C IA – 1

R ISK IN F IN A N C IA L SER V IC ES – C O M 6 4 3 C

DEPA R T M EN T O F C O M M ER C EC H R IST ( Deemed to be U niversity)

B angal
ore

2 0 2 1 -2 0 2 2

BY ,

R A A G H A V IK R - 1 9 1 0 6 7 6

1
SO U T H IN DIA N B A N K IN T R O DU C T IO N

O ne ofth e ol
destbanksinSouth IndiaT h e South IndianB ank ( SIB ) came into beingduringth e Swadesh i
movement. T h e South IndianB ank L imited wasincorporated on2 9 January 1 9 2 9 atT h rissurasaprivate
l
imited company and wasl
atterl
y converted into apubl
icl
imited company on1 1 A ugust1 9 3 9 . SIB wassetup
by agroupofenterprisingmenwh o joined togeth eratT h rissurto give th e peopl
e asafe effective and service
acquainted depository ofsavingsofth e community onone h and and to free th e businesscommunity from th e
cl
utch esofgreedy moneyl
endersonth e oth erby furnish ingneed grounded creditatreasonabl
e ratesofinterest.
SIB providesretailand commercialbankingParabankingconditioningsimil
arasdisbenefitcard th ird party
productdistributioninadditionto T reasury and F oreignExch ange B usiness. A son3 1 December2 0 2 0 th e B ank
h ad anetwork of8 7 7 B ranch esand 1 4 4 3 A T M sacrossth e country. T h e firstbranch outside K eral
awasopened
by C oimbatore B ank in1 9 4 1 . SIB wasth e firstprivate sectorbank inK eral
ato come al
isted bank in1 9 4 6
underth e R B IA ct. Inth e time 1 9 6 3 , th e bank took overth e meansand arrearsofK sh emavil
asam B anking
C ompany L td and A mbatB ank PvtL td C h itturK eral
a. T h e time 1 9 6 4 wassignificantinth e SIB saga; th e bank
h ad acquired tenbanksinth e time 1 9 6 4 al
one th e l
istofbanksincl
udesPubl
icB ank L td SuburbanB ank Pvt
L td V ijal
aksh mi B ank PvtL td C h al
akudy B ank L td M ukkattukaraC ath ol
icB ank L td A ssyrianC h arities
B ankingC ompany L td T h e C ath ol
icSyrianC h ristianB ank L td M al
abarB ank L td B h arataU nionB ank L td and
K oz h uvanalB ankL td. SIB entered th e traffickerbankingassiduity by backing/ underwriting9 9 new issuesinth e
time 1 9 9 0 . A bank'sC urrency C asketbusinessonbeh al
fofR B Iwasstarted inA pril1 9 9 2 . A l
so, inth e same
time 1 9 9 2 , SIB opened anN R I branch inN ovemberand devel
oped compl
etel
y integrated in- h ouse branch

2
robotiz ationsoftware inadditionto th e functionalinternalpartialrobotiz ationresul
t. During1 9 9 3 , th e bank set
upanartificialfinance branch inM arch and opened an" overseasbranch " to feed simpl
y to importand import
businessinJune 1 9 9 3 . T h e preface inT h e bank'sstock exch ange wasestabl
ish ed and made publ
icin1 9 9 8 .

T h e Sibertech ( T ech nol

ogy PromotionDrive ofSouth IndianB ank) design, acompreh ensive and central
iz ed
bankingresul
twasl
aunch ed by th e bank in2 0 0 1 and SIB al
so entered into anal
liance with th ree exch ange
h ousesinth e G ul
fduringth e same time 2 0 0 1 .

A fel
lowsh ipwasestabl
ish ed by th e bank with th e insurance driverin2 0 0 2 forth e distributionofth e insurance
company'sproducts. Internetbanking, orSibernet, wasintroduced by th e bank to itsguestsin2 0 0 3 and al
so
entered into anagreementwith M asterC ard Internationalto l
aunch M aestro, th e G l
obalA T M / DebitC ard.
cel
ebrated th e 7 5 th anniversary ofitsactual
ity.

