Banking Risks and Regulation

Changes in Indian Banking

Possibilities of Coping with Challenges

• Investing in state of the art technology to ensure reliable

service delivery

• Leveraging the branch network and sales structure to

mobilize low cost current and savings deposits

• Making aggressive forays in the retail advances segment

of home and personal loans

Possibilities of Coping with Challenges

• Implementing organization wide initiatives involving

people, process and technology to reduce the fixed costs

and the cost per transaction

• Focusing on fee based income to compensate for low

spread (trade services)

• Innovating products to attract customers

• Improving the asset quality as per Basel II norms

Possibilities of Coping with Challenges

Bank Nationalization

• After the independence the major historical event in

banking sector was the nationalization of 14 major banks

on 19th July 1969.

• The nationalization was deemed as a major step in

achieving the socialistic pattern of society.

• In 1980 six more banks were nationalized taking the total

nationalized banks to twenty.

Products and Services of Banks

• Value added services to customers• Emergence of strong investment and merchant banking

entities• Product innovation and creating brand equity for

specialized products • New products on the liabilities side such as

– Foreign exchange linked deposits– Investment linked deposits

Products and Services of Banks

• Investors with varied risk profiles demand better yields

• Consolidation of services between banks, corporate

clients and their retail outlets

• Sharing of common platform to increase revenue

through increased volumes

New Banking Products

• Risk managers to corporate and other entities

• Risk management of products

– Options

– Swaps

– Other aspects of financial management in a multi

currency scenario

• Development of derivative products

New Banking Products

• Offer of hedge products to the corporate sector and

other investors

– Commodity derivatives

• Sophistication in trading and specialized exchanges for

commodities

• Financial support to exchanges

• Better settlement systems

• Wider participation

Bancassurance

• Entry of banks / financial institutions in insurance

business.

• Offer of insurance products through network of bank

branches.

• Expansion of business through self-designed insurance

products after necessary legislative changes.

• Increased fee-based income of the banks.

Banking Risk

• Rising global competition

• Increasing deregulation

• Introduction of innovative products

• Changing delivery channels of banks

• Perfect market economy introduces market related risks

– Exchange risks

– Interest rate risks

– Operational risks

Banking Risk

• Growth of derivatives and off-balance sheet operations

• Diversification of banking operations

• Expansion in e-banking

• Continuous vigilance

• Revisions of regulations

Managing Banking Risk

• Centralized risk management functions • Risk management functions (independent from business

profit centers) • Integration of risk management functions into the

business process • Assessment of risk-return for new business opportunities • Incorporation of risk management in the design of new

products

Managing Banking Risk

• Combined assessment of credit, market and operations

• Reporting and managing on risks on an integrated basis

• Risk Adjusted Returns on Capital (RAROC) based

performance measures

• RAROC will be used to drive pricing, performance

measurement, portfolio management and capital

management

Managing Banking Risk

• Corporate office to branches or operating units

• Audit and supervision shifts to a risk based approach

rather than transaction orientation

• Increased risk awareness levels of line functionaries

• Technology related risks focusing more on vigilance of

operating staff

Managing Banking Risk

• Reputation risk – Maintain a high degree of public confidence for

raising capital and other resources • Risks to reputation could arise on account of

– Operational lapses – Opaqueness in operations – Shortcomings in services

• Management of reputation risk– Systems – Internal controls

Managing Banking Risk

• Advances in risk management and risk measurement • Transformation in capital and balance sheet

management • Dynamic economic capital management

– Create– Sustain – Maximize shareholders’ wealth

• Total risk enabled enterprise• Concerns of various stakeholders’ expectations

Managing Banking Risk

• Cooperation and sharing of experience among banks

• Common facilities for development of risk measurement and

mitigation tools

• Common facilities for training of staff at various levels

• Establishment of risk management systems

• Implementation of prudential norms of accounting and asset

classification

• Quality of assets

• Provisioning for impaired loans

• Significant decline in non performing asset levels

Role of Regulator

• Ensuring soundness of the system by fixing benchmark

standards for capital adequacy and prudential norms for key

performance parameters.

• Adoption of best practices especially in areas like risk

management, provisioning, disclosures, credit delivery, etc.

• Adoption of good corporate governance practices.

• Creation of an institutional framework to protect the interest of

depositors.

• Regulating the entry and exit of banks including cross-border

institutions.

Role of Indian Banks’ Association

• Self regulatory body

• Development of benchmarks on

– Risk management

– Corporate governance

– Disclosures

– Accounting practices

– Valuation of assets

– Customer contract

– Lenders’ liability

Role of Indian Banks’ Association

• Role of the Indian Bankers’ Association

– Lobbyist for getting necessary legislative enactments

– Changes in regulatory guidelines