Banking Risks and

Regulation
Changes in Indian Banking
 Possibilities of Coping with Challenges

• Investing in state of the art technology to ensure reliable

service delivery

• Leveraging the branch network and sales structure to

mobilize low cost current and savings deposits

• Making aggressive forays in the retail advances segment

of home and personal loans
 Possibilities of Coping with Challenges

• Implementing organization wide initiatives involving

people, process and technology to reduce the fixed costs
and the cost per transaction

• Focusing on fee based income to compensate for low

spread (trade services)

• Innovating products to attract customers

• Improving the asset quality as per Basel II norms

Possibilities of Coping with Challenges
 Bank Nationalization

• After the independence the major historical event in

banking sector was the nationalization of 14 major banks
on 19th July 1969.

• The nationalization was deemed as a major step in

achieving the socialistic pattern of society.

• In 1980 six more banks were nationalized taking the total

nationalized banks to twenty.
 Products and Services of Banks

• Value added services to customers

• Emergence of strong investment and merchant banking
entities
• Product innovation and creating brand equity for
specialized products
• New products on the liabilities side such as
– Foreign exchange linked deposits
– Investment linked deposits
 Products and Services of Banks

• Investors with varied risk profiles demand better yields

• Consolidation of services between banks, corporate

clients and their retail outlets

• Sharing of common platform to increase revenue

through increased volumes
 New Banking Products

• Risk managers to corporate and other entities

• Risk management of products

– Options

– Swaps

– Other aspects of financial management in a multi

currency scenario

• Development of derivative products

 New Banking Products

• Offer of hedge products to the corporate sector and

other investors

– Commodity derivatives

• Sophistication in trading and specialized exchanges for

commodities

• Financial support to exchanges

• Better settlement systems

• Wider participation
 Bancassurance

• Entry of banks / financial institutions in insurance

business.

• Offer of insurance products through network of bank

branches.

• Expansion of business through self-designed insurance

products after necessary legislative changes.

• Increased fee-based income of the banks.

 Banking Risk

• Rising global competition

• Increasing deregulation
• Introduction of innovative products
• Changing delivery channels of banks
• Perfect market economy introduces market related risks
– Exchange risks
– Interest rate risks
– Operational risks
 Banking Risk

• Growth of derivatives and off-balance sheet operations

• Diversification of banking operations

• Expansion in e-banking

• Continuous vigilance

• Revisions of regulations
 Managing Banking Risk

• Centralized risk management functions

• Risk management functions (independent from business
profit centers)
• Integration of risk management functions into the
business process
• Assessment of risk-return for new business opportunities
• Incorporation of risk management in the design of new
products
 Managing Banking Risk

• Combined assessment of credit, market and operations

• Reporting and managing on risks on an integrated basis

• Risk Adjusted Returns on Capital (RAROC) based

performance measures

• RAROC will be used to drive pricing, performance

measurement, portfolio management and capital
management
 Managing Banking Risk

• Corporate office to branches or operating units

• Audit and supervision shifts to a risk based approach

rather than transaction orientation

• Increased risk awareness levels of line functionaries

• Technology related risks focusing more on vigilance of

operating staff
 Managing Banking Risk

• Reputation risk
– Maintain a high degree of public confidence for
raising capital and other resources
• Risks to reputation could arise on account of
– Operational lapses
– Opaqueness in operations
– Shortcomings in services
• Management of reputation risk
– Systems
– Internal controls
 Managing Banking Risk

• Advances in risk management and risk measurement

• Transformation in capital and balance sheet
management
• Dynamic economic capital management
– Create
– Sustain
– Maximize shareholders’ wealth
• Total risk enabled enterprise
• Concerns of various stakeholders’ expectations
 Managing Banking Risk

• Cooperation and sharing of experience among banks

• Common facilities for development of risk measurement and

mitigation tools

• Common facilities for training of staff at various levels

• Establishment of risk management systems

• Implementation of prudential norms of accounting and asset

classification

• Quality of assets

• Provisioning for impaired loans

• Significant decline in non performing asset levels

 Role of Regulator
• Ensuring soundness of the system by fixing benchmark
standards for capital adequacy and prudential norms for key
performance parameters.

• Adoption of best practices especially in areas like risk

management, provisioning, disclosures, credit delivery, etc.

• Adoption of good corporate governance practices.

• Creation of an institutional framework to protect the interest of

depositors.

• Regulating the entry and exit of banks including cross-border

institutions.
 Role of Indian Banks’ Association

• Self regulatory body

• Development of benchmarks on
– Risk management
– Corporate governance
– Disclosures
– Accounting practices
– Valuation of assets
– Customer contract
– Lenders’ liability
 Role of Indian Banks’ Association

• Role of the Indian Bankers’ Association

– Lobbyist for getting necessary legislative enactments

– Changes in regulatory guidelines