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Risk Management Alm Npas 2008

Risk Management Alm Npas 2008

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Lecture presentation on ALM, Risk Management and NPAs to Finance / 2nd year Students of PGDM by Prof Chowdari Prasad in October 2008
Lecture presentation on ALM, Risk Management and NPAs to Finance / 2nd year Students of PGDM by Prof Chowdari Prasad in October 2008

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Published by: Prof Chowdari Prasad on Mar 31, 2009
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09/25/2009

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Risk Management & Compliance with RBI Guidelines

PGP Jan 2008-10 Oct 4, 2008 Prof Chowdari Prasad

Risk Management

Commercial Banking PGP III

Risk Management & Compliances

2

Components of a Bank B/S
Liabilities
1. 2. 3. 4. 5. Capital Reserve & Surplus Deposits Borrowings Other Liabilities

Assets
1. Cash & Balances with RBI 2. Bal. With Banks & Money at Call and Short Notices 3. Investments 4. Advances 5. Fixed Assets 6. Other Assets
3

Contingent Liabilities
Commercial Banking PGP III Risk Management & Compliances

Commercial Banking PGP III

Risk Management & Compliances

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Commercial Banking PGP III

Risk Management & Compliances

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What is Risk?

Commercial Banking PGP III

Risk Management & Compliances

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What is Risk? (2)
A Ship is very safe in a shore. But, it is not meant for that. A Ship has to sail by taking RISK. Banking too is no exception. A Bank has to carry Business by taking (Informed & calculated) RISK
Commercial Banking PGP III Risk Management & Compliances 7

What is Risk? (3)
• The threat that an event or action will adversely affect an organization's ability to achieve its business objectives and execute its strategies successfully.

Commercial Banking PGP III

Risk Management & Compliances

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Sources of Risk
• Decision, Indecision • Business cycles/ Seasonality • Economic/Fiscal changes • Policy Changes • Market movements • Events • Political compulsions • Regulations • Human resources, skill sets • Competition • Technology • Non-availability of information

Commercial Banking PGP III

Risk Management & Compliances

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Different Types of Risks
• Banks and Financial Institutions, in the process of carrying their businesses, face various kinds of financial and non-financial risks – Credit Risk – Liquidity Risk – Interest Rate Risk – Market Risk – Off-Balance Sheet Risk – Foreign Exchange Risk – Country or Sovereign Risk .................
Commercial Banking PGP III Risk Management & Compliances 10

Different Types of Risks (2)
– Operational Risk – Technology Risk – Compliance (Regulatory) Risk – Legal Risk – Reputation Risk – Insolvency Risk

Commercial Banking PGP III

Risk Management & Compliances

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Inter-dependence of Risks
• These risks are highly interdependent and events that affect each other • One area of risk can have ramifications for a range of other risk categories.

Commercial Banking PGP III

Risk Management & Compliances

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What is Risk Management?
• A system by which an organization - evaluates, deals with and monitors risk -to achieve its strategies successfully. • It is the art of approximation • It is a planned method of dealing with uncertainties of possible danger of loss

Commercial Banking PGP III

Risk Management & Compliances

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Why Risk Management?
• All transactions undertaken have one or more Risks. Risks are attached to Portfolio too. • Aggregated Risk determines Capital needs of a Bank / Financial Institution • Hence, one of the objectives of Risk Management is to enhance Risk Adjusted Return on Capital (RAROC) • RM facilitates implementation of Risk and Business Policies simultaneously in a consistent manner
Commercial Banking PGP III Risk Management & Compliances 14

Risk Management Framework
Risk Profiling Risk Identification Risk Measurement Risk Pricing Risk Monitoring, Compliance and Control Risk Mitigation
Comprehensive Risk Management should address all the risks faced by an organization and their inter linkages
Commercial Banking PGP III Risk Management & Compliances 15

Risk Identification
• Identifying various Risks associated at the Transaction Level and • Examining its impact on the Portfolio and Capital requirement. • Risk identification helps Head Office of a Bank to approve Products and their screening procedures and appropriate safeguards; Fixing Limit exposure - product-wise and amount wise and provide necessary risk taking guidelines.
Commercial Banking PGP III Risk Management & Compliances 16

Risk Measurement
• Uses Quantitative measures of Risk • Seek to measure variations in Earnings, Market value, Losses due to default, etc. • Quantitative Measures used are :
– Sensitivity – Volatility – Downgrade potential

Commercial Banking PGP III

Risk Management & Compliances

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Risk Pricing
• Implies factoring risks into pricing • Pricing should take into account besides Profit Margin, the following:
– Cost of Funds – Operating Expenses – Loss Probabilities – Capital Charge

Commercial Banking PGP III

Risk Management & Compliances

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Risk Monitoring and Control
• Adequate internal control system for monitoring compliance of internal policies and reporting risk exposures • Conduct periodic reviews, periodic supervision and inspections • Identification of large exposures and Risk concentrations • Top Management involvement - review reports on Risk Profile and Capital needs regularly and evaluate to make necessary adjustments to Bank’s Business Plans
Commercial Banking PGP III Risk Management & Compliances 19

Risk Mitigation
• Achieved by adopting strategies that eliminate or reduce various risks • Uses variety of Financial Instruments and techniques to mitigate risks – Collateralizations, third party guarantee – Insurance cover, Institutional Credit Guarantee Schemes – Hedging and – Securitisation
Commercial Banking PGP III Risk Management & Compliances 20

RISK MANAGEMENT ORGANISATION

• The Board of Directors • The Risk Management Committee – Integrated Committee / Respective Committees • The Middle Office / Support Groups

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RISK MANAGEMENT FRAMEWORK OF BANKS IN INDIA • The broad parameters of risk management function encompass: • Board approves risk management policies in consonance with the – broader business strategies – capital strength – management expertise and – overall willingness to assume risk
– guidelines to govern risk including detailed structure of prudential limits

• Periodical review and evaluation
Commercial Banking PGP III Risk Management & Compliances 22

RISK MANAGENET- COMMITTEE
• Risk Management Committee with the top Executives as members - reports directly to the Board of Directors • RMC will evaluate – overall risks faced by the bank and – determining the level of risks which will be in the best interest of the bank . • The Risk Management Committee will: – identify, monitor and measure the risk profile of the bank – develop policies and procedures – identify new risks – Fixing the quantitative prudential limits on various segments of banks’ operations
Commercial Banking PGP III Risk Management & Compliances 23

RISK MANAGEMENT COMMITTEES
• Asset - Liability Management Committee deals with different types of market risks • Credit Policy Committee (CPC) deals with credit / counter party risk and country risk
• Market and Credit risks are managed in a parallel two-track approach in banks

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Risk Management & Compliances

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