T h e company'sfol
low- onpubl
icimmol
ationwascompl
eted in2 0 0 5 . T h e B ank wonaSpecialA ward for
Excel
lence inB ankingT ech nol
ogy from IDR B T ( Institute forDevel
opmentand R esearch inB anking
T ech nol
ogy) inSeptember2 0 0 6 . Duringth e 2 0 0 6 fiscaltime, SIB opened 2 1 new branch es( incl
udingth e
gradationof1 5 extensioncounters) and 1 1 new extensioncounters. Infinancial2 0 0 6 , th e bank l
aunch ed onl
ine
bankingand mobil
e bankingviaSM S, enabl
ingitsgueststo do bankingconditioningch eaperand briskl
y. and
gl
obaladequacy T h e bank h asintroduced th e G l
obalDisbenefitcum A T M M asterC ard wh ich canbe used at
A T M sand waresacrossth e gl
obe. T h e SIB surfaced asth e toppantomime inth e assetqual
ity orderinth e 2 0 0 8
IndianB ankingA nal
ystSurvey amongprivate sectorbankswh ich incl
ude both new generationbanksand
traditionalbanksinIndia. Infinancial2 0 1 4 , SIB opened 5 4 new branch esand 2 0 0 A T M sacrossth e country.

3
SIB R ISK M A N A G EM EN T PR A C T IC ES

T h e etymol
ogy ofth e word " risk" goesback to th e L atinword " rescum" wh ich meansrisk inth e seaorth at
wh ich cuts. iscapital
, wh ich isth e mattressth atprotectsaninstitution'sl
iabil
ity h ol
ders. B anksare forced to
face differenttypesoffinancialand non- financialrisks. T h ese risksare interdependentand eventsaffectingone
risk area canimpactand affectanumberofoth errisk categories. T h e mostimportantth ingisto understand th e
risksth atth e bank facesand to ensure th atth e risksare appropriatel
y addressed, effectivel
y control
led and
properl
y managed. Each transactionmade by th e bank ch angesitsrisk profil
e.

T h erefore, th e h igh managementofbanksmustgrantsignificantimportance inorderto improve th e abil

ity to
identify, measure, monitoringand control
lingth e generalrisk ofrisk inorderto recogniz e, measure, monitor
and controlth e generalrisk mains.

B anksinth e processoffinancialintermediationare confronted with variouskindsofrisksviz . , credit, interest

rate, foreignexch ange rate, l
iquidity, equity price, commodity price, l
egal
, regul
atory, reputational
, operational
,
etc. T h ese risksare h igh l
y interdependent. T h us, topmanagementofbankssh oul
d attach considerabl
e
importance to improve th e abil
ity to identify, measure, monitorand controlth e overal
llevelofrisksundertaken

4
C R EDIT R ISK

C reditch ance ordefaul

tch ance incl
udesl
ack ofabil
ity orunwil
lingnessofaconsumerorcounterparty to ful
fil
l
commitmentsonth e subjectofl
ending, buyingand sel
ling, h edging, agreementand oth ermonetary transactions.
C reditch ance incl
udesbroadl
y speakingtwo components, viz amountofch ance, wh ich isnotanyth ingh owever
th e notabl
e mortgage stabil
ity asatth e date ofdefaul
tand th e exceptionalofch ance, viz , th e severity ofl
oss
described viaway ofmeansofProbabil
ity ofDefaul
tasdecreased viaway ofmeansofth e recoveriesth atmay
be made with inside th e occasionofdefaul
t. T h usC reditR isk isamixed finalresul
tsofDefaul
tR ISK
M A N A G EM EN T – C R EDIT R ISK and Exposure R isk. T h e factorsofC reditR isk are Portfol
io R isk
comprisingofC oncentrationR isk inadditionto IntrinsicR isk and T ransactionR isk comprisingofmigration/
downgradationch ance inadditionto Defaul
tR isk. A tth e transactionl
evel
, creditscore rankingsare beneficial
measuresofcomparingcreditscore ch ance. Portfol
io eval
uationassistinidentifyingawarenessofcreditscore
ch ance, defaul
t/ migrationstatistics, h eal
ingdata, etc. A noth ervariationofcreditscore ch ance iscounterparty
ch ance. T h e counterparty ch ance arisesfrom nonperformance ofth e buyingand sel
lingpartners. T h e
nonperformance may al
so stand upfrom counterparty’ srefusal
/l
ack ofabil
ity to carry outbecause ofadverse
ch arge actionsorfrom outside constraintsth ath ave beennow no l
ongerexpected viaway ofmeansofth e
principal
. T h e counterparty ch ance isusual
ly considered asatemporary monetary ch ance rel
ated to buyingand
sel
linginpreference to widespread creditscore ch ance.

