PROJECT ON

CREDIT RISK MANAGEMENT WITH REFERENCE TO RBI

SUBMITTED BY

ZAID QURASHI MOHD. ISLAM

ROLL NO: 68

T.Y.BMS (SEMESTER-V)

*2014-2015*

UNDER THE GUIDENCE OF

PROF. DHARIN SHAH

SUBMITTED TO

UNIVERSITY OF MUMBAI

NIRMALA MEMORIAL FOUNDATION COLLEGE OF COMMERCE AND SCIENCE

90 FEET ROAD, ASHA NAGAR, THAKUR COMPLAX,KANDIVALI (E), MUMBAI - 400101

DECLARATION

I ZAID QURASHI MOHD. ISLAM of T.Y.BMS. (Bachelor degree of Management Studies Semester V) hereby declare that I have completed the CREDIT RISK MANAGEMENT WITH REFERENCE TO RBI in the academic year 2014 2015

The information submitted is true and original to best of my knowledge.

________________ ____________Date of Submission Signature of Student

CERTIFICATE

This is to certify that the project titled as CREDIT RISK MANAGEMENT WITH REFERENCE TO RBI has been completed by ZAID QURASHI MOHD. ISLAM of T.Y.BMS. (Semester-V) examination in academic year 2014-2015.

The information submitted is true and original to the best of knowledge.

__________________ __________________(Dr. T. P. Madhu Nair) (Prof. Poonam Kakkad) Principal Program Coordinator

_______________ _______________ (Prof. Dharen Shah) External Examiner Project Guide

ACKNOWLEDGEMENT

I would like to extend my gratitude to Prof. Dharen Shah for providing guidance and support during the course of project. She has been a great help through the making of the project. I would like to thank the University of Mumbai for giving me the opportunity to work on such a relevant topic.I would also like to thank the college faculty and the librarian and the Principal Dr. T. P. Madhu Nair for their help and other who are indirectly responsible for the completion of this project. In addition I would like to take this opportunity to thank our BMS Coordinator Prof. Poonam Kakkad for being there always to guide me for extending her full support.

Date: _______________ Signature of Student

PREFACE When financial institutions, investors, or other lending facilities allow individuals and businesses to borrow money, they risk the chance that the borrower will default on the loan or credit line. Credit risk management is a means of reducing credit risk by employing a variety of strategies meant to prevent or at least offset losses due to default. There are many different strategies employed in credit risk management, including purchasing credit insurance, diversifying lending, reducing available credit, and charging fees to partially offset costs. Nearly every major financial organization in operation relies on a combination of credit risk management tactics to prevent loss from borrower default. With lines of credit, one of the most commonly employed strategies for credit risk management is to reduce spending limits to help prevent financial over-extension. For instance, if a person has a credit card with a $2000 US Dollar (USD) limit, the bank may initially impose a transaction limit of $200 USD. This prevents the borrower from maxing out the card in one go and then defaulting. Once a borrower has developed a proven track record of regular repayment, the bank may believe that the credit risk is reduce and remove transaction limits or increase the total amount of the credit line. Credit insurance is purchased by banks and large lending institutions to cover losses by default. The bank generally pays insurance premiums just as a person would for health or car insurance, but may often pass these premiums on to customers through fees and charges. In case of default, the insurance will be able to step in and cover the bank's losses. Credit insurance exists to help the bank out of trouble, though not, it should be noted, the borrower. One credit risk management strategy relies on the diversification of available credit. Risking a smaller amount of money in many different areas, such as for house loans, auto loans, and credit cards, may be safer than putting all available resources into a single area. If a market crashes, institutions that have invested solely in that market may be crushed in the wake. Institutions that have a diversified portfolio may be more likely to survive a crashing market. Credit risk management is a complicated subject that often requires excellent professional advice. Many financial institutions, both large and small, employ risk management specialists to assess risk and design and monitor a comprehensive plan for protection against credit risk. Economists, market analysts, and even accountants may be able to find gainful employment in the risk management field.

INDEX

INTRODUCTION

What is Credit risk?

Credit Risk is the potential that a bank borrower/counter party fails to meet the obligations on agreed terms. There is always scope for the borrower to default from his commitments for one or the other reason resulting in crystallization of credit risk to the bank. These losses could take the form outright default or alternatively, losses from changes in portfolio value arising from actual or perceived deterioration in credit quality that is short of default. Credit risk is inherent to the business of lending funds to the operations linked closely to market risk variables. The objective of credit risk management is to minimize the risk and maximize banks risk adjusted rate of return by assuming and maintaining credit exposure within the acceptable parameters.Credit risk consists of primarily two components, viz Quantity of risk, which is nothing but the outstanding loan balance as on the date of default and the quality of risk, viz, the severity of loss defined by both Probability of Default as reduced by the recoveries that could be made in the event of default. Thus credit risk is a combined outcome of Default Risk and Exposure Risk. The elements of Credit Risk is Portfolio risk comprising Concentration Risk as well as Intrinsic Risk and Transaction Risk comprising migration/down gradation risk as well as Default Risk. At the transaction level, credit ratings are useful measures of evaluating credit risk that is prevalent across the entire organization where treasury and credit functions are handled. Portfolio analysis help in identifying concentration of credit risk, default/migration statistics, recovery data, etc. In general, Default is not an abrupt process to happen suddenly and past experience dictates that, more often than not, borrowers credit worthiness and asset quality declines gradually, which is otherwise known as migration. Default is an extreme event of credit migration. Off balance sheet exposures such as foreign exchange forward can tracks, swaps options etc are classified in to three broad categories such as full Risk, Medium Risk and Low risk and then translated into risk Neighed assets. Risk Management.Risk Management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. It involves identification, measurement, monitoring and controlling risks to ensure thata) The individuals who take or manage risks clearly understand it.b) The organizations Risk exposure is within the limits established by Board of Directors.c) Risk taking Decisions are in line with the business strategy and objectives set by BOD.d) The expected payoffs compensate for the risks takene) Risk taking decisions are explicit and clear.f) Sufficient capital as a buffer is available to take riskThe acceptance and management of financial risk is inherent to the business of banking and banks roles as financial intermediaries. Risk management as commonly perceived does not mean minimizing risk; rather the goal of risk management is to optimize risk-reward trade -off. Notwithstanding the fact that banks are in the business of taking risk, it should be recognized that an institution need not engage in business in a manner that unnecessarily imposes risk upon it: nor it should absorb risk that can be transferred to other participants. Rather it should accept those risks that are uniquely part of the array of banks services. In every financial institution, risk management activities broadly take place simultaneously at following different hierarchy levels..a) Strategic level: It encompasses risk management functions performed by senior management and BOD. For instance definition of risks, ascertaining institutions risk appetite, formulating strategy and policies for managing risks and establish adequate systems and controls to ensure that overall risk remain within acceptable level and the reward compensate for the risk taken.b) Macro Level: It encompasses risk management within a business area or across business lines. Generally the risk management activities performed by middle management or units devoted to risk reviews fall into this category.c) Micro Level: It involves On-the-line risk management where risks are actually created. This is the risk management activities performed by individuals who take risk on organizations behalf such as front office and loan origination functions. The risk management in those areas is confined to following operational procedures and guidelines set by management. Expanding business arenas, deregulation and globalization of financial activities emergence of new financial products and increased level of competition has necessitated a need for an effective and structured risk management in financial institutions. A banks ability to measure, monitor, and steer risks comprehensively is becoming a decisive parameter for its strategic positioning. The risk management framework and sophistication of the process, and internal controls, used to manage risks, depends on the nature, size and complexity of institutions activities. Nevertheless, there are some basic principles that apply to all financial institutions irrespective of their size and complexity of business and are reflective of the strength of an individual bank's risk management practices.

