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A PROJECT REPORT ON
RISK MANAGEMENT IN BANK
SUBMITTED TO
ALL INDIA MANAGEMENT ASSOCIATION-CENTRE FOR
MANAGEMENT EDUCATION
MANAGEMENT HOUSE, 14 INSTITUTIONAL AREA,LODHI ROAD, NEW DELHI-110002
OCTOBER, 2010
BY
ABHIJEET KUMARREGISTRATION NO.
750621607
GUIDED BY
MR. RAKESH SINGHSR. MANAGER (ACCOUNT)
FOR THE PARTIAL FULFILLMENT OF
POST GRADUATION DIPLOMA IN MANAGEMENT
(FINANCE)
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To
The Manager Evaluation
AIMA CME
14, Institutional AreaLodhi Road, New Delhi
Dear Sir,
I have sent the synopsis and it has been approved but I havent received the
copy of the approval synopsis, instead has collected the control number
from the Delhi Office. The synopsis control number is 8973 and dated 9
th
April 2010.
Therefore, I am sending the project report along with a copy of the
synopsis with the expectation of earliest consideration from your side.
Thanking you
Abhijeet Kumar
Reg. No. 750621607
Date: 25 October, 2010
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Project Report
RISK MANAGEMENT IN BANK
Submitted By
Abhijeet Kumar
Reg. No. 750621607
Date: 25 October 2010
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DETAILS OF THE PROJECT
1. Name : Abhijeet Kumar
2. Reg. No. : 750621607
3. Name of the Course : PGDM
4. Address : 17/8, Indra Vikas Colony,
Mukherjee Nagar, New Delhi
5. Title of the project : Risk Management in Bank
6. Name of the project Supervisor : Rakesh Singh
Sr. Manager (Account)
Date: 25 October 2010 Abhijeet Kumar
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STUDENTS DECLARATION
I hereby declare that the project report on Risk Management in Bank submitted toAll India Management Association Centre for Management Education,New Delhi
in partial fulfillment of the requirement forPost Graduate Diploma in Management
completed is my original work and not submitted for the award of any other Degree/
Diploma or other prizes.
Place: Delhi
Date: 25 October 2010
Abhijeet Kumar
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CERTIFICATE
This is to certify that the dissertation titled Risk Management in Bank is a faithfullybonafide work done by Mr. Abhijeet Kumar under my guidance and each completed as
a part of training done during 4th semester for the fulfillment of the requirement ofPost
Graduate Diploma in Management (PGDM).
Rakesh Singh
Sr. Manager (Account)
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ACKNOWLEDGEMENT
I have had considerable help and support in making this project report a reality.
I am thankful to ICICI Bank from where I got the relevant information regarding my
project. I am also thankful to Mr. Rakesh Singh, Sr. Manager (Account) who provides
us all the relevant information regarding my project. I would also like to thank my
friend and family member.
Thanks are also due to the staff of AIMA-CME Library and Information Centre.
In the end I am thankful to that almighty god who gave me inspiration to complete this
project.
Abhijeet Kumar
Reg. No. 750621607
PGDM
New Delhi
25 October, 2010
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INDEX
Executive Summary 1
Chapter-1 2-5
Introduction to risk management in banking 3
Problem in study 4
Objectives in study 4
Research methodology 4
Limitation 5
Scope of the Study 5
Chapter-2 6-29
Conceptual Framework of ALM 7
Guidelines for Asset Liability Management (ALM)
System in Financial Institutions (FIS) 17
Review of existing literature summary 28
Chapter-3 30-39
History and Growth of the bank 20
Risk Management at ICICI 37
Chapter-4 40-93
Performance evaluation of bank 41
Risk Management Guidelines for Commercial Banks 52
Inter-Bank Exposure and Country Risk 68
Foreign Exchange (FOREX) Risk 87
Conclusion & Recommendation 94
Bibliography 95
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EXECUTIVE SUMMARY
In normal course Fis are expose to several major risk in the course of their
business- Generally classified as credit risk, market risk, operational risk- whichunderlines the need of effective risk management system in Fis. The Fis needs
to address these risks in a structure manner by upgrading the quality of their
risk management and adopting more comprehensive ALM practices.
In order to give some giving to above lines we have made a project report on
ICICI bank. The project is divided into three phases in first phase we have
highlighted the introduction of risk management in banking sector, the problem
and objective of the project. Secondly we have also shown the research
methodology of the whole project.
Second phase consist of conceptual framework of risk management and ALM it
is also include some existing literature review on risk management. Third phase
consist of history and growth of the bank also its include the performance
evaluation of the bank.
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INTRODUCTION TO RISK MANAGEMENT
Risk management is recognised in todays business world as an integral part of
good management practice. In its broadest sense, it entails the systematicapplication of management policies, procedures and practices to the tasks of
identifying, analysing, assessing, treating and monitoring risk.
The past decade has also heralded enormous developments in new financial
products. Mortgages and residential mortgages have given institutional and
individual investors powerful new tools with which to disperse risk both
domestically and internationally. Advances in complex financial products,
together with improvements in technology, have lowered the cost of and
expanded opportunities for hedging risk. With the raid growth in new tools,
quantifying risk and interpreting risk measurements have never been more
important.
These developments have enabled all companies to take a more proactive
view towards risk. Instead of only associating risk as a potential downside of
their operations, increasing numbers of firms are considering how risk can be
managed positively to enhance the firms value.
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PROBLEM
Bank in the process of financial intermediation are confronted with various
kinds of financial and non financial risk viz,credit risk,liquidity risk,forex risk
etc.These risk are highly interdependent and event that affect one area of risk
can have ramification for a range of other risk categories so based on this
problem we are going to do our research that how commercial banks monitor
such risk and controll the overall level of risk.
OBJECTIVES
To know the concept of risk management in banking.
To know the guidelines setup by R.B.I for commercial banks
To know whether the banks are following those guidelines or not.
To know the banks performance.
RESEARCH METHODOLOGY
To get the conclusion from the undertaken project one should must go through
a proper methodology. Here in this project our methodology is based on two
source, primary and secondary source
Secondary source
Under secondary source we have data collected from outside the bank such asinternet, stock exchange ,ficci library.
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SCOPE OF THE STUDY
Through effective and efficient asset-liability management, the banks can
increase their productivity and reduce cost-inefficiency.
If inefficient banking firms have a tendency to remain inefficient, it would be of
interest for the policy makers to investigate how these banks can remain
economically viable and not be driven out of the banking market and this can
be done through asset-liability management.
The asset-liability management plays a very important role in the banks and
has a very vital scope in these institutions.
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CHAPTER 2
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CONCEPTUAL FRAMEWORK
An Overview
Historical Background
In the context of present days rapidly changing business environment, asset
liability management in the financial sector especially banking refers to a
holistic approach to risk management, concerning not only individual trading or
balance sheet positions but with overall balance sheet perspective. It requires
assessing all available avenues for managing risks through natural methods,
diversification, pricing, exposure control, and use of derivatives.
Risk can be categorized into credit and market risk. Historically, credit risk
constituted the major challenge to the banking sector. However, during the last
two decades market risk has gained prominence and especially after the Basle
Committee Accord of 1988, which was instrumental in framing broad guidelines
for determining the various risks associated with financial sector. Asset Liability
Management (ALM) encompasses the effects of market risk.
Concept of ALM
ALM has gradually gained currency in Indian conditions in the wake of the
financial sector reforms during the last decade with particular emphasis on
interest rate deregulation. The technique of managing both assets and liabilities
has come into being as a strategic response of banks to inflationary pressure,
volatility in interest rates and adverse business environments including the
recessionary trends in global economy, if any.
Simply put, asset-liability management is the management of total balance
sheet dynamics with regard to its size and quality. It involves,
a) Quantification of risk and
b) Conscious decision making with regard to asset-liability structure in order to
maximize interest earnings within the framework of perceived risk. The
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profitable growth and at times survival of a financial institution depends on
effective ALM.
Scope and objectives of ALM
The primary objectives of ALM is not to eliminate risk ; but to manage it in such
a way that volatility of net interest income is minimized in the short term time
horizon and net economic value of the organization is protected in a long term
time horizon. In banking scenario, this would controlling the volatility of net
income, net interest margin, capital adequacy, and liquidity risk and finally
ensuring an acceptable balance between profitability, growth, and risk.
