Study On Suggestions By Banks To Rbi Finance Essay - Free Essay Example

Sample details Pages: 4 Words: 1312 Downloads: 10 Date added: 2017/06/26 Category Business Essay Type Analytical essay Did you like this example? Banks are of the opinion that it would ease the processes if regulator comes up with industry wise correlation. RBI guidelines are broader in nature. They should be more indicative. Don’t waste time! Our writers will create an original "Study On Suggestions By Banks To Rbi Finance Essay" essay for you Create order The document requirement for complying by the guidelines of RBI and Basel are highly centered according to international banks. Some scenarios are not at all relevant to Indian markets. Hence there is a need to revise the framework of guidelines with an Indian perspective so that the fatigue of writing so many documents can be done away with. RBI has modified the CRAR from 8% to 9%. This makes capital a limiting factor. Hence it restricts the natural growth of the bank. Hence the regulator should reconsider this. The terms used in the guidelines issued are directly picked from the documents in Basel or those finding implementation in foreign countries. The terms should be explained more correctly to all the banks. Conclusion Worldwide, there is an increasing trend towards centralizing risk management with integrated treasury management to benefit from information synergies on aggregate exposure, as well as scale economies and easier reporting to top management. Keeping all this in view, the Reserve Bank has issued broad guidelines for risk management systems in banks. This has placed the primary responsibility of laying down risk parameters and establishing the risk management and control system on the Board of Directors of the bank. However, it is to be recognized that, in view of the diversity and varying size of balance sheet items as between banks, it might neither be possible nor necessary to adopt a uniform risks management system. The design of risk management framework should, therefore, be oriented towards the banks own requirement dictated by the size and complexity of business, risk philosophy, market perception and the existing level of capital. While doing so, banks may critically evaluate their existing risk management system in the light of the guidelines issued by the Reserve Bank and should identify the gaps in the existing risk management practices and the policies and strategies for complying with the guidelines. Credit risk management: Risk management has assumed increased importance of regulatory compliance point of view. Credit risk, being an important component of risk, has been adequately focused upon. Credit risk management can be viewed at two levels-at the level of an individual asset or exposure and at the portfolio level. Credit risk management tools, therefore, have to work at both individual and portfolio levels. Traditional tools of credit risk management include loan policies, standards for presentation of credit proposals, delegation of loan approving powers, multi-tier credit approving systems, prudential limits on credit exposures to companies and groups, stipulation of financial covenants, standards for collaterals, limits on asset concentr ations and independent loan review mechanisms. Monitoring of non-performing loans has, however, a focus on remedy rather than advance warning or prevention. Banks assign internal ratings to borrowers, which will determine the interest spread charged over PLR. These ratings are also used for monitoring of loans. A more scientific Quantitative approach is the need of the hour. Market risk management: Asset Liability Management as a risk management technique is gaining in popularity as banks are beginning to recognize the need for proper risk management. The challenge for the banks therefore is to put in place the necessary infrastructure that can help them derive the utmost benefit from ALM. The banks progress in Asset Liability Management will depend on the initiatives of their management rather than on RBI supervision. Given the existing hurdles, the evolution of ALM in commercial banks will be a slow process. ALM has evolved since the early 1980s. Techniques of ALM have also ev olved. The growth of OTC derivatives markets has facilitated a variety of hedging strategies. A significant development has been securitization, which allows firms to directly address asset-liability risk by removing assets or liabilities from their balance sheets. Thus, the scope of ALM activities has widened. Today, ALM departments are addressing (non-trading) foreign exchange risks as well as other risks. Corporations have adopted techniques of ALM to address interest-rate exposures, liquidity risk and foreign exchange risk. Thus it can be safely said that Asset Liability Management will continue to grow in future and an efficient ALM technique will go a long way in managing volume, mix, maturity, rate sensitivity, quality and liquidity of the assets and liabilities so as to earn a sufficient and acceptable return on the portfolio. Operational risk management: The best defense against operational risk is to have effective systems and controls. These need to be appropriate to t he risks and as easy as possible to understand, implement and monitor. There is a strong common interest here between the regulator and a banks senior management. An intensified interest by the latter in everyday operational losses is likely to reduce the possibility of large losses, improve general risk awareness in a company and the regulator will feel that the interests of the consumer are being better safeguarded. When considering operational risk, the regulator faces a similar dilemma to the bank: where are the main risks, how can they best be controlled, and what level of capital can reasonably be required? In future, it is likely these questions will become even more pertinent. This is not least because regulators, in line with some banks, are carving out capital to be held specifically against market, credit and operational risk. But it is also because regulators have come to think that operational risk may not be significantly correlated with either of the other two types o f risk categories. However, as was the case with the original regulatory capital ratio set by the Basle Committee, the only real touchstone for this is some sort of reference to current aggregate capital. Another option for the regulator would be to refer to benchmark loss experiences. The problem here is that the data are often not obtainable availability differs from country to country and business to business and may not be suitable for operational risk throughout the bank. The regulator could, alternatively, rely on internal economic capital allocation. Perhaps what is needed most is time. One thing is clear, and it is that there are more questions than answers around operational risk for both banks and regulators. Consequently, both parties will need, in the immediate future, to enter into an open and technical discussion of the way forward. Supervision process: Before 1950s regulation and supervision by RBI was not that stringent as the banking activity was limited to col lection of deposits and issue of loans. Moreover, there was no separate comprehensive enactment for the banking sector. With the introduction of the Banking Companies Act, 1949, (later Banking Regulations Act, 1949) the scope of RBI supervision broadened over the years, necessary changes in the supervisory system have been made to meet with the new challenges emerging in the financial sector. In the wake of rapid changes in the financial sector such as emergence of Universal Banking, introduction of Securitization, integration of various markets, etc. a lot of preparations for further strengthening the supervisory mechanism is required, not only on the part of RBI but by individual banks also. World over the way financial markets are integrating day by day, risk is continuously increasing. RBI, keeping in view international best practices has already taken certain initiatives in this regard and there is a proposal to introduce shortly, the system of Consolidated Supervision too, alo ng with Risk Based Supervision. The impact on banks key ratios due to banking supervision reveals good results and walking on the same continuum few issues can be stressed upon like technology upgradation, corporate governance, market intelligence etc. By critically examining all the aspects related to risk management, an AHP model was developed which gave the comprehensive risk rating of the bank. This rating would help in comparison with other banks in the industry and evaluate the areas of improvement if any.