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Part - V

However, it is to be recognized that, in view of the diversity and varying size of balance sheet items as between banks, it might neither be possible nor necessary to adopt a uniform risks management system. The design of risk management framework should, therefore, be oriented towards the bank's own requirement dictated by the size and complexity of business, risk philosophy, market perception and the existing level of capital. While doing so, banks may critically evaluate their existing risk management system in the light of the guidelines issued by the Reserve Bank and should identify the gaps in the existing risk management practices and the policies and strategies for complying with the guidelines.

In addition to the risk management guidelines, the levels of transparency and standards of disclosure have gradually been enhanced over the years so as to provide a clearer picture of balance sheet to informed readers. Accordingly, from the year ended March 31, 2000, an enhanced set of disclosures are required to be disclosed by banks as 'Notes to Accounts' to their balance sheet. These include maturity pattern of loans and advances, maturity pattern of investments in securities, foreign currency assets and liabilities, movements in NPAs, maturity pattern of deposits, maturity pattern of borrowings, and lending to sensitive sectors like capital market and real estate. Such disclosures and transparency practices are aimed at improving the process of expectation formation by market players about bank behaviour and eventually lead to effective decision-making in banks. In addition, the Reserve Bank has laid down credit concentration norms, both for individual borrowers as well as to a group as a whole. These limits presently stand at 20 per cent and 50 per cent of the financing institutions' capital fund.

The banking industry is clearly evolving towards higher levels of risk management techniques and approaches. However, several issues need to be addressed by the banking system in this regard. I would flag a few of them for you to dwell over.

First, risk management is closely related to ALM. Any mismatch between assets and liabilities increases risks, whether it is interest rate risk, credit risk or liquidity risk. The recent experience of the South East Asian economies clearly demonstrated the need for having effective risk management techniques. Accurate risk identification and classification of past losses into expected and unexpected losses would help in positioning comprehensive internal controls. Not a simple proposition, it requires in-depth study and analysis of financial and other markets.

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* This is the keynote address delivered by Shri. Jagdish Capoor, Deputy Governor, Reserve Bank of India, at One Day Seminar on Risk Management in Financial System at a Mumbai-based Management Institute.