A sound ALM system should focus on
Review of interest rate outlook
Fixation of interest/product pricing on both assets and liabilities
Examining loan portfolio
Examining investment portfolio
Measuring foreign exchange risk
Managing liquidity risk
Review of actual performance vis--vis projections in respect of net
profit, interest spread and other balance sheet ratios
Budgeting and strategic planning
Examine the profitability of new products
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ALM-An Exercise for Risk Return Trade-Off
Risk is an inherent part of banking business and in simple words may be
defined as a profitability of loss or damage. Given the complexities of banks
balance sheets and rapidity of changes, chances of loss or risks are only
complex in nature but also varied in dimension. Broadly speaking, banks are
exposed to both categories of risk viz.credit risk and market risk. While credit
risk which is mainly on account of the counter party failure in performing the
repayment obligation on due date i.e. loan defaults are managed by the credit
policy of the bank, the market risk is related to the Asset Liability Management
process and is caused by changes in market variables, involving one or more
of the following:
Interest rate risk
Foreign exchange risk
Commodity price risk
Stock market risk
ALM as a process not only encompasses market risk but also involves liquidity
management, funding and capital planning, profitability growth and at times
management of certain credit risks which are caused by market risk variables
for e.g. in a highly volatile interest rate environment, loan defaults may increase
thereby deteriorating the credit quality.
Interest Rate Risk
The Basle Committee on Banking Supervision whose recommendations have
been accepted by the Banking Community throughout the world has called for
the Banks to have a comprehensive risk management process in place that
effectively identifies, measures, monitors and control interest rate risk exposure
and that is subject to appropriate board and senior management oversight
(source-www.bis.org; Amendment to the Capital Accord to Incorporate Market
Risks, January 1996).
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Traditionally, interest rate risk means changes in the interest income due to
changes in the rate of interest. While this focus is not misplaced, it is definitely
incomplete in as much as it overlooks an important aspect-changes in interest
rate resulting in the value of assets/liabilities. Thus, interest rate risk may be
viewed from two different complementary perspectives- earning sensitivity to
rate fluctuations and price sensitivity of instruments/products to changes in
interest rate.
Changes in interest rates can affect banks with regard to changes in
a) Market value of assets/liabilities and off balance sheet (OBS) items;
ultimately having impact on the value of net worth.
b) Net interest income arising out of mismatch in the repricing terms of the
assets and liabilities;
c) Net income as a result of changes in interest income;
d) Net income margin owing to changes in interest income and sensitivity
of non-interest income to rate changes and
e) Capital-asset ratio due to changes in net margin.
The supervisory capital requirements established by Basle Committee from the
end of 1997 covers interest rate risks in the trading activities of banks.
Accordingly, interest
Rate risks in the trading activities of banks. Accordingly, interest rate risk
management process has been constituted to include development of businessstrategy, the assumption of assets and liabilities in banking and trading
activities, as well as a system of internal controls. The focus has been on the
need for effective interest rate risk measurement, monitoring, and control
functions within the interest rate risk management process (Source- Principles
for management of interest rate risk by BIS).
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According to the studies conducted by Basle Committee based on working
experience of Banks in more than 100 countries, the banks are normally
exposed to following forms of interest rate risk.
a) Repricing risk
b) Yield curve risk
c) Basis risk
d) Optionally
Repricing risk: arises from timing differences in the maturity (for fixed rate)
and repricing (for floating rate) of banks assets , liabilities and off balance
sheet (OBS) positions while such repricing mismatches are fundamental to the
business of banking , they can expose a banks income and underlying
economic value to unanticipated fluctuations as interest rate varies. For
instance, a bank that funded a long term fixed
rate loan with a short term deposit could face a decline in both the future
income arising from the position and its underlying value if the interest rate
increases. These declines arises because the cash flows on the loan are fixed
over its lifetime , while the interest paid on the funding is variable, andincreases after the short term deposits matures.
Yield Curve Risk: arises when unanticipated shifts of the yield curve have
adverse effects on a banks income or underlying economic value. For
example, the underlying economic value of a long position in 10 yr government
bonds hedged by a short position in 5yr government notes could decline
sharply if the yield curve steepens, even if the position is hedged against
parallel movements in the yield curve.
Basis Risk: arises from imperfect correlation in the adjustment of the rates
earned and paid on different instruments with otherwise similar repricing
characteristics. When interest rates changes, these differences can give rise to
unexpected changes in the cash flows and earnings spread between assets,
liabilities and OBS instruments of similar maturities or repricing frequencies for
example a strategy of funding one year loan that reprices monthly based on
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one month LIBOR, exposes the institution to the risk that the spread between
the two index rates may change unexpectedly.
The concept of basis risk is applicable for any set of two different interest rates.
For example, basis risk between thee following the following rates can be
analyzed:
Prime/LIBOR
Treasury Bill/LIBOR
Certificate of deposits/LIBOR
LIBOR/Commercial Paper
Prime/Certificate of Deposit
The reasons for basis risk depend on particula4r set of rates, for example,
Prime/LIBOR basis risks are as follows:
a) Prime is an administered rate while LIBOR is market rate. The LIBOR
changes everyday, but the prime changes infrequently.
b) In US context, prime is a rate applicable for loans in the US_LIBOR is
applicable for intermediated outside the US. Thus other things remaining
the same, costs of certain types of regulation (e.g. Deposit Insurance
Premium Change) may impact prime only and not LIBOR.
c) During a declining rate environment, Prime tends to lag changes in
LIBOR, leading to wider spread. In an increasing rate environment, there
is an urgency to increase Prime Rate, resulting in declining spread.
This kind of pricing is usual in products market also when costs are increasing,
prices go up quickly, when costs are declining, and prices go down slowly. The
rate of change is different in different environments.
Optionality: option provides the holder the right but not the obligations to buy,
sell or in some manner alter the cash flow of an instrument or financial contract.
Options, may be in the form of standard alone instruments such as exchange
traded options or embedded within an otherwise standard instrument like the
various type of bonds and notes with caller put provisions, loans which give
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borrowers the right to repay balances and various type of non-maturity deposit
instruments which give depositors the right to withdraw funds at any time, often
without any penalties. If not adequately managed, the asymmetrical pay off
characteristic of options held both explicit and embedded are generally
exercised to the advantage of the holder and disadvantage of seller.
Effects of Interest Rate Risk:
Interest rate risk effects both on banks earning as well as its economic value.
Earnings, comprising of net interest income i.e., difference between total
interest income and total interest expense has been the focus of main attention
traditionally, and the impact of interest rate change on net interest income has
been accepted from time to time. However, in the emerging new scenario
increasing focus on fee-based income and other non-interest bearing income
and expenses have led to changes in the dimension of the game. The non-
interest income arising from many activities can also be highly sensitive to
market interest rates. In international arena, banks are providing the servicing
and loan-administration function for mortgage loan pools in return for a fee-
based on the volume of assets it administers. When interest rates fall, the
servicing bank may experience a decline in its fee income as the underlying
mortgages get prepared. In addition, even traditional sources of non-interest
income such as transaction processing fee are becoming more interest rate
sensitive. This increased sensitivity has led both bank management and
supervisors to take a broader view of potential effects of changes in market
interest rates on bank earnings and to factor these broader effects into their
estimated earnings under different interest rates environment.
The economic value, of a banks assets, liabilities, and OBS position can get
affected due to fluctuation in interest rates. The economic value of a bank can
be viewed as the present value of banks expected net cash, defined as the
expected cash flow on liabilities plus the expected net cash flows on OBS
positions. Since economic value considered the potential impacting interest
rate changes on the present value of all future cash flows, it provides a
comprehensive view of the potential long term effects of changes in interestrates. Than is offered by the earlier earnings perspectives.
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While the above two perspectives focus on the impact of changes in future
interest rates on a banks future performances, evaluation of impact past
interest rate changes may have on future performance is also of great
significance. In particular instruments that are not marked to market may
already contain embedded gains or losses due to past rate movements and
may ultimately affect bank earnings. For example, a long term fixed rate loan
entered into when interest rates were low and refunded more recently with
liabilities bearing a higher rate of interest will over its remaining, represent a
drain on banks resources
Foreign Exchange Risk:
It refers to potential impact of movement in foreign exchange rates. The risk
here is that the adverse fluctuations in exchange rates may result in a loss.
Foreign exchange risk arises when there are unhedged current mismatches in
an institution assets and liabilities. This risk persists until the open position is
covered by means of hedging transactions. The amount at risk is a function of
the magnitude of the potential exchange rate changes and the size and
duration of the foreign currency exposures. Indian banks normally do not
undertake currency exposure for funding operation (i.e. unhedged conversion
of resources in one currency for funding assets in another currency). Currency
position in Indian banks is concentrated in dealing rooms and these are
subjected to constant monitoring through separate daylight and overnight limits
and exception reporting.
Commodity Risk
It is a risk associated with trading in commodities. Commodity trading is not
practiced by Banks and Financial Institutions in India.
Stock Market Risk
Arises primarily because of movement of portfolio value, which may have an
overall impact on Banks financial position in adverse condition. The liquidation
of Barings and Daiwa Bank is related to the market related risk associated with
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over exposure to stock market to influence their profitability and long term
viability.
