Risk analysis, why its a requirement for every bank

Financial stability and consumer protection, two phrases that are music to an average Indian who entrusts his life’s savings to a bank, to secure his future and fund for his dreams whether it is a child’s education or his own dream home. And why not? If you were to buy a bike or a car, would you not inspect it and insist on a test ride? Similarly, when a bank conducts a risk-weighted average to analyse a corporate’s worth, it has to adhere to a checklist to ensure the organisation’s capability to pay back; its assets and the collateral it offers as security. One such stipulation is the RBI-adopted CAMELS framework which stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity, Systems and controls.

Foreign banks operating in India are also rated on the same parameters through the CALCS model:  Capital adequacy, Asset quality, Liquidity, Compliance and Systems & Controls. In fact, risk-based supervision was formally launched in 2003 on a pilot project basis. Onsite supervision is conducted based on the last audited balance sheet; while offsite refers to macro-level indicators. A Risk Profile Template (RPT) also assists banks to cover five chief business risks: Credit, Market, Liquidity, Operational and Group. To add teeth, Prompt Corrective Action (PCA) links regulatory action to quantitative measures of performance after identifying triggers like steep decline in Net NPA and RoA.

 

 But one of the shortcomings is the uniform, one-size-fits-all approach regardless of the bank’s risk profile. Another drawback is that supervision lacks a risk focus, a skewed allocation of supervisory resources, is the result. Worse, selection of branches for inspection is done on an ad hoc basis instead of risk assessment findings or audit results. The risk assessment process need urgent changes, primarily updating bank related information collected from various sources and indepth analysis of each concern arising from the bank’s operations. The process should adeptly identify bank activities that may create potential hazards and their impact. A Supervisory Relationship Manager (SRM) could be appointed to undertake an extensive and holistic assessment of various material risks that a bank faces and to ensure that risk management has been properly done.


What steps does your bank take while conducting a RWA? Feel free to share with us.