news letter sep 2013 vol 1
TRANSCRIPT
7/29/2019 News Letter Sep 2013 Vol 1
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Risk Management in Banking Sector
The growth in the banking sector business post liberalization
has thrown lot of challenges, be it in the areas of operations,
management, products, technology, expansion etc. Banks are
finding it difficult to cope up with the challenges and are
always prone to one or other sort of risk. Such risks are
somewhat acting as hurdles in their growth and the top priority
now a day for banking sector is to reduce and mitigate risk
through a proper Risk Management policy.
Post Globalization Challenges in Banking Sector
– A study on Risk Management
By CMA N Raveendranath Kaushik
Meaning of Risk
“Risk is Exposure to Uncertainty”. So, there are two importa
words one is exposure and the other Uncertainty in Risk.
Meaning of Risk Management
ISO 3100 – “Risk Management is the identification, assessment an
prioritization of risks followed by coordinated and economic
application of resources to minimize, monitors, and controls th
probability and/or impact of unfortunate events or to maximize th
realization of opportunities”.
The recent experience of 2007-08 financial crisis in which majo
banks like Layman Brothers, Global Trust Bank and AIG had close major part of its global business because of not having a prop
risk management policy.
Risks in Banking Sector
As per RBI guidelines issued in 1999, there are basically three typ
of risks encountered in Banking Sector and these are Credit Ris
Market Risk and Operational Risk. The changes in busine
dimension and competition has resulted in further more addition
risks in the form of Liquidity Risk, Regulatory Risk, Environment
risk, Technology risk and Governance Risk.
September,2013
Credit Risk and Risk Management
Credit Risk is a risk which arises due to default of borrower not
repaying the debt according to agreed terms. According to
BCBS (Basel Committee on Banking Supervision) defines
credit risk as the potential that a borrower or counter party will
fail to meet its obligation in accordance with the agreed terms.
Credit Risk is most common risk which occurs in banking
business, these are somewhat which is known and if proper
care is taken risk can be minimized.
MACAURO
NEWSLETTE
Vol. I / Issue No. 1
NEWSLETTER TO EDUCATE AND EMPOW
MACAURO 1
stTO 15
thSEPTEMBER 2013 Volum
‘Post Globalization challenges
in Banking Sector – A study on
Risk Management’
By CMA N Raveendranath Kaushik
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Credit Risk and Risk Management
Credit Risk is a risk which arises due to default of borrower not
repaying the debt according to agreed terms. According to BCBS
(Basel Committee on Banking Supervision) defines credit risk as the
potential that a borrower or counter party will fail to meet its
obligation in accordance with the agreed terms. Credit Risk is most
common risk which occurs in banking business, these are some what
which is known and if proper care is taken risk can be minimized.
Risk Management for Credit Risk can be done by
following ways:
1. Ceiling Credit Limits of customers – Extending loans based on
the credit worthiness of customers will help in reducing the risk.
Each and every customer is rated on different parameters and
accordingly credit limits are fixed. Rating agencies like
CRISIL, ICRA, CARE etc. can provide vital financial
information about the customers which can be used for fixing
credit limits.
2. Portfolio Management – Diversifying the lending process will
help in spreading over the credit to different channels. To some
extent risk gets spread over and controls can be envisaged in
right directions.
3.
Risk Rating Model – Setting up of Risk rating system on a scaleand frequent monitoring and reviewing the ratings on the scale
will help in understanding the risk and preemptive decisions can
be taken before the Risk triggers and causes maximum loss.
4. Credit Monitoring – Lending norms differs with types of banks.
Commercial banks have their own sort of lending norms and
Non-commercials banks follow their own norms. This is
resulting in lot of confusion in finding the approaches for fixing
credit and evaluating customers. Strengthening Credit
monitoring system at different levels in banking structure would
Market Risk and Risk Management
Market Risk in simple means the possibility of loss to bank cau
by the changes in market variables. Market variables are int
rates, foreign exchange, prices of equity and commodity. This
is something which is caused or influenced by external factors
which the Banks don’t have control.
Liquidity Risk and Management – It is
financial risk from the possible loss of liquidity. There
be either Specific Liquidity Risk which is applicable
specific bank or it may be Systematic Liquidity risk w
will affect all the participants in markets. Credit
Monitory Policy announced by RBI caters to manage
Risk. Timely control on credit and deposits by chan
SLR and CRR will help in managing the risk to sextent. But, internally each Banks can have a proper A
–Liability Management Policy which aims at having
to time matching of Assets and Liabilities. It is v
difficult to foresee and predict the behaviors of custom
and managing liquidity risk is a very challenging task s
is advisable to have a tolerance level fixed for each
every maturities based on the asset-liability mix.
