2. WHAT IS RISK MANAGMENT?
In the world of finance, risk
management refers to the
practice of identifying potential
risks in advance, analyzing them
and taking precautionary steps to
reduce/curb the risk.
3. What is Risk Management in Indian Banking
Sector and the role of RBI:
RBI in 1999 recognized the need of an
appropriate risk management and issued
guidelines to banks regarding assets
liability management, management of credit,
market and operational risks.
4. Type of Risks:
The major risks in banking business as commonly
referred can be broadly classified into:
• Liquidity Risk
• Interest Rate Risk
• Market Risk
• Credit or Default Risk
• Operational Risk
5. Role of RBI in Risk Management
in Banks:
Here, we will discuss the role of RBI in Risk Management and how the
tools called CAMELS was used by RBI to evaluate the financial
soundness of the Banks. CAMELS is the collective tool of six
components namely
• Capital Adequacy
• Asset Quality
• Management
• Earnings Quality
• Liquidity
• Sensitivity to Market risk
6. • The CAMEL was recommended for the financial soundness of
bank in 1988 while the sixth component called sensitivity to
market risk (S) was added to CAMEL in 1997.
• RBI in 1999 recognized the need of an appropriate risk
management and issued guidelines to banks regarding assets
liability management, management of credit, market and
operational risks. The entire supervisory mechanism has been
realigned since 1994 under the directions of a newly
constituted Board for Financial Supervision (BFS), which
functions under the aegis of the RBI, to suit the demanding
needs of a strong and stable financial system.
• A process of rating of banks on the basis of CAMELS in respect
of Indian banks and CACS (Capital, Asset Quality, Compliance
and Systems & Control) in respect of foreign banks has been put
in place from 1999.
7.
8. CONTD….
• Banks to set up a comprehensive risk rating systems for
counter parties.
• Banks have to fix a definite time frame for moving over to value
at risk.
• By Mar 2001 banks with international presence have to develop
methodologies for estimating and maintaining economic capital.
• Banks should evaluate portfolio quality on an on-going basis
instead of near balance sheet date.
• Investment proposals to be subjected to same credit risk
analysis as in the case of loan proposals.
9. CONTD..
• Investment proposals to be included in the total risk evaluation.
• For off balance sheet exposure the current and potential credit
exposure to be measured on a daily basis.
• Activities of ALCO ( asset, liquidity committee) and credit policy
committee should be integrated.
• For managing liquidity risk banks should place limits on inter
bank borrowings.
• Banks have to provide a contingency plan to meet adverse
swings in liquidity conditions.
