Risk Management Systems in Banks Genesis, Significance and Implementation

Risk Management Systems in Banks Genesis, Significance and Implementation

اسلاید 1: ANUPAMA K JAYA NAIR ANUPAMA SMANJU JAYSHREERisk Management Systems in Banks Genesis, Significance and Implementation

اسلاید 2: CONTENTS What is Risk? Classification of Risk Objectives of Risk Management Tools for Managing Risk Risk Management in PNB

اسلاید 3: The potential loss an asset or a portfolio is likely to suffer due to a variety of reasons. RISK

اسلاید 4: Survival of the organizationEfficiency in OperationsUninterrupted OperationsIdentifying and achieving acceptable level of riskEarning StabilityContinued and sustained GrowthOBJECTIVES OF RISK MANAGEMENT

اسلاید 5: RISKSCLASSIFICATION OF RISKSFINANCIAL RISKNON FINANCIAL RISKCREDIT RISKMARKET RISKTRANSACTION RISKPORTFOLIO RISKINTEREST RATE RISKLIQUIDITY RISKFOREX RISKOPERATING RISKSYSTEMATIC RISKPOLITICAL RISKHUMAN RISKTECHNOLOGY RISK

اسلاید 6: CREDIT RISK Risk that the counterparty will fail to perform or meet the obligation on the agreed terms .TYPES OF CREDIT RISKSTransaction RiskRisk relating to specific trade transactions, sectors or groups.Portfolio RiskRisk arising from lending to sectors non related to the core competencies of the Bank / concentrated credits to a particular sector / lending to a few big borrowers.

اسلاید 7: MARKET RISK Market risk is the risk to a bank’s financial condition that could result from adverse movements in market price.TYPES OF MARKET RISKInterest Rate RiskRisk felt, when changes in the interest rate structure put pressure on the net interest margin of the Bank. Liquidity RiskRisk arising due to the potential for liabilities to drain from the Bank at a faster rate than assets.

اسلاید 8: TYPES OF MARKET RISK (continued)FOREX RISKThis risk can be classified into three types.Transaction Risk is observed when movements in price of a currency upwards or downwards, result in a loss on a particular transaction.Translation Risk arises due to adverse exchange rate movements and change in the level of investments and borrowings in foreign currency.Country Risk. The buyers are unable to meet the commitment due to restrictions imposed on transfer of funds by the foreign govt. or regulators. When the transactions are with the foreign govt. the risk is called as Sovereign Risk.

اسلاید 9: NON-FINANCIAL RISKSOperational Risk arises as a result of failure of operating system in the bank due to certain reasons like fraudulent activities, natural disaster, human error, omission or sabotage etc.Systemic Risk is seen when the failure of one financial institution spreads as chain reaction to threaten the financial stability of the financial system as a whole.Political Risk arises due to introduction of Service tax or increase in income tax, freezing the assets of the bank by the legal authority etc.Human Risk Labour unrest, lack of motivation, inadequate skills, problems faced by the bank after implementation of VRS lead to Human Risk.Technology Risk Obsolescence, mismatches, breakdowns, adoption of latest technology by competitors, etc, come under technology risk

اسلاید 10: MANAGEMENT OF CREDIT RISKMeasurement through Credit Rating / scoringQuantification through estimate of expected loan lossesPricing on a scientific basisControlling through Effective loan review mechanism and portfolio management

اسلاید 11: TOOLS OF CREDIT RISK MANAGEMENTEXPOSURE CEILINGS :Setting of prudential norms related to the Bank’s exposure to a single borrower / group borrowers / sectorial borrowersREVIEW / RENEWAL : This involves multi-tier credit approving authority, constitution wise delegation of powers, higher delegated powers for better rated borrowers, discriminatory time for credit review / renewal, hurdle rates / benchmarks for fresh exposures & periodicity for renewal based on risk rating.

اسلاید 12: COMPREHENSIVE RISK RATING MODELSRISK BASED SCIENTIFIC PRICING: Linking loan pricing to expected lossPORTFOLIO MANAGEMENT : Stipulate quantitative ceiling on specific rating categories, distribution of borrowers in various industries / business groups , rapid portfolio reviews, on-going system for identification of credit weaknesses well in advance, initiate steps to preserve the desired portfolio quality and integrate portfolio reviews with credit decision making process.

اسلاید 13: TOOLS OF CREDIT RISK MANAGEMENTLOAN REVIEW MECHANISM : This should be done independent of credit operations & administration and cover all the loans above certain cut-off limit ensuring that at least 30 – 40% of the portfolio is subjected to LRM in a year.

اسلاید 14: RISK MANAGEMENT IN PNBNew Capital Adequacy Framework:Bank has migrated to New Capital Adequacy Framework, popularly known as BASEL II w.e.f. from March 2008. The approaches prescribed by the Regulator, namely Standardised Approach under Credit Risk and Basic Indicator Approach under Operational Risk have been implemented.The Bank had adopted Standard Duration Approach for Market Risk, since March 2006.

اسلاید 15: RISK MANAGEMENT IN PNB(contd)Bank has already placed credit risk rating models on central server based system ‘PNB TRAC’, which provides a scientific method for assessing credit risk rating of a client. The Bank has developed and placed on central server score based rating model ‘PNB SCORE’ in respect of retail loans and traders up to total limits of Rs 50 lacs. “Accept/Reject” decisions are also based on the score obtained. Scoring models for remaining sectors like SME segments have been developed and are under testing stage.

اسلاید 16: Bank is also developing framework for estimating LGD (Loss Given Default) and EAD ( Exposure at Default) and also framework for identifying concentration risk. A data warehouse is being established for effective data management and use of application tools for quantification of risks.For the Market risk bank has a Mid-Office with separate desks for Treasury & Asset Liability Management (ALM). Asset Liability Management Committee (ALCO) is primarily responsible for establishing the market Risk Management, asset liability management of the bank, implementing the risk management of the bank. The policies for hedging and mitigating risk are discussed in ALCO.

اسلاید 17: A separate independent Division known as Credit Audit & Review Division has been formed to ensure LRM implementation. LRM examines compliance with extant sanction and post-sanction process/procedures laid down by the Bank from time to time. Preventive Monitoring System (PMS): It is a tool used by bank for detection of early warning signals with a view to prevent/minimize the loan losses.

اسلاید 18: Liquidity Risk of bank is assessed through gap analysis for maturity mismatch based on residual maturity in different time buckets & management of same is done through prudential limits fixed thereon.Bank is also monitoring the liquidity through various stock options.The Bank is proactively using duration gap and interest rate forecasting to minimize impact of interest rate changes.Advance techniques such as Stress testing, simulation, sensitivity analysis etc, are conducted at regular intervals to draw contingency funding plan under different liquidity scenarios.

اسلاید 19: CONCLUSION In the Banking industry where risk is the norm , rather than the exception, we have to adopt many measures like reducing exposure in high risk areas, emphasising more on the promising industries, optimising the return by striking a balance between the risk and the return on the assets. Our motto should be effective management of risks towards ensuring quality credit portfolio.

اسلاید 20: Hope you have enjoyed our presentation.Thank you