Title: ANUPAMA K
1Risk Management Systems in Banks Genesis,
Significance and Implementation
- ANUPAMA K
- JAYA NAIR
- ANUPAMA S
- MANJU
- JAYSHREE
2CONTENTS
- What is Risk?
- Classification of Risk
- Objectives of Risk Management
- Tools for Managing Risk
- Risk Management in PNB
3 RISK
- The potential loss an asset or a portfolio is
likely to suffer due to a variety of reasons.
4OBJECTIVES OF RISK MANAGEMENT
- Survival of the organization
- Efficiency in Operations
- Uninterrupted Operations
- Identifying and achieving acceptable level of
risk - Earning Stability
- Continued and sustained Growth
5CLASSIFICATION OF RISKS
FINANCIAL RISK
NON FINANCIAL RISK
OPERATING RISK
CREDIT RISK
MARKET RISK
SYSTEMATIC RISK
POLITICAL RISK
TRANSACTION RISK
INTEREST RATE RISK
HUMAN RISK
PORTFOLIO RISK
LIQUIDITY RISK
TECHNOLOGY RISK
FOREX RISK
6CREDIT RISK Risk that the counterparty will fail
to perform or meet the obligation on the agreed
terms .
- TYPES OF CREDIT RISKS
- Transaction Risk
- Risk relating to specific trade transactions,
sectors or groups. - Portfolio Risk
- Risk 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.
7MARKET RISKMarket risk is the risk to a banks
financial condition that could result from
adverse movements in market price.
- TYPES OF MARKET RISK
- Interest Rate Risk
- Risk felt, when changes in the interest rate
structure put pressure on the net interest margin
of the Bank. - Liquidity Risk
- Risk arising due to the potential for
liabilities to drain from the Bank at a faster
rate than assets.
8TYPES OF MARKET RISK (continued)
- FOREX RISK
- This 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.
9NON-FINANCIAL RISKS
- Operational 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
10MANAGEMENT OF CREDIT RISK
- Measurement through Credit Rating / scoring
- Quantification through estimate of expected loan
losses - Pricing on a scientific basis
- Controlling through Effective loan review
mechanism and portfolio management
11TOOLS OF CREDIT RISK MANAGEMENT
- EXPOSURE CEILINGS Setting of prudential norms
related to the Banks exposure to a single
borrower / group borrowers / sectorial borrowers - REVIEW / 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.
12- COMPREHENSIVE RISK RATING MODELS
- RISK BASED SCIENTIFIC PRICING Linking loan
pricing to expected loss - PORTFOLIO 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.
13TOOLS OF CREDIT RISK MANAGEMENT
- LOAN 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.
14RISK MANAGEMENT IN PNB
- New 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.
15RISK 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.
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.
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.
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.
19CONCLUSION
- 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.
20Hope you have enjoyed our presentation.