Credit Risk Management Process

Managing credit risk

Credit risk arises from the potential that an obligor is either unwilling to perform on an obligation or its ability to perform such obligation is impaired resulting in economic loss to the bank.In a banks portfolio, losses stem from outright default due to inability or unwillingness of a customer or counter party to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively losses may result from reduction in portfolio value due to actual or perceived deterioration in credit quality. Credit risk emanates from a banks dealing with individuals, corporate, financial institutions or a sovereign. For most banks, loans are the largest and most obvious source of credit risk; however, credit risk could stem from activities both on and off balance sheet.In addition to direct accounting loss, credit risk should be viewed in the context of economic exposures. This encompasses opportunity costs, transaction costs and expenses associated with a non-performing asset over and above the accounting loss. Credit risk can be further sub categorized on the basis of reasons of default. For instance the default could be due to country in which there is exposure or problems in settlement of a transaction. Credit risk not necessarily occurs in isolation. The same source that endangers credit risk for the institution may also expose it to other risk. For instance a bad portfolio may attract liquidity problem.

PRINCIPLES OF CREDIT RISK MANAGEMENT

A. Establishing an appropriate credit risk environmentPrinciple 1: The board of directors should have responsibility for approving and periodically reviewing the credit risk strategy and significant credit risk policies of the bank. The strategy should reflect the banks tolerance for risk and the level of profitability the bank expects to achieve for incurring various credit risks.Principle 2: Senior management should have responsibility for implementing the credit risk strategy approved by the board of directors and for developing policies and procedures for identifying, measuring, monitoring and controlling credit risk. Such policies and procedures should address credit risk in all of the banks activities and at both the individual credit and portfolio levels.Principle 3: Banks should identify and manage credit risk inherent in all products and activities. Banks should ensure that the risks of products and activities new to them are subject to adequate procedures and controls before being introduced or undertaken, and approved in advance by the board of directors or its appropriate committee.

B. Operating under a sound credit granting processPrinciple 4: Banks must operate under sound, well-defined credit-granting criteria.These criteria should include a thorough understanding of the borrower or counterparty, as well as the purpose and structure of the credit, and its source of repayment.Principle 5: Banks should establish overall credit limits at the level of individual borrowers and counterparties, and groups of connected counterparties that aggregate in a comparable and meaningful manner different types of exposures, both in the banking and trading book and on and off the balance sheetPrinciple 6: Banks should have a clearly-established process in place for approving new credits as well as the extension of existing credits.Principle 7: All extensions of credit must be made on an arms-length basis. In particular, credits to related companies and individuals must be monitored with particular care and other appropriate steps taken to control or mitigate the risks of connected lending.

C. Maintaining an appropriate credit administration, measurement and monitoring process.Principle 8: Banks should have in place a system for the ongoing administration of their various credit risk-bearing portfolios.Principle 9: Banks must have in place a system for monitoring the condition of individual credits, including determining the adequacy of provisions and reserves.Principle 10: Banks should develop and utilise internal risk rating systems in managing credit risk. The rating system should be consistent with the nature, size and complexity of a banks activities.Principle 11: Banks must have information systems and analytical techniques that enable management to measure the credit risk inherent in all on- and off-balance sheet activities. The management information system should provide adequate information on the composition of the credit portfolio, including identification of any concentrations of risk.Principle 12: Banks must have in place a system for monitoring the overall composition and quality of the credit portfolio.Principle 13: Banks should take into consideration potential future changes in economic conditions when assessing individual credits and their credit portfolios, and should assess their credit risk exposures under stressful conditions.

D. Ensuring adequate controls over credit riskPrinciple 14:Banks should establish a system of independent, ongoing credit review and the results of such reviews should be communicated directly to the board of directors and senior management.Principle 15: Banks must ensure that the credit-granting function is being properly managed and that credit exposures are within levels consistent with prudential standards and internal limits. Banks should establish and enforce internal controls and other practices to ensure that exceptions to policies, procedures and limits are reported in a timely manner to the appropriate level of management.Principle 16: Banks must have a system in place for managing problem credits and various other workout situations.E. The role of supervisorsPrinciple 17: Supervisors should require that banks have an effective system in place to identify, measure, monitor and control credit risk as part of an overall approach to risk management.Supervisors should conduct an independent evaluation of a banks strategies, policies, practices and procedures related to the granting of credit and the ongoing management of the portfolio. Supervisors should consider setting prudential limits to restrict bank exposures to single borrowers or groups of connected counterparties.

Components of credit risk managementA typical Credit risk management framework in a financial institution may be broadly categorized into following main components.a) Board and senior Managements Oversightb) Organizational structurec) Systems and procedures for identification, acceptance, measurement, monitoring and control risks.