In addition to market risk associated with Asset and Liability Management
process the two other important aspects which are also of importance while
discussing asset liability management include
a) Liquidity Risk Management
b) Capital risk and capital planning
Liquidity Risk
It is the potential inability to generate cash to cope with the decline in deposits
or increase in assets. Liquidity risk originates from mismatches in the maturity
patterns of assets and liabilities since banks deal with assets and liabilities with
varied maturity patterns and risk profile, they need to strike a trade-off between
been overtly liquid and relatively liquid. An effective measurement and
monitoring process assessing all of banks cash inflows against its outflow to
identify the potential for any net shortfalls going forward forms an essential
ingredient to overall liquidity risk management. This includes funding
requirements for off balance sheet commitments. As all banks are affected by
changes in the economic climate and market conditions, the monitoring of
economic and market trends is also a key to liquidity risk management.
Traditionally, banks have been relying on core deposits for their funding.
However, in todays environment, banks have resorted to other means of
sources also for managing the liquidity on ongoing basis. Cash inflows arise
from such things as maturing assets, saleable non-maturing assets, access to
deposit liabilities, established credit lines that can be tapped and in developed
world through asset securitization also. These need to be matched against
cash flows stemming from liabilities and contingent liabilities falling due,
especially committed lines of credit that can be drawn down. A maturity ladder
is therefore a useful device to compare cash outflows and cash inflows both on
a day to day basis and over a period of time. The banks historical experience of
the patterns of flows and knowledge of market conventions can also guide a
banks decision on liquidity risk management especially in a difficult scenario.
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Use of what if analysis situations can also help in building different liquidity
scenarios for practical applications. An effective system of internal control in
banks against liquidity risk will involve:-
A strong control environment
An adequate process for identifying and evaluating liquidity risk
Establishment of policy and procedure for handling such risks
An adequate information system
Control review of adherence to established policies and procedures.
Capital Risk
Maintaining adequate capital on a continuous basis is the sine quo-non for
sound banking practice. In a business situation, banks require capital to
insulate themselves from the risks of business that they undertake. The capital
accord of 1988 calls for detailed guidelines for maintaining adequate capital by
banks to mitigate themselves from problems arising in business development
on account of inadequate capital structure.
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GUIDELINES FOR ASSET LIABILITY MANAGEMENT (ALM)SYSTEM IN FINANCIAL INSTITUTIONS (FIS)
In the normal course, FIs are exposed to credit and market risks in view of the
asset-liability transformation. With liberalisation in Indian financial markets over
the last few years and growing integration of domestic markets with external
markets, the risks, particularly the market risks, associated with FIs operations
have become complex and large, requiring strategic management. FIs are
operating in a fairly deregulated environment and are required to determine
interest rates on various products in their liabilities and assets portfolios, both in
domestic as well as foreign currencies, on a dynamic basis. Intense
competition for business involving both the assets and liabilities, together with
increasing volatility in the domestic interest rates as also in foreign exchange
rates, has brought pressure on the management of FIs to maintain a good
balance amongst spreads, profitability and long-term viability. These pressures
call for structured and comprehensive measures for institutionalising an
integrated risk management system and not just ad hocaction. The FIs are
exposed to several major risks in the course of their business generically
classified as credit risk, market risk and operational risk which underlines theneed for effective risk management systems in FIs. The FIs need to address
these risks in a structured manner by upgrading the quality of their risk
management and adopting more comprehensive ALM practices than has been
done hitherto.
The envisaged ALM system seeks to introduce a formalised framework for
management of market risks through measuring, monitoring and managing
liquidity, exchange rate and interest rate risks of a FI that need to be closely
integrated with the FIs business strategy. This note lays down broad
guidelines for FIs in respect of liquidity, exchange rate and interest rate risk
management systems which form part of the ALM function. The initial focus of
the ALM function would be to enforce the discipline of market risk management
viz. managing business after assessing the market risks involved. The objective
of a good risk management systems should be to evolve into a strategic tool for
effective management of FIs.
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The ALM process rests on three pillars:
ALM Information System
Management Information System
Information availability, accuracy, adequacy and expediency
ALM Organisation
Structure and responsibilities
Level of top management involvement
ALM Process
Risk parameters
Risk identification
Risk measurement
Risk management
Risk policies and tolerance levels.
ALM Information System
ALM has to be supported by a management philosophy which clearly specifies
the risk policies and tolerance limits. This framework needs to be built on
sound methodology with necessary supporting information system as the
central element of the entire ALM exercise is the availability of adequate
and accurate information with expedience. Thus, information is the key to the
ALM process. There are various methods prevalent world-wide for measuring
risks. These range from the simple Gap Statement to extremely sophisticated
and data intensive Risk Adjusted Profitability Measurement methods. The
present guidelines would require comparatively simpler information system for
generating liquidity gap and interest rate gap reports.
ALM Organisation
Successful implementation of the risk management process would require
strong commitment on the part of the senior management in the FI, to integrate
basic operations and strategic decision making with risk management. TheBoard should have overall responsibility for management of market risks and
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should decide the risk management policy of the FI and set limits for liquidity,
interest rate, exchange rate and equity price risks.
The ALCO is a decision-making unit, consisting of the FI's senior management
including CEO, responsible for integrated balance sheet management from
risk-return perspective including the strategic management of interest rate and
liquidity risks. While each FI will have to decide the role of its ALCO, its powers
and responsibilities as also the decisions to be taken by it, its responsibilities
would normally include:
monitoring the market risk levels of the FI by ensuring adherence to the
various risk-limits set by the Board;
articulating the current interest rate view and a view on future direction of
interest rate movements and base its decisions for future business strategy
on this view as also on other parameters considered relevant.
deciding the business strategy of the FI, both - on the assets and liabilities
sides, consistent with the FIs interest rate view, budget and pre-
determined risk management objectives. This would, in turn, include:
determining the desired maturity profile and mix of the assets and liabilities
product pricing for both - assets as well as liabilities side;
deciding the funding strategy i.e. the source and mix of liabilities or sale of
assets; the proportion of fixed vs floating rate funds, wholesale vs retail
funds, money market vs capital market funding , domestic vs foreign
currency funding, etc.
reviewing the results of and progress in implementation of the decisions
made in the previous meetings
The ALM Support Groups consisting of operating staff should be responsible
for analysing, monitoring and reporting the risk profiles to the ALCO. The staff
should also prepare forecasts (simulations) reflecting the impact of various
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possible changes in market conditions on the balance sheet and recommend
the action needed to adhere to FI's internal limits.
Composition of ALCO
The size (number of members) of ALCO would depend on the size of each
institution, business mix and organisational complexity. To ensure commitment
of the Top Management and timely response to market dynamics, the
CEO/CMD/DMD or the ED should head the Committee. Though the
composition of ALCO could vary across the FIs as per their respective set up
and business profile, it would be useful to have the Chiefs of Investment,
Credit, Resources Management or Planning, Funds Management / Treasury
(forex and domestic), International Business and Economic Research as the
members of the Committee. In addition, the Head of the Technology Division
should also be an invitee for building up of MIS and related computerisation.
Some FIs may even have Sub-committees and Support Groups.
Committee of Directors
The Management Committee of the Board or any other Specific Committee
constituted by the Board should oversee the implementation of the ALM system
and review its functioning periodically.
ALM PROCESS
The scope of ALM function can be described as follows:
Liquidity risk management
Management of market risks
Trading risk management
Funding and capital planning
Profit planning and growth projection
The guidelines contained in this note mainly address Liquidity and Interest Rate
risks.
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Liquidity Risk Management
Measuring and managing liquidity needs are vital for effective operation of FIs.
By assuring a FI's ability to meet its liabilities as they become due, liquidity
management can reduce the probability of an adverse situation
developing. The importance of liquidity transcends individual institutions, as
liquidity shortfall in one institution can have repercussions on the entire
system. FIs management should measure not only the liquidity positions of FIs
on an ongoing basis but also examine how liquidity requirements are likely to
evolve under different assumptions. Experience shows that assets commonly
considered to be liquid, such as Government securities and other money
market instruments, could also become illiquid when the market and players
are unidirectional. Therefore liquidity has to be tracked through maturity or cash
flow mismatches. For measuring and managing net funding requirements, the
use of a maturity ladder and calculation of cumulative surplus or deficit of funds
at selected maturity dates is adopted as a standard tool. The format of the
Statement of Liquidity is furnished in Annexure I.
The Maturity Profile, as detailed in Appendix I, could be used for measuringthe future cash flows of FIs in different time buckets. The time buckets, may
be distributed as under:
i) 1 to 14 days
ii) 15 to 28 days
iii) 29 days and upto 3 months
iv) Over 3 months and upto 6 monthsv) Over 6 months and upto 1 year
vi) Over 1 year and upto 3 years
vii) Over 3 years and upto 5 years
viii) Over 5 years and upto 7 years
ix) Over 7 years andupto 10 years
x) Over 10 years.
