PERISCOPE

Managing Risk: To Stride Ahead

“To view risk management only as the process of reducing risk is to miss potentially significant efficiency enhancement and new business and product development opportunities.”

– Christopher Culp

The Indian banking sector has witnessed a phenomenal shift in its capacity, processes and facade during the past one and half decades. The social motives of the public sector banks to meet the societal needs have been replaced by the profit motives with the entry of the private sector and foreign players. Technological advances have facilitated the strengthening of payment systems, supplying core banking solutions and providing online banking besides infusing ‘customer-centric’ practices with high efficiency levels. Regulators’ prescriptions included prudential norms, corporate governance, strict regulations on NPAs and focused on cautious growth, rallied round the banking sector’s in overall advancement.

Regulators’ initiative to espouse Basel II norms and march towards international risk management practices to further fortify the Indian banking system is another milestone in the expansion process. As per an Assocham study, although the financial health of Indian banks has improved considerably in terms of meeting the Capital Adequacy Ratio of 9% mandate, the Non-Performing Assets (NPAs) have risen around 25% compared to the previous financial year. Basel II recommendations demand a high degree of commitment and strategic initiatives from the directors and top management. Besides identifying, categorizing and quantifying risk, appropriate execution and supervision are prerequisites for sound risk management practices. The first pillar of Basel Accord aims at minimizing the banks’ risk by assessing and maintaining economic capital for each of credit, market and operational risks. The second and third pillars aim at supervisory discipline process and market discipline respectively. A recent Indian Banks Association (IBA) survey says that Indian banks are plugging the gaps in pillar I implementation and are willing to adopt holistic approach to Basel II compliance than slackening the pace of adoption.

Most of the Indian banks are stumbling on intricacies in quantifying their credit risk—for instance, branch-level data compilation of NPAs (as the identification, segregation, classification and then risk mitigation process are not uniform in all branches). Besides, each bank follows its own standardized model which calls for continuous upgradation. As per the survey, majority of the Public Sector Banks (PSBs) are finding the process standardization challenging, while foreign banks express their concern over cost control. Market risk assumes high priority as the volatile interest rates and exchange rates are major challenges to Indian banks. Despite the fact that some of the derivative instruments are available to mitigate this risk, the market lacks vibrancy and depth. Moreover, dynamic risk management practices and skills are prerequisites to handle this risk. Operational risk (causes a major hazard to banks) demands a high degree of competent workforce, technology innovation and upgradation, discreet audit practices, proficient processes and procedures to be in place. Besides, identification of process gaps, system gaps, data gaps on a continuous basis, monitoring and control are required for efficient operational risk management practices. According to industry experts, technology, scarcity of skilled resources and limited scope of rating agencies are some of the barriers faced by the Indian banking sector. For prudent risk management practices to be in place, experts propound to have a flexible, transparent, scalable and seamless modularity and integrity as values!

- Anita C Raman