Bancon2012: A Curtain Raiser

The dazzling banking event BANCON 2012 that will be the scene stealer and hog the news over the weekend, in Pune began at 2.15 today on this pleasantly warm Friday afternoon. All roads led to J W Mariott, where the banking event was hosted by Bank of Maharashtra in association with Indian Bank’s Association, (IBA), with McKinsey & Company as knowledge partner. The compere, Darrpan Mehta took to the stage to introduce the distinguished panel, as they took their seats on the dias: Mr Narendra Singh, Chairman & Managing Director, Bank of Maharashtra, Mr. K Ramakrishnan, Chief Executive, IBA and Mr Jatin Pant, Director McKinsey & Co, Mr. C V R Rajendran, ED, Bank of Maharashtra.

To bring attention to this year’s theme, Innovating to unlock the next decade, he quoted Steve Jobs, “Innovation distinguishes between a leader and a follower” promptly sparking interest in the media about the weekend conference where banking heavyweights will assemble to exchange ideas.

Speaking on the occasion, Mr Narendra Singh explained how technological initiatives have brought in its wake, the problem of shortage of hands as well as handling data; its sheer volume and velocity and even the opportunity for leveraging it.

Next to take to the mike was Mr Ramkrishnan. He proudly stated how total industry assets had risen six fold between 2001-2010. He highlighted major shifts like the prolific spread of ATMs and mobile banking; growth of the middle class and increasing rural affluence, and lastly the growing demand for SME’s.

This was followed by Mr. Jatin Pant’s analysis. His presentation lucidly elaborated on a) the top 10 Indian banks featuring among Asia’s top 30 value creator banks in the next decade, b) Indian banking revenue pools likely to quadruple in the next 10 years.

An interesting Q&A round concluded the session.

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.