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Part - II

Benefits of Bank-wide risk management

Risk management is a line function that needs to be addressed by each individual cost center and business unit. However, a centralized bank-wide risk management framework has certain advantages for the Bank. The advantages are: -

• Improving capital efficiency by
  • providing an objective basis for allocating resources
  • reducing expenditures on immaterial risks and
  • exploring natural hedges and portfolio effects;
• Supporting informed decision making by

  • uncovering areas of high potential adverse impact on drivers of share value, and

  • identifying and exploiting areas of risk-based advantage context.

• Building investor confidence by

  • establishing a process to stabilize results by protecting them from disturbances, and

  • demonstrating proactive risk stewardship
• Define cost and profitability centers

  • Profitability and cost allocation on customer, product, services and branch wide

Current state of Risk management practices in Indian banks

Most of the banks do not have dedicated risk management team, policy, procedures and framework in place. Those banks have risk management department, the risk manager’s role is restricted to prefact and postfact analysis of customer’s credit and there is no segregation of credit, market, operational and strategic risks. There are few banks have articulated framework and risk quantification. However, the outputs are far from the stressed or actual losses due to usage of un-compatible implications.

The traditional lending practices, assessment of credits, handling of market risks *, treasury functionality and culture of risk-rewards are hauls of public sector banks. Where as private sector banks and financial institutions are some-what better in this context.

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* Market risk includes all derivative products such as interest rate, foreign exchange, equity, liquidity and commodity risk.