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The investments are assumed as illiquid due to lack of depth in the secondary
market and are, therefore, generally shown, as per their residual maturity,
under respective time buckets. However, some of the FIs may be maintaining
securities in the Trading Book, which are kept distinct from other investments
made for retaining relationship with customers. Securities held in the 'Trading
Book should be subject to the following preconditions:
i)The composition and volume of the Trading Book should be clearly defined;
ii)Maximum maturity/duration of the trading portfolio should be restricted;
iii)The holding period of the trading securities should not exceed 90 days;
iv)Cut-loss limit(s) should be prescribed;
v) Product-wise defeasance periods (i.e. the time taken to liquidate thepositionon the basis of liquidity in the secondary market) should be prescribed;
vi) Such securities should be marked-to-market on a daily/weekly basis andtherevaluation gain/loss should be charged to the profit and loss account;etc.
FIs which maintain such Trading Books consisting of securities that comply
with the above standards, are permitted to show the trading securities under 1-
14 days, 15-28 days and 29-90 days buckets on the basis of the defeasance
periods. The Board/ALCO of the banks should approve the volume,
composition, maximum maturity/duration, holding/defeasance period, cut loss
limits, etc., of the Trading Book . FIs, which are better equipped, will have the
option of evolving with the approval of the Board / ALCO, an integrated Value
at Risk (VaR) limit for their entire balance sheet including the Banking Book
and the Trading Book, for the rupee as well as foreign currency portfolio. A
copy of the approved policy note in this regard, should be forwarded to theDepartment of Banking Supervision, FID, RBI.
Within each time bucket there could be mismatches depending on cash inflows
and outflows. While the mismatches upto one year would be relevant since
these provide early warning signals of impending liquidity problems, the main
focus should be on the short-term mismatches viz., 1-14 days and 15-28 days.
FIs however, are expected to monitor their cumulative mismatches (runningtotal) across all time buckets by establishing internal prudential limits with the
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approval of the Board / ALCO. The negative gap during 1-14 days and 15-28
days time-buckets, in normal course, should not exceed 10 per cent and 15 per
cent respectively, of the cash outflows in each time bucket. If a FI in view of its
current asset-liability profile and the consequential structural mismatches needs
higher tolerance level, it could operate with higher limit sanctioned by its
Board / ALCO giving specific reasons on the need for such higher limit. The
discretion to allow a higher tolerance level is intended for a temporary period,
i.e. till March 31, 2001. While determining the tolerance levels, the FIs may
take into account all relevant factors based on their asset-liability base, nature
of business, future strategy, etc. The RBI is interested in ensuring that the
tolerance levels are determined keeping all necessary factors in view and
further refined with experience gained in Liquidity Management.
The Statement of Liquidity may be prepared by placing all cash inflows and
outflows in the maturity ladder according to the expected timing of cash flows.
A maturing liability will be a cash outflow while a maturing asset will be a cash
inflow. It would also be necessary to take into account the rupee inflows and
outflows on account of forex operations. Thus, the foreign currency resources
raised abroad but swapped into rupees and deployed in rupee assets, would be
reflected in the rupee liquidity statement. Some of the FIs have the practice of
disbursing rupee loans to their exporter clients but denominating such loans in
foreign currency in their books which are extinguished by the export proceeds.
Such foreign currency denominated loans too would be a part of rupee liquidity
statement since such loans are created out of rupee resources. As regards the
foreign currency loans granted out of foreign currency resources on a back-to-
back basis, a currency-wise liquidity statement for each of the foreign
currencies in which liabilities and assets have been created.
Currency Risk
Floating exchange rate arrangement has brought in its wake pronounced
volatility adding a new dimension to the risk profile of FIs balance sheets.
The increased capital flows across free economies following deregulation havecontributed to increase in the volume of transactions. Large cross border flows
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together with the volatility has rendered the FIs' balance sheets vulnerable to
exchange rate movements.
Dealing in different currencies brings opportunities as also risks. If the liabilities
in one currency exceed the level of assets in the same currency, then the
currency mismatch can add value or erode value depending upon the currency
movements. Mismatched currency position, besides exposing the balance
sheet to movements in exchange rate, also exposes it to country risk and
settlement risk. FIs undertake operations in foreign exchange such as
borrowings and making loans in foreign currency, which exposes them to
currency or exchange rate risk. The simplest way to avoid currency risk is to
ensure that mismatches, if any, are reduced to zero or near zero. However,
irrespective of the strategies adopted, it may not be possible to eliminate
currency mismatches altogether.
At present, only five FIs (viz. EXIM Bank, ICICI, IDBI, IFCI and IIBI) have been
granted by RBI (ECD) restricted authorisation to deal in foreign exchange
under FERA 1973 while other FIs are not authorised to deal in foreign
exchange. The FIs are, therefore, unlike banks, are not subject to the full rigour
of the reporting requirements under Exchange Control regulations. Hence, the
MAP and SIR statements prescribed for banks vide AD (MA Series) circular no.
52 dated 27 December 1997 issued by RBI (ECD), are not applicable to FIs. In
order, however, to capture the liquidity and interest rate risk inherent in the
foreign currency portfolio of the FIs, it would be necessary to compile, on an
ongoing basis, currency-wise Statement of Liquidity and IRS Statement,
separately for each of the currencies in which the FIs have an exposure.
Interest Rate Risk (IRR)
Interest rate risk is the risk where changes in market interest rates might
adversely affect a FI's financial condition. The immediate impact of changes in
interest rates is on FI's earnings (i.e. reported profits) by changing its Net
Interest Income (NII). A long-term impact of changing interest rates is on FI'sMarket Value of Equity (MVE) or Net Worth as the economic value of banks
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assets, liabilities and off-balance sheet positions get affected due to variation in
market interest rates. The interest rate risk when viewed from these two
perspectives is known as earnings perspective and economic value
perspective, respectively. The risk from the earnings perspective can be
measured as changes in the Net Interest Income (NII) or Net Interest Margin
(NIM). There are many analytical techniques for measurement and
management of Interest Rate Risk. In the context of poor MIS, slow pace of
computerisation in FIs, the traditional Gap analysis is considered to be a
suitable method to measure the Interest Rate Risk in the initial phase of the
ALM system. However, the FIs, which are better equipped, would have the
option of deploying
advanced IRR management techniques with the approval of their Board /
ALCO, in addition to the Gap Analysis prescribed under the guidelines. It is the
intention of RBI to move over to the modern techniques of Interest Rate Risk
measurement like Duration Gap Analysis, Simulation and Value at Risk over
time when FIs acquire sufficient expertise and sophistication in acquiring and
handling MIS.
The Gap or Mismatch risk can be measured by calculating Gaps over different
time intervals as at a given date. Gap analysis measures mismatches between
rate sensitive liabilities and rate sensitive assets (including off-balance sheet
positions). An asset or liability is normally classified as rate sensitive if:
i) within the time interval under consideration, there is a cash flow;
ii) the interest rate resets/reprices contractually during the interval;
iii) it is contractually pre-payable or withdrawable before the stated maturities;
iv) It is dependent on the changes in the Bank Rate by RBI.
The Gap Report should be generated by grouping rate sensitive liabilities,
assets and off-balance sheet positions into time buckets according to residual
maturity or next re-pricing period, whichever is earlier. All investments,
advances, deposits, borrowings, purchased funds, etc. that mature/re-price
within a specified timeframe are interest rate sensitive. Similarly, any principalrepayment of loan is also rate sensitive if the FI expects to receive it within the
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time horizon. This includes final principal repayment and interim instalments.
Certain assets and liabilities carry floating rates of interest that vary with a
reference rate and hence, these items get re-priced at pre-determined intervals.
Such assets and liabilities are rate sensitive at the time of re-pricing. While the
interest rates on term deposits and bonds are generally fixed during their
currency, the interest rates on advances could be re-priced any number of
occasions, on the pre-determined reset / re-pricing dates and the new rate
would normally correspond to the changes in PLR.
The interest rate gaps may be identified in the following time buckets:
i) 1-28 days
ii) 29 days and upto 3 months
iii) Over 3 months and upto 6 months
iv) Over 6 months and upto 1 year
v) Over 1 year and upto 3 years
vi) Over 3 years and upto 5 years
vii) Over 5 years and upto 7 years
viii) Over 7 years and upto 10 years
ix) Over 10 yearsx) Non-sensitive
The various items of rate sensitive assets and liabilities and off-balance sheet
items may be classified into various time-buckets,
The Gap is the difference between Rate Sensitive Assets (RSA) and Rate
Sensitive Liabilities (RSL) for each time bucket. The positive Gap indicates that
it has more RSAs than RSLs whereas the negative Gap indicates that it has
more RSLs. The Gap reports indicate whether the institution is in a position to
benefit from rising interest rates by having a positive Gap (RSA > RSL) or
whether it is in a position to benefit from declining interest rates by a negative
Gap (RSL > RSA). The Gap can, therefore, be used as a measure of interest
rate sensitivity.
