Risk Management

Project Aim

The project aims at identifying and assessing potential risks which exist in banking business and studying the effectiveness of the action plans that have been brought into action by the government. And also suggesting some of the risk management techniques for some of the major Indian banks.

Members

  • Rashmi Raj
  • Prasanna
  • Mihir
  • Aditya Shrikhande
  • Keerthana

Work Done

.We did detailed analysis on what kinds of risks pertains in the banking industry. Further we studied Credit risk, reasons leading to it and its mitigation measures. We then looked upon prior to BASEL Senario, BASEL III norms and its implementation in Indian scenario. We then compared the DATA of 5 Banks i.e., SBI, ICICI, YES Bank, HDFC BANK, BOI and finally conducted CASE studies on above Banks and found the major risks existing in those banks and suggested the mitigation measures. Also, we had a detailed case study trying to understand the YES Bank crisis.

Future Scope

Finding some kind risk patterns in Public and private sector banks, forming some kind of risk management models for the banks studied.

Project Report

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Summary of Project

Types of Banking risks

  • liquidity risk
  • interest rate risk
  • market risk
  • credit/ default risk
  • operational risk

Credit Risk Management

Internal factors leading to credit risk

  • Deficiency in credit policy and administration of loan portfolio
  • Deficiency in appraising borrower's financial position prior to lending
  • Excessive dependence on collaterals
  • Bank's failure in post sanction follow up

The external factors for credit risk

  • The state of economy
  • Swings in commodity prices, foreign exchange rates and interest rates etc

Credit risk management

  • Exposure ceilings
  • Review or renewal
  • Risk rating model
  • Risk based scientific pricing
  • Portfolio management
  • Loan review mechanism(LRM)

Implementation and challenges for BASEL III in Indian scenario

Implementation in India

The Reserve Bank of India (RBI) introduced the norms in India in 2003. It now aims to get all commercial banks BASEL III-compliant by March 2019. So far, India’s banks are compliant with the capital needs. On average, India’s banks have around 8% capital adequacy. This is lower than the capital needs of 10.5% (after taking into account the additional 2.5% buffer). In fact, the BASEL committee credited the RBI for its efforts.

Challenges for Indian banks

Complying with BASEL III norms is not an easy task for India’s banks, which have to increase capital, liquidity and also reduce leverage. This could affect profit margins for Indian banks. Plus, when banks keep aside more money as capital or liquidity, it reduces their capacity to lend money. Loans are the biggest source of profits from banks. Plus, India banks have to meet both LCR as well as the RBI’s Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) norms. This means more money would have to be set aside, further stressing balance sheets.

YES Bank Crisis

  • Gross NPA ratio: Many borrowers started defaulting. The bank’s Gross NPA% (loans overdue for >90 days) zoomed to 7.39% as of Sept. ‘19, the highest among comparable banks.
  • ROAs: For instance, Yes Bank's RoA in FY19 was 0.52, in FY18 it was 1.78. Thus the y-o-y change of -1.26 in FY19
  • Credit Deposit ratio: Amidst the loan mess, customers withdrew large amounts, resulting in the credit-deposit ratio of Yes Bank crossing 100% (it lent more than what it received) in FY18, 19.

POST CRISIS SCENARIO

Scenario One

There are reports that the government may rope in Life Insurance Corporation of India (LIC) to join a consortium led by State Bank of India to buy a stake and inject funds in a beleaguered lender. It remains to be seen if that can materialize. The state-owned insurer already owns 51 per cent of IDBI Bank after a stake purchase from the government.

Scenario 2

Another report said the board of SBI has agreed to conduct a viability assessment into buying a stake in a troubled private sector lender. This is being referred to as a commercial decision.

Such a capital infusion would immediately be followed up by a cleanup of the bank’s balance sheet. Yes Bank’s exposure to commercial businesses will also be looked at. It is likely that the current management, including the Managing Director and CEO Ravneet Gill, would be replaced, said one report.

It is possible that the newer investors will come in, rescue the lender and turn it into an attractive investment proposition and then sell it off.

Bank of India(BOI)

Risks faced

  • Decreasing asset quality
  • Return on assets (ROA) From the above mentioned graph it is clearly evident that return of assets is lowest in the case of BOI, especially when the BOI’s NPA shot up during FY2015 and ROA fell drastically between 2015 and 2016, where it became negative
  • The absence of good financial products / services
  • Intense Competition, Declining brand equity, Foreign Players & Disinvestment

Suggestions for management of these risks faced

  • Use of mobile banking, internet banking on a large scale
  • UID/Aadhar based customer base
  • Improving products and service

HDFC BANK

Risk Faced

  • Non Performing Assets: HDFC’s major NPA’s exist in the Agricultural and Consumer Loan sectors. The Gross NPA Ratio has risen from 0.9 in 2015 to 1.36 in 2019. This is not a good thing from a bank’s perspective since the advances would be locked up in a liability rather than generating income.
  • Credit Deposit Ratio(CDR): The CDR indicates a red flag in HDFC as well with the CDR rising from an imminently high 85% (2015) to 92% (2019).

