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Risk Management Systems in Banks
DBOD.
No. BP. BC. 64 - 21.04.103 - dated 29th January 2003
As
you are aware, the RBI guidelines on asset-liability management in banks were
issued vide circular DBOD.No.BP.BC.8/ 21.04.098/ 99 dated February 10, 1999.
These guidelines broadly covered management of liquidity and interest rate risks
by banks, prescribed the reporting systems for capturing the above two risks and
also prescribed the prudential limits for liquidity mismatches. Subsequently,
the guidelines on risk management systems in banks were issued by RBI vide
circular DBOD. No. BP (SC). BC.98 /21.04.103/99 dated October 7, 1999 to serve
as a benchmark to banks which were yet to establish integrated risk management
system and covered management of credit risks, management of market risks and
development of risk management structure.
2.
As a step towards further enhancing and fine-tuning risk management
systems in banks, draft Guidance Notes on Credit Risk Management and Market Risk
Management were issued and placed on the RBI website for wider discussion among
banks, financial institutions and other market participants. The Guidance Notes
were based on the recommendations of two Working Groups constituted in Reserve
Bank of India drawing experts from banks and FIs. The draft Guidance Notes were
revised in the light of comments/ feedback received from a wide spectrum of
banks, financial institutions, rating agencies and other market participants and
the revised Guidance Notes were issued vide DBOD. No. BP. 520/ 21.04.103/
2002-03 dated October 12, 2002, and banks were advised to use these Guidance
Notes for upgrading their risk management systems. The revised Guidance Notes
for management of credit risk and market risk were also placed on the RBI
website for greater dissemination.
3.
With a view to involving banks in the process of transition to risk based
supervision (RBS), a discussion paper on "Move towards Risk Based
Supervision of banks" was issued vide DBS.CO/ RBS/ 58/ 36.01.002 dated 13th
August 2001 to all commercial banks advising banks to initiate action to prepare
themselves for RBS in five specific areas. Detailed risk profile templates were
sent to banks vide DBS. No. DBS/ CO/ 89/ 36.01.03/ 2002-03 dated July 12, 2002
with a view to enabling them to understand the technicalities of the risk
profiling exercise and re-orienting their management systems to meet the
requirements of RBS. Since risk based internal audit is an important component
of the RBS process, guidelines on risk based internal audit were issued to banks
vide circular DBS. CO. PP. BC.10/ 11.01.005/ 2002-03 dated 27th
December 2002. On-site inspection of banks under Risk Based Supervision will
initially be taken up by RBI shortly on a pilot basis and thereafter the process
will be fine tuned and extended to all commercial banks on the basis of the
experience gained. With a view to enhancing the risk management functions in the
banks and their preparedness for RBS, it will be necessary for banks to adapt
their risk management systems and put in place appropriate structures/ systems
in tune with the above guidelines at the earliest.
4.
In this connection, it would also be pertinent to mention that the
proposed New capital adequacy framework aims at moving over to an enhanced level
of risk sensitivity in the capital allocation processes and captures all the
major risks inherent in a bank�s operations viz. credit risk, market risk and
operational risk, and envisages enhancement of risk sensitivity with mutually
reinforcing pillars which would collectively contribute to safety and soundness
of the financial system.
5.
In the above background, with a view to moving over to integrated risk
management systems which would further equip banks to identify, measure, monitor
and control the various types of risks assumed by them to ensure a smooth
transition to the new capital adequacy framework, banks are advised to
critically evaluate the risk management systems already in place with reference
to the above referred guidelines and guidance notes issued by RBI. Banks should,
in particular, ensure that their risk management framework is oriented towards
their requirements dictated by the size and complexity of business, risk
philosophy, market perception and expected level of capital. The risk management
systems should be adaptable to changes in business size, market dynamics and
introduction of innovative products by banks in future. As the primary
responsibility of laying down risk parameters and establishing an integrated
risk management and control system rests with the Board of Directors, the note
assessing the risk management systems should be placed before the Board. On the
basis of such evaluation banks should initiate appropriate steps, with the
approval of their Board, to eliminate the gaps in compliance with the risk
management guidelines issued by RBI and ensure that they have efficient and
robust risk management systems in place.
6.
Please acknowledge receipt.
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