U nderstandardiz ed approach , th e risk weigh tagainsteach category ofadvance isprescribed by R B Ievery year
inth eirmastercircul
arnamed ‘PrudentialG uidel
inesonC apitalA dequacy and M arketDiscipl
ine - N ew
C apitalA dequacy F ramework ( N C A F ) ’ . A ccordingl
y exposure undereach category woul
d be mul
tipl
ied with
correspondingrisk weigh tto arrive atth e R W A forcreditrisk

5
M A R K ET R ISK

M arketrisk isth e risk th atafirm wil

llose money due to ch angesinmarketvariabl
essuch asinterestrates,
foreignexch ange rates, equity prices, and commodity prices.

Interestrate risk: Itrefersto th e risk th atth e bank’ snetincome and val

ue ofassetsgetadversel
y affected due to
ch ange ininterestrates. F orexampl
e, recentrise inratesh asresul
ted inM ark to M arket( M T M ) l
ossesformany
banks.

Equity risk: Equity risk isth e risk th atone’ sinvestmentswil

ldepreciate because ofstock marketdynamics
causingone to l
ose money.

F oreignExch ange risk: Itrefersto potentiall

ossesdue to exposure towardsforexmarket. F orexampl
e, real
and notionall
ossessuffered by banksonforward contractsdue to movementofexch ange ratesinth e direction
unexpected by bankers. C ommodity prices: - Itrefersto th e possibil
ity th atth e bank may sufferl
ossesdue to
movementincommodity prices

T h e capitalch arge underth e standardiz ed meth odol

ogy wil
lbe th e sum ofth e fol
lowingth ree categoriesofrisk
measurement:

Interestrate risk ( specificrisk and generalrisk, derivativesexcl

udingoptions) ;

• Equity positionrisk ( specificand generalmarketrisk, derivativesexcl

udingoptions) ;

• F oreignexch ange risk incl

udinggol
d and derivatives;

6
2 . InternalM odelA pproach ( IM A ) U nderstandardiz ed measurementmeth od, generalmarketrisk capitalch arge
isbased onR B Iframework. U nderInternalM odelA pproach , capitalch arge forgeneralmarketrisk woul
d be
measured based oninternalmodelusingV aR ( V al
ue atR isk) tech nique. Insimpl
e terms, V arisprobabl
e
maximum l
osswh ich abank’ sinvestmentportfol
io isl
ikel
y to sufferwith certainl
evelofprobabil
ity, say 9 9 % .
A spercurrentguidel
inesonIM A , specificrisk capitalch arge woul
d continue to be measured based on
percentagesprescribed by R B I.

O PER A T IO N A L R ISK

1 . B asicIndicatorA pproach ( B IA ) U nderB asicIndicatorA pproach th e capitalch arge iscal

cul
ated based on
1 5 % ofth e “ Jamboree”C oimbatore famil
y meetgraced by M r. Sh anmugam, C h airman, U IT C ol
lege and M r.
M oh anDG M , C oimbatore R O . annual
iz ed th ree yearaverage grossincome wh ich excl
udesyearsinwh ich th e
grossincome wasz ero ornegative.

