|
Risk Management Systems in Banks - Guidelines on Country Risk Management
DBOD.
BP. BC. 71 - 21.04.103 dated 19th February 2003
We
invite a reference to paragraphs 123 and 124 of the Statement on Monetary and
Credit Policy for the year 2002-03 enclosed to our Governor's letter MPD. No.
214/ 07.01.279/ 2001-02 dated April 29, 2002. It has been indicated therein that
with a view to moving further in complying with the Core Principles for
Effective Banking Supervision drawn up by the Basle Committee on Banking
Supervision, RBI would be issuing guidelines on country risk management and
provisioning therefore, in consultation with banks. The guidelines have since
been finalised by RBI and are furnished in the Annexure.
2. The guidelines may be placed before the
bank's Board at the next meeting and appropriate steps may be taken for their
implementation.
3. These guidelines are applicable only in
respect of countries where a bank has exposure of two per cent or more of its
assets. These guidelines shall be reviewed after one year, taking into account
the experience of banks in implementing the guidelines.
4.
Please acknowledge receipt.
ANNEXURE
Guidelines
on Country Risk Management by banks in India
Policy
& Procedures
1) Banks should formulate appropriate,
well-documented and clearly defined 'Country Risk Management' (CRM) policies,
with the approval of the respective Boards. The CRM policy should address the
issues of identifying, measuring, monitoring and controlling country exposure
risks. The Policy should specify the responsibility and accountability of the
various levels for the country risk management decisions. Banks should also put
in place procedures for ensuring that necessary steps are taken in accordance
with the CRM policy. The CRM policy should be periodically reviewed by the Board
on the basis of the experience gained.
2) Banks should institute appropriate procedures
for dealing with country risk problems. They should have in place contingency
plans and clear exit strategies, which would be activated at times of crisis.
Appropriate systems/ procedures should be laid down with the approval of the
Board to handle situations involving significant changes in conditions in any
country. For the present, only in respect of the country, where a bank�s net
funded exposure is 2 per cent or more of its total assets, the bank is required
to formulate the CRM policy for dealing with that country risk problems.
3) The CRM policy should stipulate rigorous
application of the 'Know Your Customer' (KYC) principle in international
activities which should not be compromised by availability of collateral or
shortening of maturities. Country risk element should be explicitly recognised
while assessing the counter-party risk.
Scope
4) Banks should reckon both funded and
non-funded exposures from their domestic as well as foreign branches while
identifying, measuring, monitoring and controlling country risks. In the case of
foreign banks operating in India, the scope would be confined to their branches
in India. An illustrative list of funded and non-funded exposures is furnished
below:
|
Funded
Exposures
|
Non
Funded Exposures
|
|
Cash
balances
Bank
balances
Deposit
placements
Investments
Loans
and advances
Trade
credits/receivables
Overdraft
in Vostro Account
Remittances
honoured under drawing arrangement
Other
monetary assets
|
Letters
of Credit
Committed
lines of credit
Guarantees
Performance
bonds, bid bonds, warranties.
Confirmation
of LCs issued by foreign banks.
Commitments
undertaken against the counter-guarantees of foreign banks.
|
5) Banks should take into account indirect
country risk. For example, exposures to a domestic commercial borrower with a
large economic dependence on a certain country may be considered as subject to
indirect country risk. Indirect exposures may be reckoned at 50 % of the
exposure for the purpose of these guidelines. For the present, only in respect
of the country, where a bank�s net funded exposure is 2 per cent or more of
its total assets, the bank is required to reckon indirect country risk for
measuring, monitoring and controlling with that country risk.
6) Exposures should be computed on a net basis
i.e., gross exposure �minus� collaterals, guarantees, insurance etc. Netting
may be permitted for cash collaterals, bank guarantees and credit insurance
available in/ issued by countries in a lower risk category than the country on
which exposure is assumed.
Ratings
7) Banks may put in place appropriate systems to
move over to internal assessment of country risk. Banks should evolve sound
systems for measuring and monitoring country risk. The system should be able to
identify the full dimensions of country risk as well as incorporating features
that acknowledge the links between credit and market risk. Banks should use a
variety of internal and external sources as a means to measure country risk.
Banks should not rely solely on rating agencies or other external sources as
their only country risk-monitoring tool. Banks should also incorporate
information from the relevant country managers of their foreign branches into
their country risk assessments. However, the rating accorded by a bank to any
country should not be better than the rating of that country by an international
rating agency. For the present, only in respect of the country, where a bank�s
net funded exposure is 2 per cent or more of its total assets, the bank is
required to undertake internal assessment of country risk rating.
8) The frequency of periodic reviews of country
risk ratings should be at least once a year with a provision to review the
rating of specific country, based on any major events in that country, where
bank exposure is high, even before the next periodical review of the ratings is
due.
