVENTS

Date: 28 th

August 2013 (Wednesday)

Event: Naming Ceremony of MACAURO

Venue: Auditorium

Guests: Sri. H.K.RajPurohit (Hon. Chairman), Sri M.S. Gudi (Hon.

Secretary),Sri Ramchandra (Hon. Joint Secretary), Sri .Gururaj Despande

(Hon. Treasurer),Sri Vadakeri (RES member), Smt. Shailaja M (Principal),

Sri Murali (PU Principal),

Date: 14 th August 2013 (Wednesday)

Event: Professional Development – ICAI course

Venue: Auditorium

Guests: CMA Selvanarayanan- Practicing Cost Accountant

COMMERCE QUIZ

Q1. A type of unemployment in which workers are in between jobs or are searching for new and better jobs is called :

a) Frictional Unemployment b) Cyclical Unemployment

c) Structural Unemployment d) Turnover Unemployment

Q2. When book value keeps on reducing by annual charge of depreciation it is known as :

a) Straight Line Method b) Written Down Value method

c) Reducing Balance method d) Both b) and C)

Q3. Statutory Auditor of a company in the care of casual vacancy may be appointed by the :

a) Board of Directors b) Managing Directors

c) Extraordinary General Meeting d) Government Concerned

Q4. Bombay Stock Exchange was established in the year :a) 1867 b) 1887 c) 1917 d) 1927

Kindly, send in your answers by 25th

September 2013 to Commerce and Management department or sent it via email [email protected]

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TIT BITS

INDIAN SECURITIES MARKET

Securities markets can be segregated into Primary market and

Secondary market.

Primary market deals with the new issues that a companyoffers to the public. The issuers in any markets are thecorporations, government, banks, financial institutions and mutual funds. Securities issued could be shares, bonds,debentures, other debt instruments, mutual funds schemes and collective investment schemes.

Secondary market facilitates trading and transfer of securitiesfrom one investors to another. In secondary market, the mainintermediaries are the brokers and the sub brokers.

Stock exchange facilitates the trading of securities. Thesecurities market is regulated in order to ensure safety for investors.

Bombay Stock Exchange (BSE) is the oldest exchange whichexist in India. It was called as The Native Share and Stockbrokers Association. In all there are 19 recognized stock exchanges in India. Out of which 5 are National levelExchanges and 14 regional exchanges.

NSE,BSE and MCXSE lead the Indian Securities Market in

terms of listing, trading and volumes. In April 1988, SEBI wasestablished as an administrative body to develop and regulatethe securities market and to protect the investors.SEBI Act was passed in 1992 after the failure of market in 1991 due to sharemarket scam and it was given complete regulatory control over the Indian Securities markets.

Nation wide electronic trading on NSE commenced in 1994. In1996, BSE was allowed to open trading terminals outsideMumbai.

The Securities Contracts (Regulation) Act, 1956, seeks to

prevent undesirable transactions in securities by regulating the business of dealing in securities.

Depositories Act , 1996 lead to the dematerialization (demat) of securities and transfer of securities in to electronic form.Delivery and settlement within two days of trading has been

possible due to this.

Derivatives Trading commenced in India in June 2000 whenSEBI gave approval for trading in index futures. At presenttrading volume is around 3 times that of spot markets.

Over The Counter (OTC) and Over the Terminal (OTT)exchange of India was established to provide a tradingmechanism for the small cap and mid cap companies.

Companies Act , 2012 passed in Loksabha on 8 th

September 2013. This will replace Companies Act ,1956.

Rupee to dollar stands at Rs 63.38

Foreign Direct Investment (FDI) up by 12% to$1.65 billion up to July 2013.

Retail Inflation picks up to 9.87%

Indirect Tax collection up by 3.8% in April-May

Gold prices falls for 5th day on a falling demand.

FACTS AND FIGURES

Newsletter will be uploaded on to the

web every fortnight. We invite reader’s

contribution in the form of articles or

short essay on topics relating to

commerce and management. E-mail the

soft copy of the same to

[email protected] by 5th

and 20th

of every month.

Feel free to give suggestions, opinions

and reactions to any of the article

published.

Contact Media Team for any further

information.

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