'Need for effective risk-management mechanism for e-banking'

Industry body Assocham today asked authorities to consider putting in place a more effective risk management mechanism to counter the potential risks posed by online electronic banking.
In a paper submitted to the Finance Ministry and the Reserve Bank, the industry chamber observed that funding and investment related risks could elevate with the e-banking initiatives depending on the volatility and pricing of the acquired deposits.
Assocham said that online transaction risks may result from fraud, processing errors, system disruptions, or other unanticipated events resulting in the institution's inability to deliver products or services.
The study paper, which has been jointly prepared by Assocham and financial solution provider Resurgent India, recommends institutions to modify their policies in order to address potential e-banking funding issues.

These issues include dependence on brokered funds, besides acquisition of funds from markets where an institution is not licenced to engage in banking services.
"Since the concept of e-banking is relatively new and profiles of e-banking customers are different from those of traditional banking customers, there is a threat to render existing score card models inappropriate, resulting in either higher rejection rates or inappropriate pricing," it said.

"Moreover, banks may not be able to assess credit quality at a distance as effectively as they do in face to face circumstances," the paper added.
The study paper further said that it is difficult to predict customer volumes and the stickiness of e-deposits if an institution does not establish, disclose, and enforce geographic restrictions, leading either to rapid flows in or out of the bank and liquidity problems.

"Poor e-banking planning and investment decisions can increase a financial institution's strategic risks," Assocham Secretary General D S Rawat said.
"The RBI and banking institutions should evaluate risks associated with e-banking services and resulting risk management costs against the potential return on investment prior to offering e-banking services," he added.
Since customers expect e-banking services to be available round the clock, banks should ensure their e-banking infrastructure contains sufficient capacity and redundancy to ensure reliable service availability, the study paper said.
"The key to controlling e-banking risks lies in adapting effective policies, procedures, and controls to meet the new risk exposures introduced by e-banking," Rawat said.