Board and Senior Managements OversightIt is the overall responsibility of banks Board to approve banks credit risk strategy and significant policies relating to credit risk and its management which should be based on the banks overall business strategy. To keep it current, the overall strategy has to be reviewed by the board, preferably annually. The responsibilities of the Board with regard to credit riskManagement shall, interalia, include:a) Delineate banks overall risk tolerance in relation to credit risk. Ensure that banks overall credit risk exposure is maintained at prudent levels and consistent with the available capitalc) Ensure that top management as well as individuals responsible for credit risk management possess sound expertise and knowledge to accomplish the risk management functiond) Ensure that the bank implements sound fundamental principles that facilitate the identification, measurement, monitoring and control of credit risk.e) Ensure that appropriate plans and procedures for credit risk management are in place.The very first purpose of banks credit strategy is to determine the risk appetite of the bank. Once it is determined the bank could develop a plan to optimize return while keeping credit risk within predetermined limits. The banks credit risk strategy thus should spell outa) The institutions plan to grant credit based on various client segments and products, economic sectors, geographical location, currency and maturityb) Target market within each lending segment, preferred level of diversification/concentration.c) Pricing strategy.It is essential that banks give due consideration to their target market while devising credit risk strategy. The credit procedures should aim to obtain an indepth understanding of the banks clients, their credentials & their businesses in order to fully know their customers.The strategy should provide continuity in approach and take into account cyclic aspect of countrys economy and the resulting shifts in composition and quality of overall credit portfolio. While the strategy would be reviewed periodically and amended, as deemed necessary, it should be viable in long term and through various economic cycles.The senior management of the bank should develop and establish credit policies and credit administration procedures as a part of overall credit risk management framework and get those approved from board. Such policies and procedures shall provide guidance to the staff on various types of lending including corporate, SME, consumer, agriculture, etc. At minimum the policy should includea) Detailed and formalized credit evaluation/ appraisal process.b) Credit approval authority at various hierarchy levels including authority for approving exceptions.c) Risk identification, measurement, monitoring and controld) Risk acceptance criteriae) Credit origination and credit administration and loan documentation proceduresf) Roles and responsibilities of units/staff involved in origination and management of credit.g) Guidelines on management of problem loans. In order to be effective these policies must be clear and communicated down the line. Further any significant deviation/exception to these policies must be communicated to the top management/board and corrective measures should be taken. It is the responsibility of senior management to ensure effective implementation of these policies.

Organizational Structure. To maintain banks overall credit risk exposure within the parameters set by the board of directors, the importance of a sound risk management structure is second to none. While the banks may choose different structures, it is important that such structure should be commensurate with institutions size, complexity and diversification of its activities. It must facilitate effective management oversight and proper execution of credit risk management and control processes. Each bank, depending upon its size, should constitute a Credit Risk Management Committee (CRMC), ideally comprising of head of credit risk management Department, credit department and treasury. This committee reporting to banks risk management committee should be empowered to oversee credit risk taking activities and overall credi t risk management function. The CRMC should be mainly responsible fora) The implementation of the credit risk policy / strategy approved by the Board.b) Monitor credit risk on a bank-wide basis and ensure compliance with limits approved by the Board.c) Recommend to the Board, for its approval, clear policies on standards for presentation of credit proposals, financial covenants, rating standards and benchmarks.d) Decide delegation of credit approving powers, prudential limits on large credit exposures, standards for loan collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans, provisioning, regulatory/legal compliance, etc. Further, to maintain credit discipline and to enunciate credit risk management and control process there should be a separate function independent of loan origination function. Credit policy formulation, credit limit setting, monitoring of credit exceptions / exposures and review /monitoring of documentation are functions that should be performed independently of the loan origination function. For small banks where it might not be feasible to establish such structural hierarchy, there should be adequate compensating measures to maintain credit discipline introduce adequate checks and balances and standards to address potential conflicts of interest. Ideally, the banks should institute a Credit Risk Management Department (CRMD). Typical functions of CRMD include:a) To follow a holistic approach in management of risks inherent in banks portfolio and ensure the risks remain within the boundaries established by the Board or Credit Risk Management Committee.b) The department also ensures that business lines comply with riskparameters and prudential limits established by the Board or CRMC.c) Establish systems and procedures relating to risk identification, Management Information System, monitoring of loan / investment portfolio quality and early warning. The department would work out remedial measure when deficiencies/problems are identified.The Department should undertake portfolio evaluations and conduct comprehensive studies on the environment to test the resilience of the loan portfolio. Notwithstanding the need for a separate or independent oversight, the front office or loan origination function should be cognizant of credit risk, and maintain high level of credit discipline and standards in pursuit of business opportunities.Systems and Procedures

Measuring credit risk

The measurement of credit risk is of vital importance in credit risk management.A number of qualitative and quantitative techniques to measure risk inherent in credit portfolio are evolving. To start with, banks should establish a credit risk rating framework across all type of credit activities. Among other things, the rating framework may, incorporate:

Business Risko Industry Characteristicso Competitive Position (e.g. marketing/technological edge)o ManagementFinancial Risko Financial conditiono Profitabilityo Capital Structureo Present and future Cash flows