Interest Rate Risk – This risk arises when the f
and floating interest rates of Banks is not so sensitiv
variations in market interest rates. Banks can manage
risk by first valuing returns on their portfolios held w
that of market rates. Duration Gaps shows the indica
for interest rate risk needs to be assessed at reg
intervals and this can be used for taking up strat
decisions. In this process of identifying the duration g
bank can look-in to the various dimensions of resu
risks like Yield curve risk, , reinvestment risk, reprice
etc..
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Basel’s New Capital Accord – New
Dimension to Risk Management
Bank of International Settlement (BIS) set up Basel
Committee on banking supervision in 1988. The guidelines
issued by Basel Committee brought standardization and
universalization among the global banking system for risk
management. In 1988 it came out with a Capital accord which
provided an option for measuring appropriate capital in to
risk weighted assets. The Basel II accord which was released
in 2004 made clear distinction between credit risk, market
risk and operational risk the main objectives of Basel II
accord is –
1. Make International Banking System more robust and
strong.
2. International Banks to be given more visibility and
structured guidelines for its operations.
3. Give more importance to Risk Management.
3 Pillars given in new Basel II Accord –
a) 1 Pillar Focus area is Minimum Capita
Requirement
b) 2 Pillar Supervisory Review process
c) 3 Pillar Market Discipline
As regulated by RBI, all Indian Banks are advised to keep a
minimum capital adequacy of 9% of Risk Weighted Assets
Table 2 below shows the Minimum regulatory capital of
some of the major banks as envisaged under Basel Disclosure
for March 2011.Regulatory capital is that % of capital which
the Banks are asked to maintain by the Regulator, here it is
RBI.
Exchange Risk – This is a risk caused due to
potential loss in exchange rates. Such risk can be
managed by going for future contracts and agreeing for a
limit based rates. Policy with respect to exchange rates
should be clear cut and out of the market experience and economic situation exchange rates should be agreed at
time of setting terms.
Operational Risk and Risk Management
BCBS defined Operation Risk as the risk of loss resulting from
inadequate or failed internal process, people and systems or from
external events. Such risk is in the form of avoidable risk and if
preemptive plan of action is designed then such risk can be
minimized.
.Risk Management for Operation Risk
1 Backups – Just like how the financial service industries have
BCP in its business modules even Banks can have similar
type of Backups for its operations. So, when ever there is a
system breakage or persons affected then immediately their
backups can jump up in to action.
2 Internal Controls and Checklists – Having well designed
internal controls and a system designed checklists will help
in accomplishing the task according to set guidelines and
procedures. Monitoring and reviewing the controls from time
to time will act as a good Risk management process.
3 Internal Audit – Carrying on Internal Audit will help in
detection of fraud and other issues before it does huge
damage to the Banking sector.
4 Effective Corporate Governance – Corporate Governance is
one of the effective and efficient tools which bring together
management and other stake holders under one platform. A
Strong Corporate Governance will help in bridging better
relationships between different stakeholders and also it will
help in resolving issues at initial stages.
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Conclusion
If we try to analyse the last decade of Banks performance w
coming year then one can find that the last decade was the peri
of transformation of banking sectors to meet global needs w
greater integration, adoption of core banking solutions and to som
extent transparency in its operation but, the coming decade whi
is very important and even more challenging as the Banking sec
will see enormous increase in its volume of operation mirrored
increase in use of Information Technology in its operation to ca
customer demand and needs. This will give more space for inviti
risks and it becomes important that banks take up well planned r
management policy in order to reduce or mitigate when ever r
occurs. Banking Sector should stop showing “Off Balance Sh
items” while reporting and it should shows all the risk assets a
should be more transparent when it comes to items pertaining
internal reporting. Risk is inevitable in business and it cannot
mitigated but, at least a proper risk management policy will help
minimizing the risk. Post liberalization growth and rec
recession impact on the financial sectors should act as an e
opener for financial sector especially banking sector and th
should come up with innovative ideas and systems to face a
challenges caused due to risk. Coming days will not be so easy ffinancial sectors and that too banking sector which are exposed
frequent risk need to take up some vital challenges in order
survive in market and also to gain more and more custome
Unless and until banks takes this has a key area of manageme
risks and losses are certain and coming years can witness ma
more cases like Global Trust Bank, Layman Brothers, AIG etc. a
in technology part they need to face challenges in form of hacki
of software, stealing of ATM machines, lack of technolo
knowledge, Data warehouse management etc.. So, the adventGlobalization has given less time to plan activities it
transformation which is the biggest challenges which is need
this hour and the banks should look forward to implementing t
changes at less risk.
Enterprise Risk Management (ERM)
ERM includes the methods and process used by the banking sector
to manage risk and seize the opportunities related to the
achievement of their objectives. The framework of ERM involvesidentifying particular event or circumstance relevant to the
objectives, assessing them, impact study; develop strategy and
monitoring the progress. Integration of risk within and among the
groups is possible under ERM. It focuses on strategy, operations,
financial reporting and compliances.
