Professional Documents
Culture Documents
Project Report Mba
Project Report Mba
Project Report Mba
CHAPTER I: INTRODUCTION
BABASAB PATIL
Page 1
1.2 INTRODUCTION
Risk: the meaning of %Risk& as per 'ebster&s comprehensive dictionary is (a chance of encountering harm or loss, hazard, danger) or (to e!pose to a chance of injury or loss). Thus, something that has potential to cause harm or loss to one or more planned objectives is called Risk. The word risk is derived from an Italian word (Risicare) which means (To *are). It is an e!pression of danger of an adverse deviation in the actual result from any e!pected result. +anks for International $ettlement ,+I$- has defined it as. (Risk is the threat that an event or action will adversely affect an organization&s ability to achieve its objectives and successfully e!ecute its strategies.) Risk Manage en!: Risk #anagement is a planned method of dealing with the potential loss or damage. It is an ongoing process of risk appraisal through various methods and tools which continuously /ssess what could go wrong *etermine which risks are important to deal with Implement strategies to deal with those risks
BABASAB PATIL
Page 2
1.0 OB1ECTI2ES
1overing different aspects of risk assessment Identifying keys for effective risk management To understand the challenges and impact of Implementing +asel II To analyze the current progress of +asel II in 2ubli.
1.3 METHODO#OGY
3iterature Review *ata collection 4rimary information0 4ersonal interview" 5uestionnaire $econdary information0 Through internet, #anuals, 6ournals, /udit"/nnual reports The +enefits and limitation of +asel II The 1hallenges of Implementing +asel II Impact of +asel II Research method Findings and suggestions 1onclusion
BABASAB PATIL
Page 3
BABASAB PATIL
Page 4
2.1 INTRODUCTION
Base+ I A..$-,: The +asel 1ommittee on +anking $upervision, which came into e!istence in 789:, volunteered to develop a framework for sound banking practices internationally. In 78;; the full set of recommendations was documented and given to the 1entral banks of the countries for implementation to suit their national systems. This is called the +asel 1apital /ccord or +asel I /ccord. It provided level playing field by stipulating the amount of capital that needs to be maintained by internationally active banks. Base+ II A..$-,: +anking has changed dramatically since the +asel I document of 78;;. /dvances in risk management and the increasing comple!ity of financial activities " instruments ,like options, hybrid securities etc.- prompted international supervisors to review the appropriateness of regulatory capital standards under +asel I. To meet this re uirement, the +asel I accord was amended and refined, which came out as the +asel II accord. The new proposal is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate properly the various risks that banks have to face and realign regulatory capital more closely with underlying risks. <ach of these three pillars has risk mitigation as its central board. The new risk sensitive approach seeks to strengthen the safety and soundness of the industry by focusing on0 = Risk based capital ,4illar 7= Risk based supervision ,4illar >= Risk disclosure to enforce market discipline ,4illar ?-
BABASAB PATIL
Page 5
s5*e-)is$-s !$ e)a+5a!e *-$*e-+6 !&e )a-i$5s -isks !&a! (anks 7a.e an, -ea+ign -eg5+a!$-6 $-e .+$se+6 %i!& 5n,e-+6ing -isks.
BABASAB PATIL
Page 6
BABASAB PATIL
Page 7
BABASAB PATIL
Page 8
BABASAB PATIL
Page 9
BABASAB PATIL
Page 10
BABASAB PATIL
Page 11
BABASAB PATIL
Page 12
BABASAB PATIL
Page 13
BABASAB PATIL
Page 14
BABASAB PATIL
Page 15
S!an,a-,iDe, a**-$a.&
A,)an.e, A**-$a.&
F$5n,a!i$n IRB
A,)an.e, IRB
S!an,a-,iDe, a**-$a.&0 the +asel committee as well as R+I provides a simple methodology for risk assessment and calculating capital re uirements for credit risk called $tandardized approach. This approach is divided into the following broad topics for simpler and easier understanding 7. /ssignment of Risk 'eights0 all the e!posures are first classified into various customer types defined by +asel committee or R+I. Thereafter, assignment of standard risk weights is done, either on the basis of customer type or on basis of the asset uality as determined by rating of the asset, for calculating risk weighted assets. >. <!ternal 1redit /ssessments0 the regulator or R+I recognizes certain risk rating agencies and e!ternal credit assessment institutions ,<1/Is- and rating assigned by these <1/Is, to the borrowers may be taken as a basis for assigning risk weights to the borrowers. +etter rating means better uality of assets and lesser risk weights and hence lesser re uirement of capital allocation. ?. 1redit Risk #itigation0 +asel recognized 1ollaterals and +asel recognized Duarantees are two securities that banks obtain for loans " advances to cover credit risk, which are termed as (1redit Risk #itigants)
BABASAB PATIL
Page 16
RISK MANAGEMENT IN BANKING SECTOR A,)an.e, A**-$a.&: +asel II framework also provides for advanced approaches to calculate capital re uirement for credit risk. These approaches rely heavily on a banks internal assessment of its borrowers and e!posures. These advanced approached are based on the internal ratings of the bank and are popularly known as Internal Rating +ased ,IR+- approaches. Cnder /dvanced /pproaches, the banks will have > options as under a- Foundation Internal Rating +ased ,FIR+- /pproaches. b- /dvanced Internal Rating +ased ,/IR+- /pproaches.