Internal Risk Rating.Credit risk rating is summary indicator of a banks individual credit exposure. An internal rating system categorizes all credits into various classes on the basis of underlying credit quality. A well-structured credit rating framework is an important tool for monitoring and controlling risk inherent in individual credits as well as in credit portfolios of a bank or a business line. The importance of internal credit rating framework becomes more eminent due to the fact thathistorically major losses to banks stemmed from default in loan portfolios. While a number of banks already have a system for rating individual credits in addition to the risk categories prescribed by SBP, all banks are encouraged to devise an internal rating framework. An internal rating framework would facilitate banks in a number of ways such asa) Credit selectionb) Amount of exposurec) Tenure and price of facilityd) Frequency or intensity of monitoringe) Analysis of migration of deteriorating credits and more accurate computation of future loan loss provisionf) Deciding the level of Approving authority of loan.The Architecture of internal rating system.The decision to deploy any risk rating architecture for credits depends upon two basic aspectsa) The Loss Concept and the number and meaning of grades on the rating continuum corresponding to each loss concept*.b) Whether to rate a borrower on the basis of point in time philosophy or through the cycle approach.Besides there are other issues such as whether to include statutory grades in the scale, the type of rating scale i.e. alphabetical numerical or alpha-numeric etc. SBP does not advocate any particular credit risk rating system; it should be banks own choice. However the system should commensurate with the size, nature and complexity of their business as well as possess flexibility to accommodate present and future risk profile of the bank, the anticipated level of diversification and sophistication in lending activities. A rating system with large number of grades on rating scale becomes more expensive due to the fact that the cost of obtaining and analyzing additional information for fine gradation increase sharply. However, it is important that there should be sufficient gradations to permit accurate characterization of the under lying risk profile of a loan or a portfolio of loansThe operating Design of Rating System.As with the decision to grant credit, the assignment of ratings always involve element of human judgment. Even sophisticated rating models do not replicate experience and judgment rather these techniques help and reinforce subjective judgment. Banks thus design the operating flow of the rating process in a way that is aimed promoting the accuracy and consistency of the rating system while not unduly restricting the exercise of judgment. Key issues relating to the operating design of a rating system include what exposures to rate; the organizations division of responsibility for grading; the nature of ratings review; the formality of the process and specificity of formal rating definitions.What Exposures are rated? Ideally all the credit exposures of the bank should be assigned a risk rating. However given the element of cost, it might not be feasible for all banks to follow. The banks may decide on their own which exposure needs to be rated. The decision to rate a particular loan could be based on factors such as exposure amount, business line or both. Generally corporate and commercial exposures are subject to internal ratings and banks use scoring models for consumer retail loans.The rating process in relation to credit approval and review. Ratings are generally assigned /reaffirmed at the time of origination of a loan or its renewal /enhancement. The analysis supporting the ratings is inseparable from that required for credit appraisal. In addition the rating and loan analysis process while being separate are intertwined. The process of assigning a rating and its approval / confirmation goes along with the initiation of a credit proposal and its approval. Generally loan origination function (whether a relationshipManager or credit staff) * initiates a loan proposal and also allocates a specific rating. This proposal passes through the credit approval process and the rating is also approved or recalibrated simultaneously by approving authority. The revision in the ratings can be used to upgrade the rating system and related guidelines.How to arrive at ratings The assignment of a particular rating to an exposure is basically an abbreviation of its overall risk profile. Theoretically ratings are based upon the major risk factors and their intensity inherent in the business of the borrower as well as key parameters and their intensity to those risk factors. Major risk factors include borrowers financial condition, size, industry and position in the industry; the reliability of financial statements of the borrower; quality of management; elements of transaction structure such as covenants etc. A more detail on the subject would be beyond the scope of these guidelines, however a few important aspects area) Banks may vary somewhat in the particular factors they consider and the weight they give to each factor.b) Since the rater and reviewer of rating should be following the same basic thought, to ensure uniformity in the assignment and review of risk grades, the credit policy should explicitly define each risk grade; lay down criteria to be fulfilled while assigning a particular grade, as well asthe circumstances under which deviations from criteria can take place.c) The credit policy should also explicitly narrate the roles of different parties involved in the rating process.d) The institution must ensure that adequate training is imparted to staff to ensure uniform ratingse) Assigning a Rating is basically a judgmental exercise and the models, external ratings and written guidelines/benchmarks serve as input.f) Institutions should take adequate measures to test and de velop a risk rating system prior to adopting one. Adequate validation testing should be conducted during the design phase as well as over the life of the system to ascertain the applicability of the system to the institutionsportfolio. Institutions that use sophisticated statistical models to assign ratings or to calculate probabilities of default, must ascertain the applicability of these models to their portfolios. Even when such statistical models are found to be satisfactory, institutions should not use the output of such models as the sole criteria for assigning ratings or determining the probabilities of default. It would be advisable to consider other relevant inputs as well.Ratings review The rating review can be two-fold:a) Continuous monitoring by those who assigned the rating. The Relationship Managers (RMs) generally have a close contact with the borrower and are expected to keep an eye on the financial stability of the borrower. In the event of any deterioration the ratings are immediately revised /reviewed. Secondly the risk review functions of the bank or business lines also conduct periodical review of ratings at the time of risk review of credit portfolio.Risk ratings should be assigned at the inception of lending, and updated at least annually. Institutions should, however, review ratings as and when adverse events occur. A separate function independent of loan origination should review Risk ratings. As part of portfolio monitoring, institutions should generate reports on credit exposure by risk grade. Adequate trend and migration analysis should also be conducted to identify any deterioration in credit quality. Institutions may establish limits for risk grades to highlight concentration in particular rating bands. It is important that the consistency and accuracy of ratings is examined periodically by a function such as an independent credit review group For consumer lending, institutions may adopt credit-scoring models for processing loan applications and monitoring credit quality. Institutions should apply the above principles in the management of scoring models. Where the model is relatively new, institutions should continue to subject credit applications to rigorous review until the model has stabilized.Credit Risk Monitoring & Control Credit risk monitoring refers to incessant monitoring of individual credits inclusive of Off-Balance sheet exposures to obligors as well as overall credit portfolio of the bank. Banks need to enunciate a system that enables them to monitor quality of the credit portfolio on day-to-day basis and take remedial measures as and when any deterioration occurs. Such a system would enable a bank to ascertain whether loans are being serviced as per facility terms, the adequacy of provisions, the overall risk profile is within limits established by management and compliance of regulatory limits. Establishing an efficient and effective credit monitoring system would help senior management to monitor the overall quality of the total credit portfolio and its trends. Consequently the management could fine tune or reassess its credit strategy /policy accordinglyBefore encountering any major setback. The banks credit policy should explicitly provide procedural guideline relating to credit risk monitoring. At the minimum it should lay down procedure relating toa) The roles and responsibilities of individuals responsible for credit risk monitoringb) The assessment procedures and analysis techniques (for individualloans & overall portfolio)c) The frequency of monitoringd) The periodic examination of collaterals and loan covenantse) The frequency of site visitsf) The identification of any deterioration in any loanGiven below are some key indicators that depict the credit quality of a loan:a. Financial Position and Business Conditions. The most important aspect about an obligor is its financial health, as it would determine its repayment capacity. Consequently institutions need carefully watch financial standing of obligor. The Key financial performance indicators on profitability, equity, leverage and liquidity should be analyzed. While making such analysis dueconsideration should be given to business/industry risk, borrowers position within the industry and external factors such as economic condition, government policies, regulations. For companies whose financial position is dependent on key management personnel and/or shareholders, for example, in small and medium enterprises, institutions would need to pay particular attention to the assessment of the capability and capacity of the management/shareholder(s).b. Conduct of Accounts. In case of existing obligor the operation in the account would give a fair idea about the quality of credit facility. Institutions should monitor the obligors account activity, repayment history and instances of excesses over credit limits. For trade financing, institutions should monitor cases of repeat extensions of due dates for trust receipts and bills.c. Loan Covenants. The obligors ability to adhere to negative pledges and financial covenants stated in the loan agreement should be assessed, and any breach detected should be addressed promptly.d. Collateral valuation. Since the value of collateral could deteriorate resulting in unsecured lending, banks need to reassess value of collaterals on periodic basis. The frequency of such valuation is very subjective and depends upon nature of collaterals. For instance loan granted against shares need revaluation on almost daily basis whereas if there is mortgage of a residential property the revaluation may not be necessary as frequently. In case of credit facilities secured against inventory or goods at the obligors premises, appropriate inspection should be conducted to verify the existence and valuation of the collateral. And if such goods are perishable or such that their value diminish rapidly (e.g. electronic parts/equipments), additional precautionary measures should be taken.External Rating and Market Price of securities such as TFCs purchased as a form of lending or long-term investment should be monitored for any deterioration in credit rating of the issuer, as well as large decline in market price. Adverse changes should trigger additional effort to review the creditworthiness of the issuer.