Each FI should set prudential limits on interest rate gaps in various time
buckets with the approval of the Board/ALCO. Such prudential limits shouldhave a relationship with the Total Assets, Earning Assets or Equity. In
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addition to the interest rate gap limits, the FIs which are better equipped would
have the option of setting the prudential limits in terms of Earnings at Risk
(EaR) or Net Interest Margin (NIM) based on their views on interest rate
movements with the approval of the Board/ALCO.
The classification of various components of assets and liabilities into different
time buckets for preparation of Gap reports (Liquidity and Interest Rate
Sensitivity) as indicated in Appendices I & II is the benchmark. FIs which are
better equipped to reasonably estimate the behavioural pattern, embedded
options, rolls-in and rolls-out, etc of various components of assets and liabilities
on the basis of past data / empirical studies could classify them in the
appropriate time buckets, subject to approval from the ALCO / Board. A copy of
the note approved by the ALCO / Board may be sent to the Department of
Banking Supervision, Financial Institutions Division.
The impact of embedded options (i.e. the customers exercising their options for
premature closure of term deposits, premature encashment of bonds and pre-
payment of loans and advances) on the liquidity and interest rate risks profile of
FIs and the magnitude of embedded option risk during the periods of volatility in
market interest rates, is quite substantial. FIs should therefore evolve suitablemechanism, supported by empirical studies and behavioural analysis, to
estimate the future behaviour of assets, liabilities and off-balance sheet items
to changes in market variables and estimate the impact of embedded options.
In the absence of adequate historical database, the entire amount payable
under the embedded options should be slotted as per the residual period to the
earliest exercise date.
A scientifically evolved internal transfer pricing model by assigning values onthe basis of current market rates to funds provided and funds used is an
important component for effective implementation of ALM System. The transfer
price mechanism can enhance the management of margin i.e. lending or credit
spread, the funding or liability spread and mismatch spread. It also helps
centralising interest rate risk at one place which facilitate effective control and
management of interest rate risk. A well defined transfer pricing system also
provide a rational framework for pricing of assets and liabilities.
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REVIEW OF EXISTING LITERATURE SUMMARY
The article is remark from Wlliam J McDonough on risk management,
supervision and the new Basel Accord. According to the article in recent times
the are fail to develop the commitment to manage risk appropriately to avoid
this recent past requires a clear and consisted message, as well as transparent
pattern of behaviour. Also according to william the work of financial
supervision is moving away from a purely retrospective,rules based
approach.this is particularly in banking world.Banks supervisor in many
countries around the world are assessing the safety and soundness of banks
based les on the strength of the balance sheet today, and more on the strength
of controls that will safeguard bank financial health tomorrow but William J
believed that evaluating the strength of control is, in itself, not enough in deed
financial sector required innovation in the good and services offered. Also the
member of basel committee believes that public policy can best support the
enhancement of risk management by building incentives directly to their system
of supervision. According to William J the whole article based on how
supervisor have worked to embrace and encourage the developments, how
enhancement in banks risk management processes, driven by business
imperatives, have concurrently led supervisor to move to a more process-
oriented, risk focused approach to supervision. Secondly how provision in New
Basel Accord support further changes in there supervisory approach, and
promote further enhancement in risk management of market risk and thirdly
how those development will be coming together in there supervisory approach
going forward-particularly in terms of there supervisory expections for
management of market risk, credit risk and operational risk by large banking
organization.
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Summary of article
The following article has been delivered by Dr Rakesh Mohan, Deputy
Governer of the Reserve Bank of India. The article highlight the need to work
toward reducing the real lending rates of banks. Also it focused on the need to
increase credit to SMEs as also look into aspects of creating an enabling
environment for long term financing. The article also state about the NPAs level
,the absolute amount of NPAs continues to be a major drag on the performance
of banks. The large volume of NPAs reflects both an overhang of past dues
and on-going problems of fresh accretion. Therefore reducing in NPA level and
appropriate risk management by banks would go a long way in improving
efficiency of banks and inculcating a sound credit culture
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CHAPTER 3
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HISTORY AND GROWTH OF ICICI BANK
ICICI Bank Ltd. was formed in 1994 as a new private sector bank. Its initial
equity capital of Rs 150 crores was fully subscribed by ICICI, and as a result,ICICI Bank became a wholly owned subsidiary of ICICI.
In May 1994, when ICICI obtained its commercial banking license to establish
ICICI Bank, the Reserve Bank of India (RBI) imposed a condition regarding
dilution of promoters holding in the bank. This condition required ICICI to
reduce its shareholding in ICICI Bank in stages, first to not more than 75% of its
equity share capital, and ultimately to not more than 40%. This took place in the
following ways:
Year
(FY) Event
Amount
Raised (Rs.) Holding of ICICI
1998
IPO of 15 million equity shares
of Rs. 10 each at a price of
Rs. 35 per share 52.5 crores 74.80%
2000
ADR issue on NYSE for
US$175 million 763.4 crores 62.20%
2001 Acquisition of Bank of Madura
(BOM): 2 equity shares in lieu
of every 1 share of BOM
236 crores 55.60%
Disinvestment of shares by
ICICI 19.39 crores 46.40%
2002
Disinvestment of shares by
ICICI 0.88 crores
46%(on August
2002)
During 2001, the senior managements of ICICI and ICICI Bank explored the
possibility amalgamation of ICICI with ICICI Bank. As a bank, ICICI would have
the ability to accept low-cost demand deposits and offer wider range on
products and services. In view of such benefits and RBIs guidelines on
universal banking, ICICI explored various corporate restructuring alternatives
for its transformation into a universal bank. Subsequently, the shareholders ofboth the institutions approved such amalgamation and the exchange ratio
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determined was 1 fully paid-up equity share of ICICI Bank in lieu of 2 fully paid-
up equity shares of ICICI. As a result of such amalgamation, which was
approved by RBI on April 26, 2002, the paid-up capital increased to Rs. 613
crores. The scheme of amalgamation became effective on May 3, 2002.
RBI approved the merger subject to the following major conditions:
Compliance with Reserve Requirements: ICICI Bank would comply with
the Cash Reserve Requirements (CRR) and Statutory Liquidity Reserve
(SLR) Requirements as applicable to banks on the net demand and time
liabilities of the bank, inclusive of the liabilities pertaining to ICICI from
the date of merger.
Other Prudential Norms: ICICI Bank will continue to comply with all
prudential requirements and other instructions as applicable to banks
issued by RBI from time to time on the entire portfolio of assets and
liabilities of the bank after the merger.
Priority Sector Lending: considering that the advances of ICICI were not
subject to the requirement applicable to banks in respect of prioritysector lending, ICICI Bank would after merger, maintain an additional
10% over and above the requirement of 40%, i.e., a total of 50% of the
net bank credit on the residual portion of the banks advances. This
additional 10% will apply until such time as the aggregate priority sector
advances reaches a level of 40% of the total net bank credit.
Equity Exposure Ceiling of 5%: The investments of ICICI acquired by
way of project finance as on the date of merger would be kept outside
the exposure ceiling of 5% of advances towards exposure to equity and
equity-linked instruments for a period of 5 years. ICICI Bank should,
however, mark-to-market the above instruments and provide for any loss
in their value in the manner prescribed for investments.
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Following the amalgamation, ICICI Bank has become the second largest
among all scheduled commercial banks (SCBs) in India, ranked on the basis of
their total assets, coming after the State Bank of India.
At end-FY2002, ICICI Bank had a network of 359 branches and 44 extensioncounters in 251 centers across several India states. Nearly 51% (183
branches) of ICICIs branches are in urban/metropolitan areas. The balance is
in rural/semi-urban areas. Till this time ICICI Bank had also installed 1,000
ATMs.
SUBSIDIARIES
At end-FY2001, ICICI Bank had no subsidiaries. Consequent to the merger,
ICICIs subsidiary companies have become subsidiaries of ICICI Bank. At end-
FY2002, ICICI Bank had 11 subsidiaries. The major subsidiaries are described
below:
1. ICICI Securities and Finance Co. Ltd. - performs key merchant baking
activities including underwriting, placement of debt and equity, issue
management and corporate advisory services.
2. ICICI Brokerage Services Ltd. engaged in security brokerage activities
on NSE and BSE.
3. ICICI Securities Holdings Inc. incorporated in the US, this arm has
been set up to provide investment banking services to investors in the
US who wish to enter the Indian financial market and to investors in
India who wish to enter the financial markets in the US.
4. ICICI Securities Inc. incorporated in the US, this subsidiary has been
set up to provide brokerage, research and investment banking services
to investors in the US who wish to enter the Indian financial markets.
5. ICICI Venture Funds Management Co. Ltd. provides venture capital
funding to a wide spectrum of industrial sectors.
6. ICICI Prudential Life Insurance Co. Ltd. carries out the business of Life
Insurance. This subsidiary has entered into an MoU with ICICI Bank for
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distribution of its life insurance policies through the banks branch
network.
7. ICICI Lombard General Insurance Co. Ltd. carries out the business of
general insurance.