The differences between foundation IR+ and advanced IR+ have been captured in the following table0 Table >.8.7.70 The differences between foundation IR+ and advanced IR+
Da!a In*5! 4robability of *efault 3oss Diven *efault <!posure at *efault <ffective #aturity
F$5n,a!i$n IRB A,)an.e, IRB 4rovided by bank based on 4rovided by bank based on own own estimates estimates $upervisory values set by the 4rovided by bank based on own 1ommittee estimates $upervisory values set by the 4rovided by bank based on own 1ommittee estimates $upervisory values set by the 4rovided by bank based on own 1ommittee estimates Ar /t the national discretion, provided by bank based on own estimates
BABASAB PATIL
Page 17
S!an,a-,iDe, A**-$a.&
Ma!5-i!6 Base,
D5-a!i$n Base,
R+I has issued detailed guidelines for computation of capital charge on #arket Risk in 6une >GG:. The guidelines seek to address the issues involved in computing capital charge for interest rate related instruments in the trading book, e uities in the trading book and foreign e!change risk ,including gold and precious metals- in both trading and banking book. Trading book will include0 $ecurities included under the 2eld for trading category $ecurities included under the /vailable for $ale category Apen gold position limits Apen foreign e!change position limits Trading position in derivatives and derivatives entered into for hedging trading book e!posures.
BABASAB PATIL
Page 18
Basi. In,i.a!$A**-$a.&
S!an,a-,iDe, A**-$a.&
+asic Indicator /pproach0 Cnder the basic indicator approach, +anks are re uired to hold capital for operational risk e ual to the average over the previous three years of a fi!ed percentage ,7H@ . denoted as alpha- of annual gross income. Dross income is defined as net interest income plus net non.interest income, e!cluding realized profit"losses from the sale of securities in the banking book and e!traordinary and irregular items. $tandardized /pproach0 Cnder the standardized approach, banks activities are divided into eight business lines. 'ithin each business line, gross income is considered as a broad indicator for the likely scale of operational risk. 1apital charge for each business line is calculated by multiplying gross income by a factor ,denoted beta- assigned to that business line. Total capital charge is calculated as the three.year average of the simple summations of the regulatory capital across each of the business line in each year. /dvanced #easurement /pproach0 Cnder advanced measurement approach, the regulatory capital will be e ual to the risk measures generated by the bank&s internal risk measurement system using the prescribed uantitative and ualitative criteria.
BABASAB PATIL
Page 19
principal objectives of the proposed rule is to more closely align capital charges and risk. For any type of credit, risk increases as either the probability of default or the loss given default increases. 0. M$-e e77i.ien! 5se $7 -e85i-e, (ank .a*i!a+: Increased risk sensitivity and improvements in risk measurement will allow prudential objectives to be achieved more efficiently. 3. In.$-*$-a!es an, en.$5-ages a,)an.es in -isk eas5-e en! an, -isk anage en! 0 The
proposed rule seeks to improve upon e!isting capital regulations by incorporating advances in risk measurement and risk management made over the past 7H years. =. Re.$gniDes ne% ,e)e+$* en!s an, a..$ $,a!es .$n!in5ing inn$)a!i$n in 7inan.ia+
*-$,5.!s (6 7$.5sing $n -isk: The proposed rule also has the benefit of facilitating recognition of new developments in financial products by focusing on the fundamentals behind risk rather than on static product categories. ?. Be!!e- a+ign en! $7 .a*i!a+ an, $*e-a!i$na+ -isk an, en.$5-ages (anking $-ganiDa!i$ns !$ i!iga!e $*e-a!i$na+ -isk: Introducing an e!plicit capital calculation for operational risk eliminates the implicit and imprecise (buffer) that covers operational risk under current capital rules.