Risk review

The institutions must establish a mechanism of independent, ongoing assessment of credit risk management process. All facilities except those managed on a portfolio basis should be subjected to individual risk review at least once in a year. The results of such review should be properly documented and reported directly to board, or its subcommittee or senior management without lending authority. The purpose of such reviews is to assess the credit administration process, the accuracy of credit rating and overall quality of loan portfolio independent of relationship with the obligor.Institutions should conduct credit review with updated information on the obligors financial and business conditions, as well as conduct of account. Exceptions noted in the credit monitoring process should also be evaluated for impact on the obligors creditworthiness. Credit review should also be conducted on a consolidated group basis to factor in the business connections among entities in a borrowing group.As stated earlier, credit review should be performed on an annual basis, however more frequent review should be conducted for new accounts where institutions may not be familiar with the obligor, and for classified or adverse rated accounts that have higher probability of default.For consumer loans, institutions may dispense with the need to perform credit review for certain products. However, they should monitor and report credit exceptions and deterioration.Delegation of Authority.Banks are required to establish responsibility for credit sanctions and delegate authority to approve credits or changes in credit terms. It is the responsibility of banks board to approve the overall lending authority structure, and explicitly delegate credit sanctioning authority to senior management and the credit committee. Lending authority assigned to officers should be commensurate with the experience, ability and personal character. It would be better if institutions develop risk-based authority structure where lending power is tied to the risk ratings of the obligor. Large banks may adopt multiple credit approvers for sanctioning such as credit ratings, risk approvals etc to institute a more effective system of check and balance. The credit policy should spell out the escalation process to ensure appropriate reporting and approval of credit extension beyond prescribed limits. The policy should also spell out authorities for unsecured credit (while remaining within SBP limits), approvals of disbursements excess over limits and other exceptions to credit policy.In cases where lending authority is assigned to the loan originating function, there should be compensating processes and measures to ensure adherence to lending standards. There should also be periodic review of lending authority assigned to officers.Managing problem creditsThe institution should establish a system that helps identify problem loan ahead of time when there may be more options available for remedial measures. Once the loan is identified as problem, it should be managed under a dedicated remedial process. A banks credit risk policies should clearly set out how the bank will manage problem credits. Banks differ on the methods and organization they use to manage problem credits. Responsibility for such credits may be assigned to the originating business function, a specialized workout section, or a combination of the two, depending upon the size and nature of the credit and the reason for its problems. When a bank has significant credit-related problems, it is important to segregate the workout function from the credit origination function. The additional resources, expertise and more concentrated focus of a specialized workout section normally improve collection results. A problem loan management process encompass following basic elements.a. Negotiation and follow-up. Proactive effort should be taken in dealing with obligors to implement remedial plans, by maintaining frequent contact and internal records of follow-up actions. Often rigorous efforts made at an early stage prevent institutions from litigations and loan lossesb. Workout remedial strategies. Sometimes appropriate remedial strategies such as restructuring of loan facility, enhancement in credit limits or reduction in interest rates help improve obligors repayment capacity. However it depends upon business condition, the nature of problems being faced and most importantly obligors commitment and willingness to repay the loan. While such remedial strategies often bring up positive results, institutions need to exercise great caution in adopting such measures and ensure that such a policy must not encourage obligors to default intentionally. The institutions interest should be the primary consideration in case of such workout plans. It needs not mention here that competent authority, before their implementation, should approve such workout plan.c. Review of collateral and security document. Institutions have to ascertain the loan recoverable amount by updating the values of available collateral with formal valuation. Security documents should also be reviewed to ensure the completeness and enforceability of contracts and collateral/guarantee.d. Status Report and Review Problem credits should be subject to more frequent review and monitoring. The review should update the status and development of the loan accounts and progress of the remedial plans. Progress made on problem loan should be reported to the senior management"Credit Risk Management: Policy Framework for Indian Banks"Cool Avenues Knowledge Management Team, a knowledge management portal on various topics also have written about the credit risk management framework for Indian banks. According to them in this article, Risk is inherent in all aspects of a commercial operation and covers areas such as customer services, reputation, technology, security, human resources, market price, funding, legal, regulatory, fraud and strategy. However, for banks and financial institutions, credit risk is the most important factor to be managed. Credit risk is defined as the possibility that a borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks' dealings with or lending to a corporate, individual, another bank, financial institution or a country. Credit risk may take various forms, such as: in the case of direct lending, that funds will not be repaid; in the case of guarantees or letters of credit, that funds will not be forthcoming from the customer upon crystallization of the liability under the contract; in the case of treasury products, that the payment or series of payments due from the counterparty under the respective contracts is not forthcoming or ceases; in the case of securities trading businesses, that settlement will not be effected; in the case of cross-border exposure, that the availability and free transfer of currency is restricted or ceases. The more diversified a banking group is, the more intricate systems it would need, to protect itself from a wide variety of risks. These include the routine operational risks applicable to any commercial concern, the business risks to its commercial borrowers, the economic and political risks associated with the countries in which it operates, and the commercial and the reputational risks concomitant with a failure to comply with the increasingly stringent legislation and regulations surrounding financial services business in many territories. Comprehensive risk identification and assessment are therefore very essential to establishing the health of any counterparty. Credit risk management enables banks to identify, assess, manage proactively, and optimise their credit risk at an individual level or at an entity level or at the level of a country. Given the fast changing, dynamic world scenario experiencing the pressures of globalisation, liberalization, consolidation and disintermediation, it is important that banks have a robust credit risk management policies and procedures which is sensitive and responsive to these changes. The quality of the credit risk management function will be the key driver of the changes to the level of shareholder return. Industry analysts have demonstrated that the average shareholder return of the best credit performance US banks during 1989 - 1997 was 56% higher than their peers.

They have mentioned the Credit security on certain parameters.That are-

Building Blocks on Credit Risk

In any bank, the corporate goals and credit culture are closely linked, and an effective credit risk management framework requires the following distinct building blocks: - Strategy and Policy