2 . A dvanced M easurementA pproach ( A M A ) . U nderth e A M A , th e operationalrisk capitalch arge wil

lbe
determined by usingth e bank’ sinternal
ly derived V al
ue atR isk ( V aR ) ofoperationall
osses. T h e V aR isbased
on: Internall
ossdata( B ased oneventsofourbank)

Externall
ossdata( B ased oneventsofvariousbanks)

Scenario anal
ysis

B usinessenvironmentand internalcontrolfactors

H ence th e B ank h ave to tune inneroperationaldangerl

ossfactsand ch eck th e rel
evance ofth atfactsto
contemporary operations. Inorderto transportcl
oserto A M A , B ank h ave to make sure mostautomationin
L oanO rigination, reportcontroland consumercourtingcontrol
.
7
A utomated structureswil
lofferanmore desirabl
e fitnessindexratingforth e eval
uationunitinorderto ease
th e motioncl
oserto A M A . T h e factsh ave to consistofal
lcl
oth sportsand exposuresinal
lstructuresand
financialinstitutionl
ocations. Externall
ossfactsh ave to be used foroccasionswh ich migh tbe infrequent, but
probabl
y severe, wh ich incl
udesanearth quake. Scenario anal
yseswh ich incl
udesprofessionalopinionenter
h ave to be appl
ied forh igh - severity occasions. T h e dangereval
uationneed to cowlal
lkey enterprise
environmentsand innercontrol
sfactors. A robustR isk C ontroland Sel
fA ssessment( R C SA ) framework isa
pre- considered necessary forA M A . R C SA wil
lassistindiscountofl
ossesand sol
vingK ey R isk Indicatorsfor
th e financialinstitutionasawh ol
e.

F indingsand F inancialIncl
usionF orR isk M anagementPractices:

T h e firststepisto decide th e organiz ation'scause forgrowingaR isk M anagementprogram. T h e program’ s

cause canbe to l
essenth e price invol
ved to switch th e effectofh az ard orl
essenth e variety ofprogram-
associated h arm. B y figuringoutitspurpose earl
ierth anstartinguph az ard controlpl
anning, th e organiz ation
canoutl
ine key overal
lperformance indicators( K PIs) and examine th e outcomesto decide itseffectiveness.
T ypical
ly, th e T opM anagementwith th e B oard ofDirectorssetth e ch aracterforth e h az ard controlprogram.
A ssignobl
igationforth e h az ard controlpl
an:

T h e 2 nd stepisto designate anmanorwomanorcrew ch argeabl

e forgrowingand enforcingth e organiz ation's
h az ard controlprogram. W h il
e th e crew isgeneral
ly ch argeabl
e forth e h az ard controlpl
an, aasuccessprogram
cal
lsforth e combinationofh az ard controlinside al
lrangesofth e organiz ation. O perationsbody ofworkers
controlneed to assistth e h az ard controlcommittee infiguringoutdangersand growingappropriate l
ossmanage
and interventionstrategies.

 Inorderto l
imitth e magnitude ofcreditrisk, prudentiall
imitssh oul
d be l
aid downonvariousaspectsof
credit. Stipul
ate bench mark current/ debtequity and profitabil
ity ratios, debtservice oroth erratios, with
fl
exibil
ity fordeviations. T h e conditionssubjectto wh ich deviationsare permissibl
e and th e auth ority for
th e deviationssh oul
d al
so be cl
earl
y spel
tinth e Pol
icy;
 Singl
e/ groupborrowerl
imits, may be l
owerth anth e l
imitsprescribed by th e B ank to provide afil
tering
mech anism;

8
 Substantialexposure l
imiti. e. sum totalofexposuresassumed inrespectofborrowersenjoyingcredit
facil
itiesinexcessofath resh ol
dlimit, say capitalfunds. T h e substantialexposure l
imitmay be fixed at
8 0 0 % ofcapitalfunds, dependinguponth e degree ofconcentrationrisk th e bank isexposed;

M aximum publ
icity l
imitsto enterprise, z one, etc. ough tto be setup. T h ere mustadditional
ly be structuresin
regionto assessth e exposuresataffordabl
e durationsand th e l
imitsough tto be adjusted specifical
ly wh ena
sel
ected z one orenterprise facessl
owdownordifferentz one/ enterprise particul
arprobl
ems. T h e publ
icity l
imits
to touch y sectors, such as, advancestowardsfairnesssh ares, actualestate, etc. , wh ich canbe probl
em to a
excessive dipl
omaofassetch arge vol
atil
ity and to particul
arindustries, wh ich canbe probl
em to frequent
enterprise cycl
es, may al
so al
waysbe restricted. Simil
arl
y, excessive- ch ance industries, asperceived th rough
th e bank, ough tto additional
ly be positioned bel
ow decrease portfol
io l
imit. A ny extrapubl
icity ough tto be
absol
utel
y backed th rough ok col
lateral
sorstrategicconsiderations; and nine B anksmay al
so recal
ladul
th ood
profil
e ofth e mortgage book, preservinginview th e marketpl
ace dangersinh erentwith inside th e bal
ance sh eet,
ch ance assessmentcapabil
ity, l
iquidity, etc.