BABASAB PATIL
Page 20
B. En&an.e, s5*e-)is$-6 7ee,(a.k: all three pillars of the proposed rule aim to enhance supervisory feedback from federal banking agencies to managers of banks and thrifts. <nhanced feedback could further strengthen the safety and soundness of the banking system. C. En&an.e, ,is.+$s5-e *-$ $!es measurement and risk management. 1E. P-ese-)es !&e (ene7i!s $7 in!e-na!i$na+ .$nsis!en.6 an, .$$-,ina!i$n a.&ie)e, %i!& !&e 1CBB Base+ A..$-,: /n important objective of the 78;; /ccord was competitive consistency of capital re uirements for banking organizations competing in global markets. +asel II continues to pursue this objective. a-ke! ,is.i*+ine: The proposed rule seeks to aid market
discipline through the regulatory framework by re uiring specific disclosures relating to risk
BABASAB PATIL
Page 21
C$s!+6 Da!a(ase C-ea!i$n an, Main!enan.e P-$.ess: The most obvious impact of +/$<3 II is the need for improved risk management and measurement. It aims to give impetus to the use of internal rating system by the international banks.
A,,i!i$na+ Ca*i!a+ Re85i-e en!: 2ere is a worrying aspect that some of the banks will not be able to put up the additional capital to comply with the new regulation and they may be isolated from the global banking system.
#a-ge P-$*$-!i$n $7 NPAFs: / large number of Indian banks have significant proportion of E4/Is in their assets. /long with that a large proportion of loans of banks are of poor uality. There is a danger that a large number of banks will not be able to restructure and survive in the new environment. This may lead to forced mergers of many defunct banks with the e!isting ones and a loss of capital to the banking system as a whole.
In.-ease, P-$;C6.+i.a+i!6: The increased importance to credit ratings under +asel II could actually imply that the minimum re uirements could become pro.cyclical as banks are re uired to raise capital levels for loans in times of economic crises.
#$% Deg-ee $7 C$-*$-a!e Ra!ing Pene!-a!i$n: India has as few as three established rating agencies and the level of rating penetration is not very significant as, so far, ratings are restricted to issues and not issuers. 'hile +asel II gives some scope to e!tend the rating of issues to issuers, this would only be an appro!imation and it would be necessary for the system to move to ratings of issuers. <ncouraging ratings of issuers would be a challenge.
C-$ss B$-,e- Iss5es 7$- F$-eign Banks: In India, foreign banks are statutorily re uired to maintain local capital and the following issues are re uired to be resolvedF 7. Jalidation of the internal models approved by their head offices and home country supervisor adopted by the Indian branches of foreign banks. >. *ate history maintained and used by the bank should be distinct for the Indian branches compared to the global data used by the head office ?. capital for operational risk should be maintained separately for the Indian branches in India
BABASAB PATIL
Page 22
BABASAB PATIL
Page 23
RISK MANAGEMENT IN BANKING SECTOR 3. C5-!ai+ en! $7 C-e,i! !$ In7-as!-5.!5-e P-$Ge.!s: The norms re uire a higher weight age for project finance, curtailing credit to this is very crucial sector. The long.term impacts for this could be disastrous. =. P-e7e-en.e 7$- M$-!gage C-e,i! !$ C$ns5 e- C-e,i! #$%e- Risk 4eig&!s !$ M$-!gage .-e,i!: 4reference for #ortgage 1redit to 1onsumer 1redit 3ower Risk 'eights to #ortgage credit would accentuate bankers& preference towards it vis.K.vis consumer credit. ?. Base+ II: A,)an!age Big Banks: It would be far easier for the larger banks to implement the norms, raising their uality of risk management and capital ade uacy. This combined with the higher cost of capital for smaller players would ueer the pitch in favour of the former. The larger banks would also have a distinct advantage in raising capital in e uity markets. <merging #arket +anks can turn this challenge into an advantage by active implementation and e!panding their horizons outside the country. B. IT s*en,ing: A,)an!age !$ In,ian IT .$ *anies: An the flipside, Indian IT companies, which have considerable e!pertise in the +F$I segment, stand to gain. #ajor Indian IT companies such as I.fle! and Infosys already have the products, which could help them develop an edge over their rivals from the developed countries.
BABASAB PATIL
Page 24
BABASAB PATIL
Page 25
".1 INTRODUCTION
The reason for conducting this survey was to establish how these new regulations were perceived in terms of priority, urgency and interest within the banks. In addition, aim is to provide a view on strategic issues and to report on key trends related to many aspects of compliance within the +asel II regulatory framework. Finally, to make recommendations on the opportunities offered by the new regulations for the risk management process.
"." OB1ECTI2ES
1overing different aspects of risk assessment Identifying keys for effective risk management To understand the challenges and impact of Implementing +asel II To analyze the current progress of +asel II in 2ubli.
