The new-generation Indian banks are on a par with their global peers in terms of risk appetite, governance and use of risk-measurement tools. However, traditional banks are still lagging in key areas such as fund-transfer pricing and asset and liability mismatch (ALM) modelling, according to a McKinsey & Company study.
“Both sets of banks (new-generation and traditional) have highlighted the lack of adequate people capabilities as well as the scope/mandate of the mid-office as key concern areas,” the report highlighted.
The report further illustrated that traditional players place relatively more emphasis on subjective and qualitative elements in setting limits and loan pricing, while balancing this with stringent “maker-checker” systems.
“New-generation players, on the other hand, have imbibed various statistical approaches (such as scoring models, probability of default models, early warning systems and collateral management approaches) and are using credit TAT as a tool for customer satisfaction and growth,” the report added.
Both sets of banks are at par with the surface, treasury scope, trading strategies and instruments and improved financial performance is strongly correlated with superior risk management practices.
“This demonstrates the need for the sector to fundamentally reorient itself and ensure that sustainable stakeholder value creation is the core rationale for adopting various tools and processes as opposed to mere regulatory compliance,” the report added.
The study contains findings from the risk-assessment survey carried out at 17 participating banks across three elements — credits and enterprise risk, operational risk, ALM and market risk.
The report also indicated that broadly the Indian banking sector has progressed significantly by inculcating various best practices across risk modeling, risk-adjusted pricing and portfolio-risk management, with a varied degree of sophistication.
“While this is critical, the next step is to suitably modify the risk mandate. This involves changing the role of the CRO from one of pure oversight and post-mortem to that of a proactive equal business partner, redefining the scope and functions of the risk department, adequately skilling and staffing the function to successfully play this role and communicating the new role across the organization,” the report said.