Risk Management

  • Capital Adequacy Management : Here’s what HDFC has stated in it’s BASEL III disclosure regarding management of capital adequacy. The Bank identifies, assesses and manages comprehensively all risks that it is exposed to through sound governance and control practices, robust risk management framework and an elaborate process for capital calculation and planning.
  • Credit Risk Management: Analyzing the perceived risks in the business, and the assumed returns, The Board Of Directors endorses and approves the Credit Risk strategies and policies in the bank. It has set up a Risk Policy and Monitoring Committee (RPMC) which oversees the development and implementation of Credit Risk Management strategies.
  • NPA Management:The Government has helped in the reduction of NPAs of Public Sector Banks (PSBs) by 89,189 Crores in 2018-19 due to the 4 Rs Strategy that comprise of
  1. Recognition
  2. Resolution
  3. Recapitalisation
  4. Reforms

ICICI BANK

Key Risks Impacting the Bank’s Business

1)Macroeconomic uncertainties:

Uncertainties exist due to India’s high dependence on global crude oil and capital requirements, evolving policy environment and need for sustainable job creation.

Mitigation:

The Bank closely monitors developments in the global and Indian economy. It has a dedicated team for monitoring and evaluating the impact of macroeconomic trends. The Bank has an established Country Risk Management Policy which addresses the identification, measurement, monitoring and reporting of country risk. The Bank’s risk team continuously monitors all sectors as well as corporates within the sectors and country risks.

2)Credit risks:

The Bank’s core business is lending which exposes it to various types of credit risks, especially failure in repayments and increase in non-performing loans.

Mitigation:

The credit related aspects in the Bank are primarily governed by the Credit and Recovery Policy approved by the Board of Directors. The Bank measures, monitors and manages credit risks at an individual borrower level and at the portfolio level. In the last few years, the Bank has strengthened its Enterprise Risk Management and Risk Appetite framework for managing concentration risk, including limits/thresholds with respect to single borrower and group exposure. Limits have been set up for the borrower group based on turnover, track record and rating of borrowers.

3)Market and liquidity risks:

Movement in interest rates, foreign exchange rates, credit spreads and equity prices could impact the Bank’s net interest margin, the value of the trading portfolio, income from treasury operations and the quality of the loan portfolio.

Mitigation:

The Investment Policy, Asset Liability Management Policy and Derivatives Policy, approved by the Board of Directors, govern the treasury activities and the associated risks and contain the limits structure.

4)Operational risks:

There is a risk of loss resulting from inadequate or failed internal processes, people or systems or from external events.

Mitigation:

The Bank has put in place a system of internal controls, systems and procedures to monitor transactions, key back-up procedures and undertakes regular contingency planning. The governance and framework for managing operational risks is defined in the Operational Risk Management Policy.

5)Technology risks:

Rapid technological developments and the increasing dependence on technology, combined with the continuous digitisation in banking activities have exposed banks to a host of new risks

Mitigation:

The Bank’s Information Technology Strategy Committee ensures that information technology strategy is aligned with the business strategy.

6)Cyber risks:

Increasing reliance on technology and digitisation increases the risks of cyber attacks including computer viruses, malicious or destructive code, phishing attacks, denial of service or information, ransomware, unauthorised data access, attacks on personal emails of employees, application vulnerability and other security breaches.

Mitigation:

The Information Technology Strategy Committee oversees cyber security related threat landscape and the Bank’s preparedness to address these from a prevention, detection and response perspective. The Chief Information Security Officer is responsible for tracking the risks.

7)Compliance risks:

The environment for financial institutions is seeing unprecedented changes in laws, regulations and regulatory policies. This could increase the risks of compliance and regulatory action in the form of fines, restrictions or other sanctions for instances of regulatory failures.

Mitigation:

The Bank has a dedicated compliance team that continuously monitors new developments and updates the senior management on their implications. All relevant groups in the Bank build capabilities on an ongoing basis to be able to respond to regulatory changes in a time-bound manner.

8)Reputation risks:

Any negative publicity arising due to actual or alleged conduct including lending practices and credit exposures, the level of non-performing loans, corporate governance, regulatory compliance, sharing or inadequate protection of customer information and actions taken by the government, regulatory bodies and investigative agencies could impact the Bank’s reputation

Mitigation:

The Bank has a Reputation Risk Management Group which identifies, assesses and monitors the risk in accordance with defined policies and procedures. Further, the Bank has well-articulated policies on various aspects including business conduct, employee conduct, compliance, IT and other relevant identified areas that could potentially create reputation risks for the Bank.

9)International risks:

The Bank has a presence in multiple overseas jurisdictions, through its branches and subsidiaries, which can expose it to a variety of regulatory, legal and business challenges and increase the complexity of risks.

Mitigation:

The Bank’s strategy for international business is largely focussed on India-linked opportunities. There is a dedicated team overseeing the risks associated with its branches within the Bank’s Risk Management Group. Further, specific teams have been set up at local jurisdictions to get a ground-level understanding of country specific regulatory and business requirements. The Compliance Group oversees regulatory compliance at the overseas branches and banking units.

Qualitative Analysis on Banks