8. ICICI Home Finance Co. Ltd. provides finance for housing.
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MANAGEMENT
The management team of ICICI Bank consists of the following individuals who
are very well qualified, possess rich experience and are competent
professionals from their field.
Name Designation
Mr. K.V. Kamath Managing Director & CEO
Mr. H.N. Sinor Joint Managing Director; In charge of domestic banking
Ms. Lalita D. Gupte
Joint Managing Director; In charge of international
business
Ms. Kalpana Morparia Executive Director; In charge of legal department
Mr. S. Mukherji Executive Director; In charge project finance
Ms. Chanda D.
Kochhar Executive Director, In charge of retail banking
Dr. Nachiket Mor Executive Director, In charge of wholesale banking
BUSINESS & OPERATIONS
ICICI Banks asset base of Rs. 1,041 billion (at end FY2002) places it as the
second largest scheduled commercial bank in India behind only State Bank of
India (SBI). ICICI Banks asset base is nearly 4.4 times larger than the second-
largest new private sector bank in India HDFC Bank (assets of Rs. 238 billion
as end-FY2002).
ICICI Banks principal activities include corporate banking, retail banking and
treasury operations.
RELATIONSHIP WITH THE GOVERNMENT
The GoI has never directly held any shares of ICICI Bank. However, GoIs
controlled institutions held a 20.8% stake in ICICI Bank at end August 2002.
These include the LIC (8.6%), the GIC and its subsidiaries (7.3%), UTI (3.3%),
and others (1.6%). Under the terms of the loan and guarantee facilitiesprovided by the GoI to ICICI that have been transferred to ICICI Bank, the GoI
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is entitled to appoint and has appointed one representative to the BoD of ICICI
Bank. Comparison of key ratios is done on the basis of previous year and the
current year.
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RISK MANAGEMENT AT ICICI
Risk is an inherent part of ICICI Banks business, and effective Risk
Compliance & Audit Group is critical to achieving financial soundness and
profitability. ICICI Bank has identified Risk Compliance & Audit Group as one of
the core competencies for the next millennium. The Risk Compliance & Audit
Group Group (RC & AG) at ICICI Bank benchmarks itself to international best
practices so as to optimise capital utilisation and maximise shareholder value.
With well defined policies and procedures in place, ICICI Bank identifies,
assesses, monitors and manages the principal risks:
Credit risk (the possibility of loss due to changes in the quality of
counterparties)
Market Risk (the possibility of loss due to changes in market prices and
rates of securities and their levels of volatility)
Operational risk (the potential for loss arising from breakdowns in
policies and controls, human error, contracts, systems and facilities)
The ability to implement analytical and statistical models is the true test of a risk
methodology. In addition to three departments within the Risk Compliance &
Audit Group handling the above risks, an Analytics Unit develops quantitative
techniques and models for risk measurement.
CREDIT RISK MANAGEMENT
Credit risk, the most significant risk faced by ICICI Bank, is managed by the
Credit Risk Compliance & Audit Department (CRC & AD) which evaluates risk
at the transaction level as well as in the portfolio context. The industry analysts
of the department monitor all major sectors and evolve a sectoral outlook,
which is an important input to the portfolio planning process. The department
has done detailed studies on default patterns of loans and prediction of defaults
in the Indian context. Risk-based pricing of loans has been introduced.
The functions of this department include:
Review of Credit Origination & Monitoring
Credit rating of companies/structures
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Default risk & loan pricing
Review of industry sectors
Review of large exposures in industries/ corporate groups/
companies
Ensure Monitoring and follow-up by building appropriate
systems such as CAS
Design appropriate credit processes, operating policies & procedures
Portfolio monitoring
Methodology to measure portfolio risk
Credit Risk Information System (CRIS)
Focussed attention to structured financing deals
Pricing, New Product Approval Policy, Monitoring
Monitor adherence to credit policies of RBI
During the year, the department has been instrumental in reorienting the credit
processes, including delegation of powers and creation of suitable control
points in the credit delivery process with the objective of improving customer
response time and enhancing the effectiveness of the asset creation and
monitoring activities.
Availability of information on a real time basis is an important requisite for
sound risk management. To aid its interaction with the strategic business units,
and provide real time information on credit risk, the CRC & AD has
implemented a sophisticated information system, namely the Credit Risk
Information System. In addition, the CRC & AD has designed a web-based
system to render information on various aspects of the credit portfolio of ICICI
Bank.
MARKET RISK COMPLIANCE & AUDIT GROUP
ICICI Bank is exposed to all categories of Market Risk, viz.,
Interest Rate Risk (risk due to changes in interest rates)
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Exchange Rate Risk (risk due to changes in exchange rates)
Equity Risk (risk due to change in equity prices)
Liquidity Risk (risk due to deterioration in market liquidity for tradable
instruments)
The Market Risk Compliance & Audit Department evaluates, tests and
approves market risk methodologies developed by the Treasury. It also
participates in the new product approval process on a firm-wide basis and
evaluates all new products from a market risk perspective
OPERATIONAL RISK MANAGEMENT
ICICI Bank, like all large banks, is exposed to many types of operational risks.
These include potential losses caused by events such as breakdown in
information, communication, transaction processing and settlement systems/
procedures.
The Audit Department, an integral part of the Risk Compliance & Audit Group,
focusses on the operational risks within the organisation. In recent times, there
has been a shift in the audit focus from transactions to controls. Some
examples of this paradigm shift are: Adherence to internal policies, procedures
and documented processes Risk Based Audit Plan Widening of Treasury
operations audit coverage Use of Computer Assisted Audit Techniques
(CAATs) Information Systems Audit Plans to develop/ buy software to capture
the workflow of the Audit Department
The Audit Department conceptualised and put into operation a Risk Based
Audit Plan during the year 1998-99. The Risk Based Audit Plan envisages
allocation of audit resources in accordance with the risk constituents of ICICI
Banks business.
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CHAPTER 4
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PERFORMANCE OF ICICI BANK
1) Credit-Deposit (%): This ratio is compared as under:
We notice that in the year 1997 credit deposit ratio is 69.8% which fell to
21.37% in the year 1998. In 1999 it further drop to 11.22%. In 2000 it drop
to 1.03%. In the year 2001 it rose to 4.55%. In the year 2002 it rose to
70.83%.
2) Investment/Deposit (%): This ratio is compared as under:
We notice that in the year 1997 investment ratio is 33.64% it rose to 3.04%
in the year 1998. In the year 1999 again it rose to 7.96%. In the year 2000 it
rose to 1.02%. In the year 2001 it rose to 2.36%.In the year 2002 it rose to42.93% which is a significant increase.
3) Cash /Deposit(%) : This ratio is compared as under:
We notice that in the year 1997 Cash /deposit ratio is 12.27% which fell to
0.69% in the year 1998. In the year 1999 it again fell to 2.66%. In the year
2000 it fell to 1.47%.In the year 2001 it again fell to 0.01%.In the year 2002
it fell to 1.24%.
4) Interest Expended/Interest Earned(%): this ratio is compared as under :
We notice that In the year 1997 interest earned(%) is 64.1% which rose
to7.78%.in the year 1998. again it rose to 6.33%. in the year 1999. in the
year 2000 it fell to 0.01%. in the year 2001 again it fell to 10.76%. in the
year 2002 it fell to 5%.
5) Other Income/Total Income(%) : this ratio is compared as under:
We notice that in the year 1997 percentage of other income/total income is
18.93% which rose to 5.75% in the year 1998. In the year 1999 it fell to
10.6%. In the year 2000 there is a significant increase of 4.47%. in the year
2001 it fell to 3.1%. in the year 2002 It rose to 6.5%.
6) Operating Expenses/Total Income(%) : This ratio is compared as under :
We notice that the percentage of operating expenses in the year 1997 is
17.98% which fell to 1.26% in the year 1998.In the year 1999 again it fell to
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3.6%.In the year 2000 it rose to 0.59%.in the year 2001 it rose to 8.36%.in
the year 2002 it rose to 0.71%.
7) Interest Income/Total funds(%): this ratio is compared as under:
We notice that percentage of interest income in the year 1997 is 12.43%
which fell to 2.17% in the year 1998.In the year 1999 it rose to 0.34%.in the
year 2000 it fell to 1.65%.in the year 2001 it fell to 1.14%.in the year 2002 it
further fell to 4.33%.