9) Till such time, as banks move over to
internal rating systems, banks may use the seven category classification
followed by Export Credit Guarantee Corporation of India Ltd. (ECGC) for the
purpose of classification and making provisions for country risk exposures. ECGC
shall provide to banks, on request, quarterly updates of their country
classifications and shall also inform all banks in case of any sudden major
changes in country classification in the interim period.
For this purpose, banks may contact:
General Manager (Corporate)
Express Towers, 10th floor,
Nariman Point,
Mumbai- 400 021.
Tel No. 022 � 22023490
Fax No. 022 � 22045253
Exposure
limits
10) Bank Boards may set country exposure limits in relation
to the bank�s regulatory capital (Tier I + Tier II) with sub-limits, if
considered necessary for products, branches, maturity etc. The basis for setting
the limits for the country/ category shall be left to the discretion of the
banks� Boards. The country exposure limits set by the Board should be reviewed
periodically and in any case should be at least once a year.
11) Exposure limit for any country should not exceed its
regulatory capital, except in the case of insignificant risk category. In
respect of foreign banks, the regulatory capital would be the capital (Tier I +
Tier II) held in their Indian books.
12) Banks may also set up regional exposure limits for
country groups, at the discretion of their Boards. The Board may decide on the
basis for grouping of countries and also lay down the guidelines regarding all
aspects of such regional exposure limits.
13) RBI may, if it becomes necessary, prescribe a prudential
aggregate country exposure limit for the higher risk categories.
Monitoring
of exposures
14) Banks should monitor their country exposures on a weekly
basis before switching over to real-time monitoring. However, exposures to
high-risk (and above) categories should be monitored on a real-time basis. Banks
should switchover to real-time monitoring of country exposures (all categories)
by 31st March 2004.
15) Management of country risk should incorporate stress
testing as one method to monitor actual and potential risks. Stress testing
should include an assessment of the impact of alternative outcomes to important
underlying assumptions.
16) Boards should review the country risk exposures at
quarterly intervals. The review should include progress in establishing internal
country rating systems, compliance with the regulatory and the internal limits,
results of stress tests and the exit options available to the banks in respect
of countries belonging to �high risk & above� categories. In case, any
significant deterioration takes place in respect of any particular country risk
or overall exposure, banks should report to the Board such developments in its
next meeting, without waiting for the quarterly review by the Board.
17) Country risk management processes employed by banks would
require adequate internal controls that include audits or other appropriate
oversight mechanisms to ensure the integrity of the information used by senior
officials in overseeing compliance with policies and limits.
Provisioning/
Capital requirement
18) Banks shall make provisions, with effect from the year
ending 31 March 2003, on the net funded country exposures on a graded scale
ranging from 0. 25 to 100 per cent, according to the risk categories mentioned
below. To begin with, banks shall make provisions as per the following schedule:
|
Risk category
|
ECGC classification
|
Provisioning requirement (per cent)
|
|
Insignificant
|
A1
|
0.25
|
|
Low
|
A2
|
0.25
|
|
Moderate
|
B1
|
5
|
|
High
|
B2
|
20
|
|
Very
high
|
C1
|
25
|
|
Restricted
|
C2
|
100
|
|
Off-credit
|
D
|
100
|
For the present, only in respect of the
country, where a bank�s net funded exposure is 2 per cent or more of its total
assets, the bank is required to make provision for dealing with that country
risk exposure.
19) The provision for country risk shall be in addition to
the provisions required to be held according to the asset classification status
of the asset. In the case of �loss assets� and �doubtful assets�,
provision held, including provision held for country risk, may not exceed 100%
of the outstanding.
20) Banks may not make any provision for �home country�
exposures i.e. exposure to India. The exposures of foreign branches of Indian
banks to the host country should be included. Foreign banks shall compute the
country exposures of their Indian branches and shall hold appropriate provisions
in their Indian books. However, their exposures to India will be excluded.
21) Banks may make a lower level of provisioning (say 25% of
the requirement) in respect of short-term exposures (i.e. exposures with
contractual maturity of less than 180 days).
22) The issue of requiring banks to maintain capital to cover
country risk would be considered at the time of implementation of the New
Capital Accord.
23) Banks shall be allowed to treat the �provisions held
for country exposures� on par with the 'provisions held for standard assets'
for being reckoned for Tier II capital, subject to the ceiling of 1.25 % of the
risk weighted assets.
Disclosures
24) Banks should disclose as a part of the 'Notes on
Accounts' to the Balance Sheet as on 31st March each year,
a.
the risk category-wise country exposures, and
b.
the extent of aggregate provisions held there against.
25) The Statutory Auditors should look into and comment on
the country risk exposures and the adequacy of provisions held.
Reporting
26) Banks should report details of their country-wise
exposures to the RBI as a part of their DSB returns along with the details of
the provisions held therefore.
Review
27) These guidelines shall be reviewed after one year, taking
into account the experience of banks in implementing the guidelines.
|