BABASAB PATIL
Page 26
BABASAB PATIL
Page 27
BABASAB PATIL
Page 28
Figure :.7.7 Readiness for the new +asel proposal >. 2ave you done a gap analysis between current risk management practice and new capital re uirementsL Table :.7.>0 Dap analysis N<$ EA 1R<*T RI$M 8 7 #/RM<T RI$M H H A4<R/TIAE/3 RI$M 8 7
BABASAB PATIL
Page 29
Figure :.7.> Dap analysis ?. 'hat degree of priority do you address to the new +asel regulatory frameworkL Table :.7.?0 4riority to new +asel regulatory framework J<RN I#4ART/ET I#4ART/ET EAT I#4ART/ET 1R<*T RI$M 8 7 #/RM<T RI$M 8 7 A4<R/TIAE/3 RI$M 7G
Figure :.7.? 4riority to new +asel regulatory framework :. 2ow do you view +asel II regulation0 as an opportunity to enhance the risk management process, or as a regulatory constraintL
BABASAB PATIL
Page 30
RISK MANAGEMENT IN BANKING SECTOR Table :.7.:0 Jiew of +asel II regulation 1R<*T A44ARTCEITN 1AE$TR/IET RI$M 7G #/RM<T RI$M ; > A4<R/TIAE/3 RI$M 7G
Figure :.7.:0 Jiew of +asel II regulation OBSER2ATIONS The majority of banks consider themselves to be fully prepared. / majority of banks have performed a gap analysis between their current risk management practice and the new capital re uirements. Anly one bank does not view +asel II implementation as a high priority project. The banks largely believe that +asel II will provide them an opportunity to enhance risk management.
BABASAB PATIL
Page 31
RISK MANAGEMENT IN BANKING SECTOR INTERPRETATION /lthough the +asel II regulations are considered important to very important by a strong majority of banks, some are only partly prepared for implementation. The banks aim to look beyond the regulatory aspects and aim to benefit from the new regulations as a means to enhanced risk management.
BABASAB PATIL
Page 32
RISK MANAGEMENT IN BANKING SECTOR >. To whom does the Risk manager reportL Table :.>.>0 'hom does risk manager report 1R<*T 12I<F <O<1CTIJ< AFFI1<R 12I<F FIE/E1I/3 AFFI1<R /$$<T$ /E* 3I/+3ITN #/E/D<R 1R<*IT RI$M AFFI1<R AT2<R $4<1IFN RI$M : > : #/RM<T RI$M P 7 > A4<R/TIAE/3 RI$M P 7 >
Figure :.>.>0 'hom does risk manager reportL ?. 'hat is the assigned manager&s time dedicated to this activityL Table :.>.?0 Time dedication 1R<*T RI$M G.>G@ >G.HG@ QHG@ > > P #/RM<T RI$M : 7 H A4<R/TIAE/3 RI$M > > P
BABASAB PATIL
Page 33
Figure :.>.?0 Time dedication :. 2ow many people work in these departmentsL Table :.>.:0 Eumber of people work 1R<*T RI$M 7.? ?.H H. 7G Q 7G > P 7 7 #/RM<T RI$M : : 7 7 A4<R/TIAE/3 RI$M 7 H 7 ?
BABASAB PATIL
Page 34
RISK MANAGEMENT IN BANKING SECTOR Table :.>.H0 Risk 1ommittee 1R<*T RI$M N<$ EA P : #/RM<T RI$M H H A4<R/TIAE/3 RI$M P :
Figure :.>.H0 Risk 1ommittee OBSER2ATIONS /lmost all of the participating banks have a risk management departemnt. #ost of the industry&s risk managers& report to the 1hief <!ecutive Afficer, /sset and liability manager and 1hief Risk Afficer accounting for the balance in e ual proportions. $lightly more attention is paid to credit and operational risk than to #arket risk, as :G @ of the banks operating do not have risk committee. INTERPRETATION *espite the relatively small size of banks, they are generally well aware of the risk management function, and for this purpose, risk managers spend over half their time performing these functions.