SuggestionF orR isk M anagementPractices:

1 . PreparingaC reditR isk Environment

T h e key stakeh ol
dersand th e board ofdirectorsinabank mustbe responsibl
e to monitorand review th e current
risk pol
iciesand amend itasperth e presentmarketscenarios, asrequired. A nidealpol
icy isth e one th atcl
earl
y
h igh l
igh ts th e risk tol
erance l
evel
s and th e interestrates l
inked with th em. A creditstrategy th atis cl
assified,
monitored, measured and regul
ated mustbe fol
lowed rel
igiousl
y atal
llevel
s.

2 . Structuringastabl
e C reditL endingProcess
F or a bank to operate, itbecomes crucialfor th em to underl
ine a pre- setcriteria for l
ending credits to th e
borrowers. T h e criteriaincl
ude anumberoffactorssuch asth e targetmarket, creditl
endingrequirements, credit
l
imits, purpose ofl
oans, repaymentmodes etc. O n th e oth er h and, banks are al
so responsibl
e to structure th e
course ofactionsforrenewal
s, switch ingl
oans, premature cl
osure and new credits. Inany case, ignoringth ese
guidel
inesmustnotbe permitted.

3 . IntegrationofInformationSystem to M anage R isks

B anks mustincorporate a ful
l- fl
edged information system in pl
ace to mitigate al
lassociated risks effectivel
y.
A ninformationsystem al
lowsbanksto use anal
yticaltool
sto getinsigh tsoncustomers, h igh exposures, credit
l
imitsand accountperformance.

9
C O N C L U SIO N
T raditional
ly bankingwasconsidered asboringbusiness. H owever, afterth e evol
utionofmany innovative
products, rise incrosssel
lingofth ird- party products, ch angesintech nol
ogy, emergence oftech - savvy waysof
del
ivery ofservicesbankingh asbecome more interestingand compl
ex. T h e ch angingbusinessenvironment
and customerprofil
e h asal
so forced bankersto designnew arrangementsto finance venturesinameaningful
manner. B utth e risingcompl
exity h asmade th e banksmore vul
nerabl
e to fraudsand oth erriskswh ich were
bl
issful
ly absentintraditionalbanking. F urth er, th e risk managementpracticesinindividualbanksand banking
sectorcoul
d notcatch upwith th e ch angesinth e businessmodel
sofmany banks. N ow, many economists
( incl
udingprominentonessuch asPaulC rogman) h asargued forreturnto traditionalbanking, wh ich wasnotas
interestingasmodern- day banking; butwassafer. A bove al
l, arobustaccountabil
ity mech anism foral
llevel
sof
h ierarch y inth e stakeh ol
ders– banks, borrowers, regul
ators, pol
icy makersand th e governmentatl
arge – wil
l
h ave to be putinpl
ace to ensure th atbanks’ assetqual
ity improvesonasustained basis

Effective creditrisk managementstartswith assessingth e borrower’ sprofil

e and continuestil
lrecovery and
beyond. B anksmustcreate agil
elendingprocessesequipped with rel
evantratingsystemsto identify
creditworth inessand ch arge appropriate interestrates. T h iswil
lh el
pth em coverupany potentiall
oandefaul
ts
th atmay h appeninth e future. B anksmustal
so al
locate enough capitalto coverupany majorl
oanl
ossesand
remainafl
oat. Such practicesare necessary to reduce h igh erdefaul
tprobabil
itiesand improve th e h eal
th ofl
oan
books.

R EF ER EN C E

SIB. (2022, 02 01). Retrieved from SIB: https://www.southindianbank.com//

Wikipedia. (2022, 02 01). Retrieved from Wikipedia: https://en.wikipedia.org/wiki/SIB_BANK

h ttps: / / www. south indianbank. com/ userfil
es/ magaz ine/

10