RISK MANAGEMENT IN E-BANKING

An Introduction to E-Banking

Electronic banking is one of the truly widespread avatars of E-commerce the world over. Various authors define E-Banking differently but the most definition describe the meaning and features of E-Banking are as follows:

• Banking is a combination of two, Electronic technology and Banking.

• Electronic Banking is a process by which a customer performs banking Transactions electronically without visiting a brick-and-mortar institutions.

• E-Banking denotes the provision of banking and related service through Extensive use of information technology without direct recourse to the bank by the customer

Risk Management is the process of measuring or assessing the actual or

potential dangers of a particular situation.Risk management is the process of

monitoring and addressing the potential for loss

AN INTRODUCTION TO RISK

Operational RiskReputational Risk

Credit RiskLegal Risk

TYPES OF RISK IN E-BANKING

The risk of loss resulting from inadequate or failed internal

processes, people and systems, or from external events. That type risk

is called as operational risk

OPERATIONAL RISK

Internal Fraud.External Fraud.

Employment Practices and Workplace Safety.

Clients, Products and Business Practices.

Damage to Physical Assets.Business Disruption and System

Failures.Execution, Delivery and Process

Management.

OPERATIONAL RISKS INCLUDE

Unauthorized Activity.

Transactions not reported.

Transaction type unauthorized.

Mismarking of position.Theft and Fraud.

Fraud/credit fraud/worthless deposits.

Theft/extortion/embezzlement/robbery.

Misappropriation of assets.

Forgery.

Account take-over/impersonation.

Bribes/kickbacks.

Insider trading.

Money laundering.

Willful blindness.

INTERNAL FRAUD

Employee training. Close management oversight.

Segregation of duties. Employee background checks.

Procedures and process. Purchase of insurance.

Exiting certain businesses. Capitalization of risks.

OPERATIONAL RISK CHECKLIST

Risk due to an uncertainty in a counterparty’s ability to meet its obligations in accordance with

agreed upon terms. That type of risk is called a credit risk

CREDIT RISK

Loans.Acceptances.

Interbank transactions.Trade financing.

Futures.Swaps.

Equities.Letters of credit.

Options.

CREDIT RISKS INCLUDE:

Establish an appropriate credit risk environment.

Operate under a sound credit-granting process.

Maintain an appropriate credit administration, measurement and

monitoring process.Ensure adequate controls over credit risk.

SOUND PRACTICES FOR MANAGING CREDIT RISK

Board of Directors should review credit risk strategy

periodically.Senior management should

implement credit risk strategy approved by the Board.

ESTABLISH AN APPROPRIATE CREDIT RISK

ENVIRONMENT

Criteria should include thorough understanding of the borrower,

purpose/structure of credit and its source of repayment.

Establish overall credit limits at the level of individual

borrowers/connected counterparties.Have a clearly established process for

approving new credits/extension of existing credits.

Extension of credit must be made on an arm’s length basis.

OPERATE UNDER A SOUND CREDIT GRANTING PROCESS

Have in place a system for ongoing administration of various risk-bearing

portfolios.Develop an internal risk rating

system for managing credit risk.Have an information system and analytical techniques that enable

management to measure credit risk of on/off balance sheet activities.

MAINTAIN A CREDIT ADMINISTRATION, MEASUREMENT

AND MONITORING PROCESS

It is System for monitoring overall composition and

quality of the credit portfolio.Consider future changes in economic conditions when

assessing individual credits.

MAINTAIN A CREDIT ADMINISTRATION,

MEASUREMENT AND MONITORING

PROCESS (CONTINUED)

It is System of independent, ongoing credit review.

Credit granting function is properly handled and credit exposures are within limits.

System for managing problem credits.

ENSURE ADEQUATE CONTROLS OVER CREDIT

RISK

Stringent credit standards for borrowers and counterparties.

Strict portfolio risk management. Constant focus on changes in economic or other circumstances that can lead to a decline in the

credit standing of a bank’s counterparties.

CREDIT RISK CHECKLIST

Reputational risk is the potential that negative publicity,

whether true or not, will result in loss of

customers, severing of corporate affiliations, decrease in revenues and increase in costs. These type of risk is

called as reputational risk

REPUTATIONAL RISK

Improving relations with shareholders.Creating a more favorable environment

for investment.Recruiting/retaining the best employees.

Reducing barriers to development in new markets.

Securing premium prices for products.Minimizing threats of litigation.

BENEFITS OF EFFECTIVE REPUTATION MANAGEMENT

Processes for crisis management are planned and documented.

External perceptions of the bank are regularly measured.

Reputational threats are systematically tracked.Employees are trained to identify and manage

reputational risks.Standards on environmental, human rights and

labor practices are set publically.Relationships and trust with pressure groups

and other potential critics are established.

REPUTATIONAL RISK CHECKLIST

legal risk is a risk which is done in purely the result of legal problems, with a specific focus on counterparty risk. That type of risk is called as legal risk

LEGAL RISK

CONCLUSION

Banks should develop appropriate incident response plans, including communication strategies, that ensure business continuity, control r risk and limit liability associated with disruptions in their e-banking services.