BABASAB PATIL
Page 35
7. /re you producing reporting for Table :.?.70 Reports produced for 1R<*T RI$M R<DC3/TARN 4CR4A$< ? #AEITARIED 9 *<1I$IAE #/MIED 9 4CR4A$< #/RM<T RI$M : ; : A4<R/TIAE/3 RI$M : ; :
Figure :.?.70 Reports produced for >. *oes e!ternal reporting drive your internal reportingL Table :.?.>0 <!ternal reporting drive internal reporting 1R<*T RI$M J<RN $IDEIFI1/ET3N $IDEIFI1/ET3N EAT /T /33 $IDEIFI1/ET3N : H 7 #/RM<T RI$M H : 7 A4<R/TIAE/3 RI$M : H 7
BABASAB PATIL
Page 36
Figure :.?.>0 <!ternal reporting drive internal reporting ?. *oes e!ternal reporting affect your decision making processL Table :.?.?0 <!ternal reporting affect decision making process 1R<*T RI$M J<RN $IDEIFI1/ET3N ? $IDEIFI1/ET3N P EAT /T /33 7 $IDEIFI1/ET3N #/RM<T RI$M ? H > A4<R/TIAE/3 RI$M ? P 7
BABASAB PATIL
Page 37
RISK MANAGEMENT IN BANKING SECTOR :. 2ow fre uent is your internal reportingL Table :.?.:0 Fre uency of internal reporting 1R<*T RI$M *aily 'eekly #onthly /nnually 7 ; 7 7 ; 7 #/RM<T RI$M A4<R/TIAE/3 RI$M 7 7 9 7
Figure :.?.:0 Fre uency of internal reporting H. 'ill you produce specific internal reporting for 1redit, #arket and Aperational RiskL Table :.?.H0 4roduction of specific internal reporting 1R<*T RI$M N<$ EA 7G #/RM<T RI$M 7G A4<R/TIAE/3 RI$M 7G
BABASAB PATIL
Page 38
Figure :.?.H0 4roduction of specific internal reporting OBSER2ATIONS /ll risk reporting is compiled largely for monitoring and *ecision making purposes than Regulatory purpose. /ll the +anks produce internal report. #ost of the +anks produce Internal Report monthly. #ost of the banks said <!ternal reporting affect their decision making process.
BABASAB PATIL
Page 39
Figure :.:.70 /pproach that best suit organization >. 2ave you performed a 1ost"+enefit analysis for each approach proposed by +asel IIL Table :.:.>0 1ost"+enefit analysis 1R<*T RI$M N<$ EA 7G #/RM<T RI$M ; > A4<R/TIAE/3 RI$M 8 7
BABASAB PATIL
Page 40
Figure :.:.>0 1ost"+enefit analysis ?. In your situation, could regulatory capital consumption be motivation for0 Table :.:.?0 Regulatory capital consumption be motivation $TA44IED /1TIJITI<$ *<J<A43IED /1TIJITI<$ /15CIRIED /1TIJITI<$ EAE< 1R<*T RI$M #/RM<T RI$M > 7 H 9 7 7 7 7 A4<R/TIAE/3 RI$M > P
BABASAB PATIL
Page 41
Figure :.:.?0 Regulatory capital consumption be motivation OBSER2ATIONS #ost of the banks believe that the standard approach is most appropriate for their purposes. An the whole, a cost"benefit analysis has been done for each approach. It appears that the banks have completed their cost"benefit analysis only for their elected approach. Regulatory capital consumption is motivated for developing activities.
INTERPRETATION #ost of the banks would prefer to adopt the standard approach, but only few of those who would like to implement the advanced approach and they will implement. The banks that would prefer to adopt the standard approach should try to adopt advanced approach.
BABASAB PATIL
Page 42
Figure :.H.70 <stimation of the regulatory capital consumption >. 'ill you outsource activities with high capital consumptionL Table :.H.>0 Autsource activities for high capital consumption 1R<*T RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
N<$ EA
: P
? 9
H 9
BABASAB PATIL
Page 43
Figure :.H.>0 Autsource activities for high capital consumption ?. 'ill you insure selected RiskL Table :.H.?0 Insure Risk 1R<*T RI$M N<$ EA 9 ? #/RM<T RI$M H H A4<R/TIAE/3 RI$M P :
Figure :.H.?0 Insure Risk :. *o you intend allocating economic capital by +usiness linesL
BABASAB PATIL
Page 44
RISK MANAGEMENT IN BANKING SECTOR Table :.H.:0 /llocation of economic capital 1R<*T RI$M N<$ EA ; 7 #/RM<T RI$M 9 > A4<R/TIAE/3 RI$M ; 7
Figure :.H.:0 /llocation of economic capital H. 'ill you make use of +asel II re uirements to implement an economic capital allocation throughout your business linesL Table :.H.H0 Cse of +asel II re uirements 1R<*T RI$M N<$ EA 8 #/RM<T RI$M ; 7 A4<R/TIAE/3 RI$M ; 7
BABASAB PATIL
Page 45
Figure :.H.H0 Cse of +asel II re uirements OBSER2ATIONS #ost of the banks do not outsource activities with high capital consumption. 2alf of the banks insure selected Risk. +anks with less sophisticated approaches are likely to use regulatory capital as the basis for internal capital allocation. INTERPRETATION Jery few banks plan to outsource activities with high capital consumption, but the majority will insure their credit risks, while nearly half will plan to insure their market and operational risks. / strong majority of local banks will allocate economic capital according to business lines, while a stronger majority will use the +asel II re uirements to implement that capital allocation process.