This covers issues such as the definition of the credit appetite, the development of credit guidelines and the identification and the assessment of the credit risk. OrganisationThis would entail the establishment of competencies and clear accountabilities for managing the credit risk.Operations/SystemsMIS requirements of the senior and middle management, and the development of tools and techniques will come under this domain.Strategy and PolicyIt is essential that each bank develops its own credit risk strategy or enunciates a plan that defines the objectives for the credit-granting function. This strategy should spell out clearly the organizations credit appetite and the acceptable level of risk - reward trade-off at both the macro and the micro levels. The strategy would therefore, include a statement of the bank's willingness to grant loans based on the type of economic activity, geographical location, currency, market, maturity and anticipated profitability. This would necessarily translate into the identification of target markets and business sectors, preferred levels of diversification and concentration, the cost of capital in granting credit and the cost of bad debts.The policy document should cover issues such as organizational responsibilities, risk measurement and aggregation techniques, prudential requirements, risk assessment and review, reporting requirements, risk grading, product guidelines, documentation, legal issues and management of problem loans. Loan policies apart from ensuring consistency in credit practices, should also provide a vital link to the other functions of the bank. It has been empirically proved that organisations with sound and well-articulated loan policies have been able to contain the loan losses arising from poor loan structuring and perfunctory risk assessments. The credit risk strategy should provide continuity in approach, and will need to take into account the cyclical aspects of any economy and the resulting shifts in the composition and quality of the overall credit portfolio. This strategy should be viable in the long run and through various credit cycles.An organizations risk appetite depends on the level of capital and the quality of loan book and the magnitude of other risks embedded in the balance sheet. Based on its capital structure, a bank will be able to set its target returns to its shareholders and this will determine the level of capital available to the various business lines.Keeping in view the foregoing, a bank should have the following in place: - 1. Dedicated policies and procedures to control exposures to designated higher risk sectors such as capital markets, aviation, shipping, property development, defense equipment, highly leveraged transactions, bullion etc. 2. Sound procedures to ensure that all risks associated with requested credit facilities are promptly and fully evaluated by the relevant lending and credit officers. 3. Systems to assign a risk rating to each customer/borrower to whom credit facilities have been sanctioned. 4. a mechanism to price facilities depending on the risk grading of the customer, and to attribute accurately the associated risk weightings to the facilities. 5. Efficient and effective credit approval process operating within the approval limits authorized by the Boards. 6. Procedures and systems which allow for monitoring financial performance of customers and for controlling outstanding within limits. 7. Systems to manage problem loans to ensure appropriate restructuring schemes. A conservative policy for the provisioning of non-performing advances should be followed. 8. a process to conduct regular analysis of the portfolio and to ensure on-going control of risk concentrations. Credit Policies and ProceduresThe credit policies and procedures should necessarily have the following elements: Banks should have written credit policies that define target markets, risk acceptance criteria, credit approval authority, credit origination and maintenance procedures and guidelines for portfolio management and remedial management. Banks should establish proactive credit risk management practices like annual / half yearly industry studies and individual obligor reviews, periodic credit calls that are documented, periodic plant visits, and at least quarterly management reviews of troubled exposures/weak credits. Business managers in banks will be accountable for managing risk and in conjunction with credit risk management framework for establishing and maintaining appropriate risk limits and risk management procedures for their businesses. Banks should have a system of checks and balances in place around the extension of credit which are: An independent credit risk management function Multiple credit approvers An independent audit and risk review function The Credit Approving Authority to extend or approve credit will be granted to individual credit officers based upon a consistent set of standards of experience, judgment and ability. The level of authority required to approve credit will increase as amounts and transaction risks increase and as risk ratings worsen. Every obligor and facility must be assigned a risk rating. Banks should ensure that there are consistent standards for the origination, documentation and maintenance for extensions of credit. Banks should have a consistent approach toward early problem recognition, the classification of problem exposures, and remedial action. Banks should maintain a diversified portfolio of risk assets in line with the capital desired to support such a portfolio. Credit risk limits include, but are not limited to, obligor limits and concentration limits by industry or geography. In order to ensure transparency of risks taken, it is the responsibility of banks to accurately, completely and in a timely fashion, report the comprehensive set of credit risk data into the independent risk system.

Organizational StructureA common feature of most successful banks is to establish an independent group responsible for credit risk management. This will ensure that decisions are made with sufficient emphasis on asset quality and will deploy specialised skills effectively. In some organisations, the credit risk management team is responsible for the management of problem accounts, and for credit operations as well. The responsibilities of this team are the formulation of credit policies, procedures and controls extending to all of its credit risks arising from corporate banking, treasury, credit cards, personal banking, trade finance, securities processing, payment and settlement systems, etc. This team should also have an overview of the loan portfolio trends and concentration risks across the bank and for individual lines of businesses, should provide input to the Asset - Liability Management Committee of the bank, and conduct industry and sectoral studies. Inputs should be provided for the strategic and annual operating plans. In addition, this team should review credit related processes and operating procedures periodically.It is imperative that the independence of the credit risk management team is preserved, and it is the responsibility of the Board to ensure that this is not allowed to be compromised at any time. Should the Board decide not to accept any recommendation of the credit risk management team and then systems should be in place to have the rationale for such an action to be properly documented. This document should be made available to both the internal and external auditors for their scrutiny and comments. The credit risk strategy and policies should be effectively communicated throughout the organisation. All lending officers should clearly understand the bank's approach to granting credit and should be held accountable for complying with the policies and procedures.Keeping in view the foregoing, each bank may, depending on the size of the organization or loan book, constitute a high level Credit Policy Committee also called Credit Risk Management Committee or Credit Control Committee, etc. to deal with issues relating to credit policy and procedures and to analyse, manage and control credit risk on a bank wide basis. The Committee should be headed by the Chairman/CEO/ED, and should comprise heads of Credit Department, Treasury, Credit Risk Management Department (CRMD) and the Chief Economist. The Committee should, inter alia, formulate clear policies on standards for presentation of credit proposals, financial covenants, rating standards and benchmarks, delegation of credit approving powers, prudential limits on large credit exposures, asset concentrations, standards for loan collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans, provisioning, regulatory/legal compliance, etc. Concurrently, each bank may also set up Credit Risk Management Department (CRMD), independent of the Credit Administration Department. The CRMD should enforce and monitor compliance of the risk parameters and prudential limits set by the CPC. The CRMD should also lay down risk assessment systems, monitor quality of loan portfolio, identify problems and correct deficiencies, develop MIS and undertake loan review/audit. Large banks may consider separate set up for loan review/audit. The CRMD should also be made accountable for protecting the quality of the entire loan portfolio. The Department should undertake portfolio evaluations and conduct comprehensive studies on the environment to test the resilience of the loan portfolio.Operations / SystemsBanks should have in place an appropriate credit administration, measurement and monitoring process. The credit process typically involves the following phases: - 1. Relationship management phase i.e. business development. 2. Transaction management phase: cover risk assessment, pricing, structuring of the facilities, obtaining internal approvals, documentation, loan administration and routine monitoring and measurement. 3. Portfolio management phase: entail the monitoring of the portfolio at a macro level and the management of problem loans. Successful credit management requires experience, judgement and a commitment to technical development. Each bank should have a clear, well-documented scheme of delegation of limits. Authorities should be delegated to executives depending on their skill and experience levels. The banks should have systems in place for reporting and evaluating the quality of the credit decisions taken by the various officers. The credit approval process should aim at efficiency, responsiveness and accurate measurement of the risk. This will be achieved through a comprehensive analysis of the borrower's ability to repay, clear and consistent assessment systems, a process which ensures that renewal requests are analyzed as carefully and stringently as new loans and constant reinforcement of the credit culture by the top management team. Commitment to new systems and IT will also determine the quality of the analysis being conducted. There is a range of tools available to support the decision making process. These are: Traditional techniques such as financial analysis. Decision support tools such as credit scoring and risk grading. Portfolio techniques such as portfolio correlation analysis. The key is to identify the tools that are appropriate to the bank. Banks should develop and utilize internal risk rating systems in managing credit risk. The rating system should be consistent with the nature, size and complexity of the bank's activities. Banks must have a MIS, which will enable them to manage and measure the credit risk inherent in all on- and off-balance sheet activities. The MIS should provide adequate information on the composition of the credit portfolio, including identification of any concentration of risk. Banks should price their loans according to the risk profile of the borrower and the risks associated with the loans

