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.

Empowering India with Innovations in Banking

The urban Indian has never had it so good. Locate closest ATM on mobile, before leaving home for work or use a 19-inch touch screen to portray the transaction at hand. Most banks in India utilize biometric smart cards and POS devices for authentication and transaction which also connect rural masses. These technological marvels in banking empower the semi-literate farmer who merely tells the amount of transaction to acquire the money he needs; without the hassle of obtaining or maintaining a checkbook, which in today’s digital age appears prehistoric.

However, Harish K Murthi, Chairman, HMA STARware, the first company in India to sell ATMs to public sector banks, maintains that, “In technology, we have a lot of catching up to do.” He adds, “Korea hs over 2,00,000 POS terminals versus a mere 50,000 in our country.”

Almost 12 million users in Kenya, withdraw cash through their mobiles thanks to M-PESA. 

 In another part of  the world,  NFC Payments capability like Visa PayWave, Mastercard PayPass built right into the handset could be revolutionary for our 21st century, spelling the end of checks and possibly even cash. Whereas the most recently launched Square makes people and organizations, become instant merchants through their iPhone OS.

Every bank’s golden opportunity!

If you thought it is only Indian women who are crazy about the yellow metal, or elderly parents using gold as an investment for the future, think again. Zoom in to Koramangala, India, the IT hub, where several youngsters buy gold coins and bars, invest in gold saving schemes through monthly instalments and allot themselves, an additional budget for light jewellery as daily office wear. Jewellers cash in on the trend by devising special schemes for the auspicious Akshay Tritiya and Diwali. The Swarndhara Scheme, akin to a fixed deposit, has helped jewelers reap a golden harvest, luring 3 lakh customers. You can even book a small amount every month, like in a savings scheme, through the Swarn Mangal Kalash, offered by another popular jeweller. Then there is Tanishq tempting with its Golden Harvest. But does the customer really benefit? What about making charges? Conversion costs while redeeming?

Fear about the financial crisis, insecurity of other assets like government bonds have made customers believe gold is a safe haven. In fact, In Germany, 1 gm gold wafers and 10gm bars can be obtained from vending machines at airports and railway stations, through GoldtoGo for safety-seeking shoppers. Money from exchange-traded funds (ETFs) will be pooled to buy gold. This is how banks are rebuilding gold reserves. ETFs save investors the bother of purchasing and keeping gold, in fact these allow buying and selling on the stock market, at wholesale rate and even guarantee purity. Paper gold, then amply proves to be the best bet for small investors.

The festive season has once again accelerated gold buying, considered part of Indian tradition. Banks and financial institutions have geared up; selling gold at lower prices than the prevailing market price. ICICI Bank has offered a discount, for online purchase of the metal, with its Pure Gold offer. Punjab National Bank and Oriental Commerce Bank have offered rebate for a single purchase of gold coins of any denomination, on a day. Will your bank be a part of the gold rush?