BABASAB PATIL
Page 46
Figure :.P.70 <stablishment of action plan >. 2ow will you e!ecute this action planL Table :.P.>0 <!ecution of action plan 1R<*T RI$M IET<RE/3 R<$ACR1<$ <OT<RE/3 R<$ACR1<$ +AT2 : ? ? 7 : 7 9 #/RM<T RI$M H A4<R/TIAE/3 RI$M ;
BABASAB PATIL
Page 47
Figure :.P.>0 <!ecution of action plan ?. 'hat will the largest spending area beL Table :.P.?0 3argest spending area 1R<*T T<12EA3ADN 1A##CEI1/TIAE AT2<R ,$4<1IFN*AE&T MEA' RI$M ; 7 #/RM<T RI$M 9 : A4<R/TIAE/3 RI$M ; 7
BABASAB PATIL
Page 48
RISK MANAGEMENT IN BANKING SECTOR :. 2ow far are you in the implementation of your action planL Table :.P.:0 1urrent progress 1R<*T RI$M EAT R</33I$<* 4/RTI/33N R</33I$<* FC33N R</33I$<* H ? H H 9 H #/RM<T RI$M A4<R/TIAE/3 RI$M
Figure :.P.:0 1urrent progress OBSER2ATIONS /ll the banks established by an action plan to achieve the +asel II re uirements. #ost of the banks e!ecute the action plan with internal resources than e!ternal resources. 3argest spending area is technology. 2alf of the bank&s implementation of action plan is partially realized and half fully realized.
BABASAB PATIL
Page 49
RISK MANAGEMENT IN BANKING SECTOR INTERPRETATION The banks have generally determined an action plan to help them to meet +asel II re uirements. They have partially completed the actions re uired, and will continue with these action plans. Those banks that have not yet begun implementation tend to be the smaller banks, with simpler business models, which re uire less time and resources to meet the +asel II re uirements.
0.? TECHNO#OGY
7. *oes your current IT infrastructure allow you to meet the +asel II re uirementsL Table :.9.70 IT infrastructure 1R<*T RI$M N<$ EA 7G #/RM<T RI$M ; > A4<R/TIAE/3 RI$M 8 7
BABASAB PATIL
Page 50
RISK MANAGEMENT IN BANKING SECTOR >. 'ill you develop an IT solution for Risk managementL Table :.9.>0 IT solution for Risk management 1R<*T RI$M N<$ EA 9 ? #/RM<T RI$M 9 ? A4<R/TIAE/3 RI$M 9 ?
Figure :.9.>0 IT solution for Risk management ?. 2ave you completed a review of potential IT solutions availableL Table :.9.?0 Review of potential IT solutions available 1R<*T RI$M T<12EA3ADN 1AE$C3TIED H : #/RM<T RI$M ? P A4<R/TIAE/3 RI$M : H
BABASAB PATIL
Page 51
Figure :.9.?0 Review of potential IT solutions available :. 'hat difficulties do you foreseeL Table :.9.:0 *ifficulties that you foresee 1R<*T IET<DR/TIAE 1/4/+I3ITI<$ */T/+/$< *<$IDE #A*<3$ +C*D<T */T/ D/T2<RIED 2C#/E R<$ACR1< AT2<R ,$4<1IFNRI$M ? 7 7 : ? #/RM<T RI$M 7 7 7 7 : ? A4<R/TIAE/3 RI$M 7
P ?
BABASAB PATIL
Page 52
Figure :.9.:0 *ifficulties that you foresee OBSER2ATIONS #ore than half of the +anking industry will use their IT infrastructure in its current format. *ifficulties that banks foresee are more on *ata Dathering and 2uman Resource.
INTERPRETATION The banks should train their employees, in order to overcome the difficulties in implementing the +asel II norms. The banks should develop sufficient infrastructure to gather the re uired data.
BABASAB PATIL
Page 53
BABASAB PATIL
Page 54
3.1 FINDINGS
1redit risk is generally well contained, but there are still problems associated with loan classification, loan loss provisioning, and the absence of consolidated accounts. #arket risk and Aperational risk are clear challenge, as they are relatively new to the areas that were not well developed under the original +asel 1apital /ccord. The new regulations will allow banks to introduce substantial improvements in their overall risk management capabilities, improving risk based performance measurement, capital allocation as portfolio management techni ues. Future comple!ity is e!pected because banks diversify their operations. It is e!pected that banks will diversify their operations to generate additional income sources, particularly fee.based income i.e. non interest income, to improve returns. +asel II leads to increase in *ata collection and maintenance of privacy and security in various issues. The banks that would prefer to adopt the $tandard /pproach should try to adopt /dvanced /pproach.