RBIRisk Management in RBI

As a financial intermediary, RBI is exposed to risks that are particular to its lending and trading businesses and the environment within which it operates. RBIs goal in risk management is to ensure that it understands measures and monitors the various risks that arise and that the organization adheres strictly to the policies and procedures which are established to address these risks. As a financial intermediary, RBI is primarily exposed to credit risk, market risk, liquidity risk, operational risk and legal risk.

RBI has a central Risk, Compliance and Audit Group with a mandate to identify, assess, monitor and manage all of RBIs principal risks in accordance with well-defined policies and procedures. The Head of the Risk, Compliance and Audit Group reports to the Executive Director responsible for the Corporate Center, which does not include any business groups, and is thus independent from RBIs business units. The Risk, Compliance and Audit Group coordinate with representatives of the business units to implement RBIs risk methodologies.

Committees of the board of directors have been constituted to oversee the various risk management activities. The Audit Committee of RBIs board of directors provides direction to and also monitors the quality of the internal audit function. The Risk Committee of RBIs board of directors reviews risk management policies in relation to various risks including portfolio, liquidity, interest rate, off-balance sheet and operational risks, investment policies and strategy, and regulatory and compliance issues in relation thereto. The Credit Committee of RBIs board of directors reviews developments in key industrial sectors and RBIs exposure to these sectors.

The Asset Liability Management Committee of RBIs board of directors is responsible for managing the balance sheet and reviewing the asset-liability position to manage RBIs market risk exposure. The Agriculture & Small Enterprises Business Committee of RBIs board of directors, which was constituted in June 2003 but has not held any meetings to date, will, in addition to reviewing RBIs strategy for small enterprises and agri-business, also review the quality of the agricultural lending and small enterprises finance credit portfolio. As shown in the following chart, the Risk, Compliance and Audit Group is organized into six subgroups:

Credit Risk Management, Market Risk Management, Analytics, Internal Audit, Retail Risk Management and Credit Policies and Reserve Bank of India Inspection. The Analytics Unit develops proprietary quantitative techniques and models for risk measurement

CREDIT RISK MANAGEMENT IN COMMERCIAL BANKS

Risk Management in HDFC Bank

HDFC Bank has formulated a Risk Management Framework. The Risk Management Committee (RMC) apprises the Audit Committee and the board of the risk assessment and mitigation mechanisms of the Corporation. The RMC comprises the Executive Director as chairperson and senior management heading key functional areas as members of the committee. During the year, the Audit Committee and the board reviewed the efficacy of the Risk Management Framework, the key risks associated with the business of the Corporation and the measures in place to mitigate the same.

The audit committee formulated a Risk Management Framework. The Risk Management Committee (RMC) apprises the Audit Committee and the board of the risk assessment and mitigation mechanisms of the Corporation. The RMC comprises the Executive Director as chairperson and senior management heading key functional areas as members of the committee. During the year, the Audit Committee and the board reviewed the efficacy of the Risk Management Framework, the key risks associated with the business of the Corporation and the measures in place to mitigate the same.

Risk Management through ALM techniqueThere are three different but related ways of managing financial risks. The first is to purchase insurance. But this is viable only for certain type of risks such as credit risks, which arise if the party to a contract defaults. The second approach refers to asset liability management (ALM). This involves careful balancing of assets and liabilities. It is an exercise towards minimizing exposure to risks by holding the appropriate combination of assets and liabilities so as to meet earnings target of the firm. The third option, which can be used either in isolation or in conjuction with the first two options, is hedging. It is to an extent similar to ALM. But while ALM involves on-balance sheet positions, hedging involves off-balance sheet positions. Products used for hedging include futures, options, forwards and swaps. It is ALM, which requires the most attention for managing the financial performance of banks. Asset-liability management can be performed on a per-liability basis by matching a specific asset to support each liability. Alternatively, it can be performed across the balance sheet. With this approach, the net exposure of the banks liabilities is determined, and a portfolio of assets is maintained, which hedges those exposures.

Asset-liability analysis is a flexible methodology that allows the bank to test interrelationships between a wide variety of risk factors including market risks, liquidity risks, actuarial risks, management decisions, uncertain product cycles, etc. However, it has the shortcoming of being highly subjective. It is up to the bank to decide what mix would be suitable to it in a given scenario. Therefore, successful implementation of the risk management process in banks would require strong commitment on the part of the senior management to integrate basic operations and strategic decision making with risk management. The scope of ALM function can be described as follows: Liquidity risk management. Management of market risks. Trading risk management. Funding and capital planning Profit planning and growth projection. The objective function of the risk management policy in financial entities is two fold. It aims at profitability through price matching while ensuring liquidity by means of maturity matching. Price matching aims to maintain interest spreads by ensuring that deployment of liabilities will be at a rate more than the costs. This exercise would indicate whether the institution is in a position to benefit from rising interest rates by having a positive gap (assets > liabilities) or whether it is in a position to benefit from declining interest rates by a negative gap (liabilities > assets). The gap between the interest rates (on assets/liabilities) can therefore be used as a measure of interest rate sensitivity. These spreads can however, be achieved if interest rate movements are known with accuracy. Similarly, grouping assets/liabilities based on their maturity profile ensures liquidity. The gap is then assessed to identify future financing requirements. However, there are often maturity mismatches, which may to a certain extent affect the expected results.