8) Interest Expended/Total Funds(%) : this ratio is compared as under
1997:- 7.97%
1998:-0.59%(decrease)
1999: 0.91%(increase)
2000:1.29%(decrease)
2001:1.73%(decrease)
2002:2.75%(decrease)
9) Net interest income/Total funds(%) : This ratio is compared as under
1997 : 4.46%
1998 : 1.57%(decrease which take it to 2.89%)
1999 : 0.58%(decrease which take it to 2.31%)
2000 : 0.36%( decrease)
2001 : 0.59%(increase)
2002 : 1.58%(decrease)
10) Non interest income/total funds(%) : this ratio is compared as under
1997 :2.9%
1998:0.46%(increase)
1999:1.62%(decrease)
2000: 0.3%(increase)
2001 :0.61%(decrease)
2002:0.45%(decrease)
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11. Operating expense/Total funds(%) : this ratio is compared as under :
1997 :2.76%
1998 :0.48%(decrease)
1999:0.66%(decrease further)
2000:0.11%(decrease)
2001:0.53%(increase)
2002:1.03%(decrease)
12.) Profit before provisions/total funds(%) : comparison of this I s done as
under:
1997 : 4.61%
1998 :0.64%(decrease)
1999:1.54%(decrease)
2000:0.11%(increase)
2001:0.55%(decrease)
2002:1.01%(decrease)
13.) Net Profit/Total funds(%): comparison of this is given as under:
1997: 2.73%
1998 :0.75%(decrease)
1999:0.75%(decrease)
2000:0.12%(decrease)
2001:0.1%(decrease)
2002:0.59%(decrease)
14.) RONW(%) : Comparison of this is done as under :
1997:23.7%
1998:1.31%(decrease)
1999:0.35%(decrease)
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GAP ANALYSIS
Outflow 1-14days
15-28days
29-3months
3-6months
6-1 year 1-3 year 3-5 year Above 5 Total
Deposits 315206 92177 481706 277906 579855 1289359 40318 14421 3090948
Borrowings 99649 149971 441520 322932 894286 1416256 395130 284823 4004567
Total 414855 242148 923226 600838 1474141 2705615 435448 299244 7095515
Inflow
Loans/adv. 82564 35692 255294 233150 371087 1322562 763733 1370069 4424151
Invest/Sect. 131998 68624 289018 267530 521877 736576 447461 1155706 3618790
Total 214562 104316 544312 500680 892964 2059138 1211194
2525775 8052941
Mismatch(B-A)
-200293 -137832 -378914 -100158 -581177 -646477 775746 2226531 1603903
Gap report indicates that there is a mismatch in the maturity buckets of 1-14
days to 1-3 years. However this means RSL>RSA this shows the bank in a
position to benefit from declining interest rate by a negative gap.
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ICICI BANK
FINANCIALOVERVIEW
2002-03 2001-03 2000-03 1999-03 1998-03 1997-03
Equity Paid Up 220.36 196.82 196.82 165 165 150
Networth 5855.9 1289.08 1149.51 308.33 266.75 181.88
Capital Employed 104109.92 19736.59 12072.63 6981.68 3279.43 1781.87
Gross Block 4494.29 589.67 315.14 261.57 218.97 110.58
Sales 2151.93 1242.13 852.87 544.05 259.7 182.68
PBIDT 1912.31 1100.57 823.64 536.41 271.67 178.86
PBDT 353.39 262.9 156.69 110.89 84.99 61.77
PBIT 1848.22 1063.82 798.85 518.88 257.2 170.62PBT 289.3 226.15 131.9 93.36 70.52 53.53
PAT 258.3 161.1 105.3 63.36 50.22 40.13
CP 322.39 197.85 130.09 80.89 64.69 48.37
Revenue earningsin forex
0 0 0 0 0 0
Revenue expensesin forex
0 0 0 0 0 0
Book Value (UnitCurr)
265.74 65.5 58.4 18.69 16.17 12.13
MarketCapitalisation
2732.46 3255.4 5117.32 452.1 755.7 0
CEPS (annualised)(Unit Curr)
14.43 9.82 6.47 4.78 3.82 3.22
EPS (annualised)(Unit Curr)
11.52 7.96 5.21 3.72 2.95 2.68
Dividend(annualised%)
20 20 15 12 10 10
Payout (%) 17.36 28.14 24.13 32.26 33.4 37.38
Cash Flow FromOperating Activities
2241.2 -394.02 1091.57 662.9 568.37 281.8
Cash Flow FromInvesting Activities
-23.68 -78.39 -56.03 -47.69 -105.9 -60.11
Cash Flow FromFinancing Activities
131.4 -27.47 741.37 150.15 37.5 -11.73
Rate of Growth (%)
Net Worth (%) 354.27 12.14 272.82 15.59 46.66 16.03
Capital Employed(%)
427.5 63.48 72.92 112.89 84.04 53.97
Gross Block (%) 662.17 87.11 20.48 19.45 98.02 110.75
Sales (%) 73.25 45.64 56.76 109.49 42.16 57.31
PBIDT (%) 73.76 33.62 53.55 97.45 51.89 68.83
PBDT (%) 34.42 67.78 41.3 30.47 37.59 193.86
PBIT (%) 73.73 33.17 53.96 101.74 50.74 68.21
PBT (%) 27.92 71.46 41.28 32.39 31.74 224.23
PAT (%) 60.34 52.99 66.19 26.16 25.14 143.06
CP (%) 62.95 52.09 60.82 25.04 33.74 130.11Revenue earnings 0 0 0 0 0 0
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in forex (%)
Revenue expensesin forex (%)
0 0 0 0 0 0
MarketCapitalisation (%)
-16.06 -36.38 1031.9 -40.17 0 0
Key RatiosCredit-Deposit(%) 111.56 40.73 36.18 37.21 48.43 69.8
Investment /Deposit (%)
90.95 48.02 45.66 44.64 36.68 33.64
Cash / Deposit (%) 6.2 7.44 7.45 8.92 11.58 12.27
Interest Expended /Interest Earned (%)
72.44 67.44 78.2 78.21 71.88 64.1
Other Income /Total Income (%)
21.95 15.45 18.55 14.08 24.68 18.93
OperatingExpenses / TotalIncome (%)
22.78 22.07 13.71 13.12 16.72 17.98
Interest Income /Total Funds (%)
3.48 7.81 8.95 10.6 10.26 12.43
Interest Expended /Total Funds (%)
2.52 5.27 7 8.29 7.38 7.97
Net InterestIncome / TotalFunds (%)
0.96 2.54 1.95 2.31 2.89 4.46
Non InterestIncome / TotalFunds (%)
0.98 1.43 2.04 1.74 3.36 2.9
OperatingExpenses / TotalFunds (%)
1.01 2.04 1.51 1.62 2.28 2.76
Profit beforeProvisions / TotalFunds (%)
0.92 1.93 2.48 2.43 3.97 4.61
Net Profit / Totalfunds (%)
0.42 1.01 1.11 1.23 1.98 2.73
RONW (%) 7.23 13.21 14.45 22.04 22.39 23.7
BS
200203 200103 200003 199903 199803 199703
CAPITAL ANDLIABILITIES
Capital + 220.36 196.82 196.82 165 165 150Reserves andSurplus +
5635.54 1092.26 952.69 143.33 101.75 31.88
Deposits + 32085.11 16378.21 9866.02 6072.94 2629.02 1347.6
Borrowings + 48681.21 1032.79 491.47 199.89 192.23 92.99
Other Liabilities &Provisions +
17487.7 1036.51 565.63 400.52 191.43 159.4
TOTAL
104109.92 19736.59 12072.63 6981.68 3279.43 1781.87
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ASSETS
Cash & Balanceswith RBI
1774.47 1231.66 721.89 465.81 310.09 150.34
Balances with
Banks & money atCall & Short Notice
11011.88 2362.03 2693.27 1172.44 562.79 222.58
Investments + 35891.08 8186.86 4416.68 2861.23 1023.39 435.35
Advances + 47034.87 7031.46 3657.35 2110.12 1127.87 798
Fixed Assets + 4239.34 384.75 222.12 199.64 183.7 96.37
Other Assets + 4158.28 539.83 361.32 172.44 71.59 79.23
TOTAL 104109.92 19736.59 12072.63 6981.68 3279.43 1781.87
ContingentLiabilities +
39446.59 13848.01 9780.47 5013.97 2906.24 1495.76
Bills for collection 1323.42 1229.8 761.44 438.46 218.19 123.01
PL
200203 (12) 200103 (12) 200003 (12) 199903 (12) 199803 (12) 199703 (12)
I. INCOME :
Interest Earned + 2151.93 1242.13 852.87 544.05 259.7 182.68
Other Income + 605.02 226.96 194.19 89.14 85.09 42.65
TOTAL 2756.95 1469.09 1047.06 633.19 344.79 225.33
II.EXPENDITURE :Interest expended
+
1558.92 837.67 666.95 425.52 186.68 117.09
OperatingExpenses +
628.09 324.28 143.54 83.08 57.65 40.51
Provisions &Contingencies +
311.64 146.04 131.27 61.23 50.24 27.6
TOTAL 2498.65 1307.99 941.76 569.83 294.57 185.2
III. PROFIT/LOSS
Net Profit for theyear
258.3 161.1 105.3 63.36 50.22 40.13
Prior YearAdjustments +
0 0 0 0 0 0
Profit broughtforward
0.83 0.8 0.13 0.39 0.02 0.39
TOTAL 259.13 161.9 105.43 63.75 50.24 40.52
IV.APPROPRIATIONSTransfer toStatutory Reserves
65 80 25 20 27 25.5
Transfer to OtherReserves +
126 32.5 52.82 21.84 5 0
Proposed Dividend /Transfer toGovernment +
48.57 48.57 27.47 21.78 17.85 15
Balance c/f toBalance Sheet
19.56 0.83 0.14 0.13 0.39 0.02
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TOTAL 259.13 161.9 105.43 63.75 50.24 40.52
Equity Dividend 44.07 44.07 24.75 19.8 16.23 15
Corporate DividendTax
4.5 4.5 2.72 1.98 1.62 0
Equity Dividend (%) 20 20 15 12 10 10
Earning Per Share(Rs.)(Unit Curr.)