BABASAB PATIL
Page 55
3.2 SUGGESTIONS
The +anks should review +asel II components and develop a vision, strategy and action plan for what is e!pected to be a suitable framework based on how the banking system evolves over time. The +anks need regular engagement for sustained support. / ualified long.term advisor would be preferable. / workshop should be planned to produce a road map to +asel II 1ompliance.
Training and additional assistance to make it easier for the banking system to comply with new guidelines on market and operational risk.
BABASAB PATIL
Page 56
BABASAB PATIL
Page 57
=.1 CONC#USION
Implementation of +asel II has been described as a long journey rather than a destination by itself. Cndoubtedly, it would re uire commitment of substantial capital and human resources on the part of both banks and the supervisors. R+I has decided to follow a consultative process while implementing +asel II norms and move in a gradual, se uential and co.ordinate manner. For this purpose, dialogue has already been initiated with the stakeholders. /s envisaged by the +asel 1ommittee, the accounting profession too, will make a positive contribution in this respect to make Indian banking system still stronger.
BABASAB PATIL
Page 58
BABASAB PATIL
Page 59
?.1 :UESTIONNAIRE
I am +/+/$/+ 4/TI3 studying :th semester #+/ in +<1 *A#$ . I am working on a
project titled (RISK MANAGEMENT IN BANKING SECTORI. In this regard I re uest you to spend your valuable time in filling this uestionnaire @Ti.k !&e a**-$*-ia!e ($'A. This information will be used only for academic purpose and will be kept confidential. INSTITUTIONA# INFORMATION 7. Eame of your bank0 >. 4lease indicate the name of the contact Eame0 person for this uestionnaire and his"her position in the +ank. 4osition0 ?. To which of the following types of 4ublic sector banks does your bank belongL
o o o
:. 'here is your parent"head office locatedL Ti.k !&e a**-$*-ia!e ($' A4ARENESS OF REGU#ATIONS 7. 'hat is your assessment of your readiness for the new +asel proposals with respect to capital re uirementsL 1R<*T RI$M FC33N 4R<4/R<* 4/RTI/33N 4R<4/R<* EAT N<T #/RM<T RI$M A4<R/TIAE/3 RI$M
4R<4/R<* >. 2ave you done a gap analysis between current risk management practice and new capital re uirementsL
BABASAB PATIL
Page 60
RISK MANAGEMENT IN BANKING SECTOR 1R<*T RI$M N<$ EA ?. 'hat degree of priority do you address to the new +asel regulatory frameworkL 1R<*T RI$M J<RN I#4ART/ET I#4ART/ET EAT I#4ART/ET :. 2ow do you view +asel II regulation0 as an opportunity to enhance the risk management process, or as a regulatory constraintL 1R<*T RI$M A44ARTCEITN 1AE$TR/IET ORGANISTIONA# STRUCTURE 7. *o you have an assigned 1redit risk, #arket risk and Aperational risk manager in your bankL 1R<*T RI$M N<$ EA #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
BABASAB PATIL
Page 61
RISK MANAGEMENT IN BANKING SECTOR >. To whom does the Risk manager reportL 1R<*T RI$M 12I<F <O<1CTIJ< AFFI1<R 12I<F FIE/E1I/3 AFFI1<R /$$<T$ 3I/+3ITN #/E/D<R 1R<*IT RI$M /E* #/RM<T RI$M A4<R/TIAE/3 RI$M
AFFI1<R AT2<R $4<1IFN ?. 'hat is the assigned manager&s time dedicated to this activityL 1R<*T RI$M G.>G@ >G.HG@ QHG@ :. 2ow many people work in these departmentsL 1R<*T RI$M 7R? ?RH H. 7G Q 7G #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
BABASAB PATIL
Page 62
RISK MANAGEMENT IN BANKING SECTOR H. *o you have a Risk 1ommitteeL 1R<*T RI$M N<$ EA REPORTING ABI#ITY 7. /re you producing reporting for 1R<*T RI$M R<DC3/TARN 4CR4A$< #AEITARIED *<1I$IAE #/MIED 4CR4A$< >. *oes e!ternal reporting drive your internal reportingL 1R<*T RI$M J<RN $IDEIFI1/ET3N $IDEIFI1/ET3N EAT /T /33 $IDEIFI1/ET3N #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