RISK MANAGEMENT GROUPS AND SUBGROUPS OF HDFC

Managing Director and CEOAudit/ Risk/ Credit/Agriculture& Small Enterprises BusinessCommittee of the Board

Executive Director/Corporate CenterHead Risk Compliance & Audit GroupAnalyticsInternal Audit

Retail Risk ManagementMarket Risk ManagementCredit RisK ManagementCredit Policies (RBI)

Risk Management of Standard Chartered Bank

Standard Chartered is the world's leading emerging markets bank headquartered in London. It offers both consumer and wholesale banking services. The bank employs 30,000 people in over 500 locations in more than 50 countries including the Asia Pacific Region, South Asia, the Middle East, Africa, the United Kingdom and the Americas. The world-wide IT infrastructure features 5,000 servers and 35,000 desktops. IT supports 600 different applications.The main business problem is that it needs an effective method for tackling critical security problems quickly and efficiently in a high risk high profile environment. Further, developing an effective, global, risk-driven approach to security in a highly distributed enterprise is on the agenda.Standard Charterers Requirements Prioritise patching effectively Detect vulnerabilities quickly Integrate easily with existing proprietary security approach SolutionQualysGuard Enterprise to automate the network discovery, scanning, patching and verification process

Why Qualys? Accuracy Ease of global deployment Scalability Value for money Integration with established security operations

The stakes are very high indeed. With our many large and complex interconnections to the outside world, it's vital to carry out effective patch management. Our aim is to achieve the right level of security through implementing an appropriate risk-based strategy. This cannot be achieved without a clear and accurate understanding of what needs patching and ensuring that it remains reliably patched. We use QualysGuard as a dynamic tool to underpin this processThe aim is to achieve the right level of security on our global networks. This means a clear and accurate understanding of what needs patching and ensuring that it remains reliably patched. We rely upon QualysGuard to underpin this process.Being able to report on remediation and response plans has also helped us meet strict financial compliance requirements. QualysGuard reports give me and my security team an instant overview of the overall level of health of security in my organisation.

Standard Chartered's Need for Vulnerability ManagementSecurity monitoring in an environment like Standard Chartered's requires the capability to cover diverse IT platforms - including both Windows and Linux - and many applications and services. Its goal was to consolidate these ad-hoc efforts into one cohesive, global process with clear visibility, follow through and accountability.Before the introduction of enterprise vulnerability management, Standard Chartered's network topology and system configurations were unknown. Local operating teams performed only occasional scanning with various tools. Spot audits were made through penetration- testing and there was no rigorous methodology to assess exposure and take corrective action.The bank evaluated four alternatives including tools from Foundscan, ISS, Vigilante and X-Force but eventually, it selected QualysGuard on six clear criteria: Scanning accuracy, deployability, scalability, ease-of-use, integration capabilities and overall cost effectiveness."It was the only solution which met our demands without compromise, giving the bank a reliable, centralised method for protecting our critical assets worldwide. Their experience of rolling out QualysGuard has been remarkably painless. Working with our integration team in both London and Singapore, the service has been consistently high.

The role of Vulnerability Management at Standard CharteredBy introducing vulnerability management, Standard Chartered gained a clear picture of the exposure with common standards worldwide. The company has been able to quickly prioritise remediation; get security and operating teams to work together smoothly and effectively and empowered outsourcing vendors to meet specific security service level agreements.Many major viruses have the ability to recur and creep insidiously back into the network causing considerable problems; another reason why on-going scanning is important.Although Standard Chartered Bank was not hit the first time round by SQL Slammer, it did manage to infect the network a number of months later due to difficulties in restoring patched server builds after operational problems. Our IDS engines and QualysGuard enabled the Bank to pinpoint rapidly the source of the problem and close it down, avoiding major infection.Reports Help to Improve Risk Management and to Address Regulatory RequirementsQualysGuard's easily accessible reports provide a clear audit trail for fixing vulnerabilities. Delivered on a monthly basis to the bank's operational risk committee, they have enabled Standard Chartered to improve its risk management methodology and address regulatory requirements that impact financial institutions.

These reports help the security group support the front-line production operations team more effectively to patch and maintain the security of the whole network. They allow centralised management by checking the patch management performance, tracking patching actions to completion and distributing tasks to the relevant geographic support group. Regulatory pressures and increased exposure are driving more complex requirements for managing security risk. The vulnerability management strategy gained the bank ability to view and act upon security risk as it pertains to our organisation's assets.The reports also enable management to justify the investments we need and further define the security strategy. Today, the bank really can deploy our security manpower much more effectively in both preparing and responding to security incidents.Standard Chartered Bank, an international bank that provides interest rate derivatives products for corporate customers globally, is expanding its Sun Microsystems technology infrastructure in four offices worldwide as it implements a more sophisticated, object-oriented global derivatives trading system.

Risk Management in Union Bank

Risk is inherent part of Banks business. Effective Risk Management is critical to any Bank for achieving financial soundness. In view of this, aligning Risk Management to Banks organizational structure and business strategy has become integral in banking business. Over a period of year, Union Bank of India (UBI) has taken various initiatives for strengthening risk management practices. Bank has an integrated approach for management of risk and in tune with this, formulated policy documents taking into account the business requirements / best international practices or as per the guidelines of the national supervisor. These policies address the different risk classes viz., Credit Risk, Market Risk and Operational Risk. The issues related to Credit Risk are addressed in the Policies stated below; Loan Policy Credit Monitoring Policy Real Estate Policy Credit Risk Management Policy Collateral Risk Management Policy Recovery Policy Treasury Policy

The Policies and procedures for Market Risks are articulated in the ALM Policy and Treasury Policy.

The Operational Risk Management involves framework for management of operational risks faced by the Bank. The issues related to this risk is addressed by;

Operational Risk Management Policy Business Continuity Policy Outsourcing Policy Disclosure Policy

Besides, the above Board mandated Policies, Bank has detailed Internal Control Principles communicated to the business lines for ensuring adherence to various norms like Anti-Money Laundering, Information Security, Customer complaints, Reconciliation of accounts, Book-keeping etc. Oversight MechanismOur Board of Directors has the overall responsibility of ensuring that adequate structures, policies and procedures are in place for risk management and that they are properly implemented. Board approves our risk management policies and also sets limits by assessing our risk appetite, skills available for managing risk and our risk bearing capacity. Board has delegated this responsibility to a sub-committee: the Supervisory Committee of Directors on Risk Management & Asset Liability Management. This is the Apex body / Committee is responsible for supervising the risk management activities of the Bank. Further, Bank has the following separate committees of top executives and dedicated Risk Management Department: Credit Risk Management Committee (CRMC): This Committee deals with issues relating to credit policies and procedure and manages the credit risk on a Bank-wide basis Asset Liability Management Committee (ALCO): This Committee is the decision-making unit responsible for balance sheet planning and management from the angle of risk-return perspective including management of market risk Operational Risk Management Committee (ORMC): This Committee is responsible for overseeing Banks operational risk management policy and process Risk Management Department of the Bank provides support functions to the risk management committees mentioned above through analysis of risks and reporting of risk positions and making recommendations as to the level and degree of risks to be assumed. The department has the responsibility of identifying, measuring and monitoring the various risk faced the bank, assist in developing the policies and verifying the models that are used for risk measurement from time to time