Risk Based Supervision (RBS)
RBI with a view to see that all the banks self access their risk has
introduced RBS where in it came out with a risk profile template
and the banks are asked to populate the relevant period data in the
template and do their own assessments and see to where they stand
in terms of risk. This process has opened doors for new
dimensional audit which is Risk Based Audit and it goes by the
concept that self introspection and assessment is the best judgment
which is available for the banking sector risk management.
Internal Capital Adequacy Assessment Process
(ICAAP)
ICAAP is a self regulatory document of banks which is
propounded by RBI for each of the Banks. Based on the
availability of data Banks are asked by RBI to prepare ICAAP
document with the involvement and approval of their Board of
Directors. This documents indicates the areas which are risk prone
and also suggests with the control and process adopted by banks in
risk management. Since it involves all the levels of management it
is more participatory and transparent and also more effective tool
to manage risk.
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NEWS AND EVENTS
Date: 28 th
August 2013 (Wednesday)
Event: Naming Ceremony of MACAURO
Venue: Auditorium
Guests: Sri. H.K.RajPurohit (Hon. Chairman), Sri M.S. Gudi (Hon.
Secretary),Sri Ramchandra (Hon. Joint Secretary), Sri .Gururaj Despande
(Hon. Treasurer),Sri Vadakeri (RES member), Smt. Shailaja M (Principal),
Sri Murali (PU Principal),
Date: 14 th August 2013 (Wednesday)
Event: Professional Development – ICAI course
Venue: Auditorium
Guests: CMA Selvanarayanan- Practicing Cost Accountant
COMMERCE QUIZ
Q1. A type of unemployment in which workers are in between jobs or are searching for new and better jobs is called :
a) Frictional Unemployment b) Cyclical Unemployment
c) Structural Unemployment d) Turnover Unemployment
Q2. When book value keeps on reducing by annual charge of depreciation it is known as :
a) Straight Line Method b) Written Down Value method
c) Reducing Balance method d) Both b) and C)
Q3. Statutory Auditor of a company in the care of casual vacancy may be appointed by the :
a) Board of Directors b) Managing Directors
c) Extraordinary General Meeting d) Government Concerned
Q4. Bombay Stock Exchange was established in the year :a) 1867 b) 1887 c) 1917 d) 1927
Kindly, send in your answers by 25th
September 2013 to Commerce and Management department or sent it via email [email protected]
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TIT BITS
INDIAN SECURITIES MARKET
Securities markets can be segregated into Primary market and
Secondary market.
Primary market deals with the new issues that a companyoffers to the public. The issuers in any markets are thecorporations, government, banks, financial institutions and mutual funds. Securities issued could be shares, bonds,debentures, other debt instruments, mutual funds schemes and collective investment schemes.
Secondary market facilitates trading and transfer of securitiesfrom one investors to another. In secondary market, the mainintermediaries are the brokers and the sub brokers.
Stock exchange facilitates the trading of securities. Thesecurities market is regulated in order to ensure safety for investors.
Bombay Stock Exchange (BSE) is the oldest exchange whichexist in India. It was called as The Native Share and Stockbrokers Association. In all there are 19 recognized stock exchanges in India. Out of which 5 are National levelExchanges and 14 regional exchanges.
NSE,BSE and MCXSE lead the Indian Securities Market in
terms of listing, trading and volumes. In April 1988, SEBI wasestablished as an administrative body to develop and regulatethe securities market and to protect the investors.SEBI Act was passed in 1992 after the failure of market in 1991 due to sharemarket scam and it was given complete regulatory control over the Indian Securities markets.
Nation wide electronic trading on NSE commenced in 1994. In1996, BSE was allowed to open trading terminals outsideMumbai.
The Securities Contracts (Regulation) Act, 1956, seeks to
prevent undesirable transactions in securities by regulating the business of dealing in securities.
Depositories Act , 1996 lead to the dematerialization (demat) of securities and transfer of securities in to electronic form.Delivery and settlement within two days of trading has been
possible due to this.
Derivatives Trading commenced in India in June 2000 whenSEBI gave approval for trading in index futures. At presenttrading volume is around 3 times that of spot markets.
Over The Counter (OTC) and Over the Terminal (OTT)exchange of India was established to provide a tradingmechanism for the small cap and mid cap companies.
Companies Act , 2012 passed in Loksabha on 8 th
September 2013. This will replace Companies Act ,1956.
Rupee to dollar stands at Rs 63.38
Foreign Direct Investment (FDI) up by 12% to$1.65 billion up to July 2013.
Retail Inflation picks up to 9.87%
Indirect Tax collection up by 3.8% in April-May
Gold prices falls for 5th day on a falling demand.
FACTS AND FIGURES
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