BABASAB PATIL
Page 63
RISK MANAGEMENT IN BANKING SECTOR ?. *oes e!ternal reporting affect your decision making processL 1R<*T RI$M J<RN $IDEIFI1/ET3N $IDEIFI1/ET3N EAT /T /33 $IDEIFI1/ET3N :. 2ow fre uent is your internal reportingL 1R<*T RI$M *aily 'eekly #onthly /nnually H. 'ill you produce specific internal reporting for 1redit, #arket and Aperational RiskL 1R<*T RI$M N<$ EA COMP#IACE 4ITH BASE# II 7. 'hich approach will best suit your organizationL 1R<*T RI$M $T/E*/R* FACE*/TIAE /*J/E1<* *AE&T MEA' #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
BABASAB PATIL
Page 64
RISK MANAGEMENT IN BANKING SECTOR >. 2ave you performed a 1ost"+enefit analysis for each approach proposed by +asel IIL 1R<*T RI$M N<$ EA ?. In your situation, could regulatory capital consumption be motivation for0 1R<*T RI$M $TA44IED /1TIJITI<$ *<J<A43IED /1TIJITI<$ /15CIRIED /1TIJITI<$ EAE< CAPITA# A##OCATION 7. 2ave you estimated the regulatory capital consumption for each of your individual businessesL 1R<*T RI$M N<$ EA >. 'ill you outsource activities with high capital consumptionL 1R<*T RI$M N<$ EA #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
BABASAB PATIL
Page 65
RISK MANAGEMENT IN BANKING SECTOR ?. 'ill you insure selected RiskL 1R<*T RI$M N<$ EA :. *o you intend allocating economic capital by +usiness linesL 1R<*T RI$M N<$ EA H. 'ill you make use of +asel II re uirements to implement an economic capital allocation throughout your business linesL 1R<*T RI$M N<$ EA BASE# II ACTION P#AN 7. 2ave you established an action plan to achieve the +asel II re uirementsL 1R<*T RI$M N<$ EA #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
BABASAB PATIL
Page 66
RISK MANAGEMENT IN BANKING SECTOR >. 2ow will you e!ecute this action planL 1R<*T RI$M IET<RE/3 R<$ACR1<$ <OT<RE/3 R<$ACR1<$ +AT2 ?. 'hat will the largest spending area beL 1R<*T RI$M T<12EA3ADN 1A##CEI1/TIAE AT2<R ,$4<1IFN*AE&T MEA' Ather ,specify- SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS :. 2ow far are you in the implementation of your action planL 1R<*T RI$M EAT R</33I$<* 4/RTI/33N R</33I$<* FC33N R</33I$<* TECHNO#OGY 7. *oes your current IT infrastructure allow you to meet the +asel II re uirementsL 1R<*T RI$M N<$ EA #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
>. 'ill you develop an IT solution for Risk managementL 1R<*T RI$M N<$ EA ?. 2ave you completed a review of potential IT solutions availableL #/RM<T RI$M A4<R/TIAE/3 RI$M
BABASAB PATIL
Page 67
RISK MANAGEMENT IN BANKING SECTOR 1R<*T RI$M T<12EA3ADN 1AE$C3TIED :. 'hat difficulties do you foreseeL 1R<*T RI$M IET<DR/TIAE 1/4/+I3ITI<$ */T/+/$< *<$IDE #A*<3$ +C*D<T */T/ D/T2<RIED 2C#/E R<$ACR1< AT2<R ,$4<1IFN#/RM<T RI$M A4<R/TIAE/3 RI$M #/RM<T RI$M A4<R/TIAE/3 RI$M
43/1<0 */T<0
SSSSSSSSSSSSSSSSSS $ignature.
BABASAB PATIL
Page 68
REFFERENCE
4EB SITES www.bis.org www.rbi.org www.kpmg.com www.cognizant.com www.google.com www.yahoo.com
ARTICA#S Risk #anagement in +anks. .. R $ Raghavan 1hartered /ccountant. +asel Eorms challenges in India R$wapan +akshi 'hite 4aper The Ripple <ffect0 2ow +asel II will impact institutions of all sizes Risk #anagement Duidelines for 1ommercial +anks B *FIs. +/$<3 II R /re Indian +anks Doing to DainL .. $antosh E. Dambhire 6amanalal, +ajaj Institute of #anagement $tudies #umbai +asel II and IndiaIs banking structure 1. 4. 1handrasekhar and 6ayati Dhosh
REPORTS Report on Implementing +asel II0 Impact on <merging <conomies .. 6aydeep M. Thaker E#I#$
BABASAB PATIL
Page 69
RISK MANAGEMENT IN BANKING SECTOR 4aper on Risk /ssessment and Risk #anagement .. $antosh *eoram 'atpade B $iddhi $hrikant Jyas #<T&s Institute of #anagement Eashik.
BABASAB PATIL
Page 70