11.52 7.96 5.21 3.72 2.95 2.68
Book Value(UnitCurr.)
265.74 65.5 58.4 18.69 16.17 12.13
Extraordinary Items+
-0.03 -0.09 -0.1 -0.07 -0.03 -0.03
BS SCHEDULES
200203 200103 200003 199903 199803 199703
CAPITAL ANDLIABILITIES
Capital
Equity Authorised 300 300 300 300 300 300
Preference CapitalAuthorised
0 0 0 0 0 0
UnclassifiedAuthorised
0 0 0 0 0 0
Equity Issued 220.36 196.82 196.82 165 165 150
Equity Subscribed 220.36 196.82 196.82 165 165 150
Equity Called Up 220.36 196.82 196.82 165 165 150
Less : Equity Callsin Arrears
0 0 0 0 0 0
Equity Forfeited 0 0 0 0 0 0
Equity Suspense 392.67 23.54 0 0 0 0
Adjustments toequity
0 0 0 0 0 0
Equity Paid Up 220.36 196.82 196.82 165 165 150
Preference CapitalPaid Up
0 0 0 0 0 0
Unclassified Sharespaid -up
0 0 0 0 0 0
TOTAL CAPITAL 220.36 196.82 196.82 165 165 150
Equity convertedduring the year
0 0 0 0 0 0
GDRs IssuedDuring the Year
0 0 0 0 0 0
Bonus in Equity 0 0 0 0 0 0
Reserves andSurplusContingencyReserve
0 0 0 0 0 0
Other StatutoryReserve
249.43 184.43 103.86 78.86 58.86 31.86
Capital Reserves 0 0 0 0 0 0
Capital Redemption
Reserve
0 0 0 0 0 0
Debt Redemption 0 0 0 0 0 0
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Reserve
DebentureRedemptionReserve
10 0 0 0 0 0
Exchangefluctuation Reserve
0 0 0 0 0 0
AmalgamationReserve
0 0 0 0 0 0
Share Premium 804.54 804.54 769.03 37.5 37.5 0
Revenue & otherReserves
4524.67 91.12 79.66 26.84 5 0
Other Reserves 27.34 11.34 0 0 0 0
Profit & Loss A/c 19.56 0.83 0.14 0.13 0.39 0.02TOTAL RESERVESEXCLUDINGREVALUATIONRESERVE
5635.54 1092.26 952.69 143.33 101.75 31.88
RevaluationReserve
0 0 0 0 0 0
TOTAL RESERVESAND SURPLUS
5635.54 1092.26 952.69 143.33 101.75 31.88
Deposits
Demand Deposits 2736.15 2621.86 1587.47 576.62 363.17 316.33
Saving Deposits 2497 1880.64 533.26 227.12 103.74 49.67
Term & OtherDeposits
26851.96 11875.71 7745.29 5269.2 2162.11 981.6
TOTAL DEPOSITS 32085.11 16378.21 9866.02 6072.94 2629.02 1347.6
Borrowings
Borrowings in India
- RBI
140.89 301.24 218.67 148.48 0 0
Borrowings in India-Other Banks
2687.6 397.8 192.18 41.77 29.29 80.04
Borrowings in India-Other agencies
9265.09 333.75 80.62 9.64 162.94 12.95
Borrowings outsideIndia
22709.97 0 0 0 0 0
ConvertibleDebentures
0 0 0 0 0 0
Non ConvertibleDebentures
13744.47 0 0 0 0 0
Partly ConvertibleDebentures
133.19 0 0 0 0 0
Less : DebenturesCalls in arrears
0 0 0 0 0 0
TOTALBORROWINGS
48681.21 1032.79 491.47 199.89 192.23 92.99
Secured Borrowingsincluded above
0 0 0 0 0 0
Other Liabilities &ProvisionsBills Payable 817.33 380.56 142.2 112.19 107.81 68.79
Inter OfficeAdjustment (Net)
33.05 0 0 0 0 0
Interest Accrued 2289.51 55.65 33.52 23.49 17.56 5.67Share Application 1280.12 23.54 0 0 0 0
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Money
Unclaimed Dividend 0 0 0 0 0 0
Other Liabilities(IncludingProvisions)
13067.69 576.76 389.91 264.84 66.06 84.94
TOTAL OTHER
LIABILITIES ANDPROVISIONS
17487.7 1036.51 565.63 400.52 191.43 159.4
TOTAL 104109.92 19736.59 12072.63 6981.68 3279.43 1781.87
ASSETS
Cash & Balanceswith RBI
1774.47 1231.66 721.89 465.81 310.09 150.34
Balances with Banks &
money at Call & ShortNotice
11011.88 2362.03 2693.27 1172.44 562.79 222.58
Investments
Quoted GovernmentSecurities
22722.31 4070.44 2814.94 1527.36 704.67 313.36
Other ApprovedSecutires
70.46 41.49 0 0 0 0
Shares 1908.65 125.12 160.95 138 47.03 10.47
Debentures &Bonds
6436.36 3070.08 1137.22 666.61 216.51 69.34
Investment inSubsidiaries
608.18 0 0 0 0 0
Units 0 0 0 0 0 0
Other Investments 4145.12 879.73 303.57 529.26 55.18 42.18
TOTALINVESTMENTS
35891.08 8186.86 4416.68 2861.23 1023.39 435.35
Market Value ofQuoted Investments
0 0 0 0 0 0
Advances
Bills Purchased &Discounted
2484.7 1087.04 701.3 454.96 140.92 76.4
Cash Credits,Overdraft & Loans
Repayable onDemand
2402.51 4970.91 2577.67 1383.5 841.59 632.1
Term Loans 42147.66 973.51 378.38 271.66 145.36 89.5
TOTAL ADVANCES 47034.87 7031.46 3657.35 2110.12 1127.87 798
Fixed Assets
Premises 1443.17 203.09 144.74 130.21 106.62 28.82
Other Fixed Assets 3051.12 386.58 170.4 131.36 112.35 81.76
Gross Block 4494.29 589.67 315.14 261.57 218.97 110.58
AccumulatedDepreciation
254.95 204.92 93.02 61.93 35.27 14.21
Net Block 4239.34 384.75 222.12 199.64 183.7 96.37
Capital Work-in-Progress
0 0 0 0 0 0
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TOTAL FIXEDASSETS
4239.34 384.75 222.12 199.64 183.7 96.37
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RISK MANAGEMENT GUIDELINES FOR COMMERCIAL BANKS
Introduction
Banks in the process of financial intermediation are confronted with various
kinds of financial and non-financial risks viz., credit, interest rate, foreign
exchange rate, liquidity, equity price, commodity price, legal, regulatory,
reputational, operational, etc. These risks are highly interdependent and events
that affect one area of risk can have ramifications for a range of other risk
categories. Thus, top management of banks should attach considerable
importance to improve the ability to identify, measure, monitor and control the
overall level of risks undertaken.
The broad parameters of risk management function should encompass:
i) organizational structure;
ii) comprehensive risk measurement approach;
iii) risk management policies approved by the Board which should be
consistent with the broader business strategies, capital strength,
management expertise and overall willingness to assume risk;
iv) guidelines and other parameters used to govern risk taking including
detailed structure of prudential limits;
v) strong MIS for reporting, monitoring and controlling risks;
vi) well laid out procedures, effective control and comprehensive risk
reporting framework;
vii) separate risk management framework independent of operational
Departments and with clear delineation of levels of responsibility for
management of risk; andviii) periodical review and evaluation.
RISK MANAGEMENT STRUCTURE
A major issue in establishing an appropriate risk management organisation
structure is choosing between a centralised and decentralised structure. The
global trend is towards centralising risk management with integrated treasury
management function to benefit from information on aggregate exposure,
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natural netting of exposures, economies of scale and easier reporting to top
management. The primary responsibility of understanding the risks run by the
bank and ensuring that the risks are appropriately managed should clearly be
vested with the Board of Directors. The Board should set risk limits by
assessing the banks risk and risk-bearing capacity. At organisational level,
overall risk management should be assigned to an independent Risk
Management Committee or Executive Committee of the top Executives that
reports directly to the Board of Directors. The purpose of this top level