Banks Rushing To Spruce Up Risk Management

Banks are suddenly gearing into action to put in place necessary safeguards and controls to improve their risk management ability. Even as the Reserve Bank of India's (RBI) draft guidelines on "risk management systems in banks" were put in October 1999, banks -- especially those in the public sector -- failed to react immediately. Now, it's good business for consultants.

Bank of Baroda, Bank of Rajasthan, Jammu & Kashmir Bank, Exim Bank and IndusInd Bank, as well as Gilts Securities Trading Corporation and even ITC international division looking after commodity trading, are among those which have their risk management systems in place.

 

Some of the largest public sector banks such as Central Bank of India and Union Bank of India, among others, have not yet set up the necessary risks systems, but have awarded the mandate to leading consultants, PricewaterhouseCoopers (PwC) and Boston Consultancy Group, respectively.

PwC is at present bidding for half a dozen more banks, a majority of which are from the public sector, to undertake a similar exercise of risk management.

Some consultants said that many public sector banks had been working on the guidelines for the past 10 to 18 months. "However, they have to follow the Central Vigilance Commission (CVC) guidelines for bidding, and hence it takes around 8-9 months for them to award a mandate," said one consultant.

The trigger point could be the need for banks to shore up their non-fund-based income. Narrowing of spreads and increasingly competitive interest rates have seen pressure on fund-based income. "Moreover, markets are more liquid today and have greater depth," said PwC principal consultant (financial services industry practice) Shakti Saran.

"Private sector banks have been quicker to respond to the RBI guidelines and foreign banks had inherited the controls system from their overseas headquarters," said Saran.

While risk management has to be undertaken in three areas -- operational, market and credit risks, "banks are giving key attention to market and credit risks". This follows 75 per cent of investments being marked-to-market on a daily basis in the case of trading books. Banks have to look not only at the interest income, but also more importantly at the capital gains," Saran said.

"A lot of work is in the area of quantifying risks, as this will ensure as the controls established are consistent with the risk appetite of individual banks," he said.

There should be no element of surprise in the case of loss, as the bank would have streamlined its risk controls and identified the maximum loss possible, he added.

In addition, once securitisation is introduced in the country, even credit risks will need to be marked-to-market, Saran said. PwC in its diagnostic of banks is benchmarking their existing practices against international practices. In the design of any entreprise-wise solution for banks, consultants are putting in place risk organisation structure, management reporting framework, limits and authorisation framework, risk measurement methodology, and system infrastructure. This varies from bank to bank, Saran said.