2. Definition
• In India, the definition of the business of banking
has been given in the Banking Regulation
Act, (BR Act), 1949 'a banking company is a
company which transacts the business of banking
in India.', 'accepting, for the purpose of lending or
investment, of deposits of money from the
public, repayable on demand or otherwise, and
withdrawable, by cheque, draft, order or
otherwise.'
4. Funtions Of A bank
(i) maintaining deposit accounts including current
accounts,
(ii) issue and pay cheques, and
(iii) collect cheques for the bank's customers.
5. What is Risk Management?
The four letters „RISK‟ indicates that risk is an
unexpected event or incident, which needs to
be identified, measures monitored and
control.
• R = Rare (Unexpected)
• I = Incident (Outcome)
• S = Selection (Identification)
• K = Knocking
(measuring, monitoring, controlling)
6. Different Types of Risks?
Broadly speaking the risk can be divided into four main categories.
• Market Risk: Market Risk can be defined as the risk of losses in and off
balance sheet positions arising from adverse movement of market
variables.
• OPERATION RISK: “Operational Risk” is defined as the risk of direct or
indirect loss resulting from inadequate or failed internal process , people
and system or from external events.
• COUNTRY RISK: Country Risk is the possibility that a Country will be
unable to service or repay its debts foreign lenders in a timely manner Risk
relating to dealing with other countries such as sovereign risk, political
risk,
• Credit risk: It is a risk of potential loss arising out of inability or un-
willingness of a customer or counter party to meet its commitments in
relation to lending. Hedging, settlement and other financial transactions.
7. TOOLS FOR CREDIT RISK
MANAGEMENT
• Operations in the account
• Stock Statements
• QIS/QMR
• Review of account and financial statements
• ASCROM and PSR
• Audit and inspections: concurrent audit, annual
audit, Stock audit, periodical inspection, ZIC
inspection, etc.
• Discretionary Lending power and „Cap”
• Exposure ceiling- Single, Group, and activity exposure.
• Insurance and Credit rating
• Credit rating – CRISIL RAM
8. Risk Based Supervision
• The Reserve Bank of India is supervising the banks on
CAMELS model which covers Capital Adequacy, Asset
Quality, Management, Earnings, Liquidity and Systems
& Control.
• All other Schedule Commercial banks are encouraged
to migrate to these approaches under Basel-II in
alignment with them, but, in any case not later than
March 31, 2009. RBI has also specified that banks
would have to maintain a minimum Tier-I ratio of 6
%, while continuing to maintain CAR of 9 %.
9. Credit Risk Mitigation (CRM)
Techniques
• 1. Collateralised Transactions - Certain securities are eligible to be
considered for Basel-II purpose. The securities may be either prime
securities or collateral securities like cash margin, Bank‟s own
deposit, NSC, Indira Vikas Patras & Kisan Vikas Patra, LIC policies, Gold, etc
i.e. cash or near cash securities are considered as security for Basel-II
purpose. In respect of Standard Assets Basel-II does not recognize land
and building, Plant and Machinery as Collateral for risk mitigation
purposes.
• 2. On balance sheet netting - It is confined to loans / advances and
deposits, where banks have legally enforceable netting
arrangement, involving specific lien with proof documentation. Loans and
advances are treated as exposure and deposits as collateral. Exposure may
be offset against eligible collateral credit.
•
• 3. Guarantees - The eligible guarantors are Sovereign, sovereign
entities, ECGC, PSEs, Banks, primary dealers with a lower risk weight than
the counter party (borrower), other entities rated AA or better External
Credit
10. Mitigation Of Risks
• 1. Credit Concentration Risk – Concentration risk may be used in a
broader sense to include concentration by sector, Concentration by
Industry, geographical location and concentration of risk mitigant
measures.
• 2. Country Risk – The exposure to various countries are in terms of rating
categories as specified by the ECGC guidelines on Country risk
management in terms of percentage to Tier 1 and Tier 2 Capital.
• 3. Interest Rate Risk in the Banking Book – Interest rate risk is taken to be
the current or prospective risk to both the earning and capital of the bank
arising from adverse movements in interest rates. In the context of pillar
2, this is to be estimated for banking book only, given that the interest rate
risk in the trading book is already covered under Pillar 1 market risk
regulation.
11. Mitigation Of Risks
• 4. Liquidity Risk - Liquidity risk occurs when an institution is unable to
fulfil its commitment in time when commitment falls due. The liquidity
risk for the bank will be monitored and measured as per the ALM Policy. It
is not mandatory to maintain capital for liquidity risk.
• 5. Reputation Risk - Reputation risk is the current or prospective indirect
risk to earnings and capital from adverse perception of the image of the
bank on the part of customers, shareholders and regulator. Reputation risk
may originate in lack of compliance with industry service standards and
regulatory standards, failure to deliver on commitments, lack of customer
friendly service and fair market practices, a service style that does not
harmonize with customer expectation.
• 6. Business and Strategic risk - Business risk means current or prospective
risk to earnings and capital arising from changes in the business
environment and from adverse business decisions.
