Page 47 - Banking Finance October 2015

ARTICLE

future of banking will undoubtedly rest on risk affect one area of risk can have ramifications for a range
management dynamics. of other risk categories. Thus, top management of banks
should attach considerable importance to improve the
Risk management is by far the most important area to be ability to identify measure, monitor and control the
covered under global best practices and standards. The overall level of risks undertaken. The broad parameters of
success of any financial institution depends on its risk risk management function should encompass:
management capabilities. Success will come only if we 4 Organizational structure;
assess risks correctly, price them properly and manage
them effectively. It is always necessary to restrict or limit 4 Comprehensive risk measurement approach;
losses from different transactions.
4 Risk management policies approved by the Board
By means of this strategy every bank has to control and which should be consistent with the broader business
regulate its overall exposure to different areas. What strategies, capital strength, management expertise
banks need today is a strong pro-active risk management and overall willingness to assume risk;
strategy which helps to avoid high risks and ensures their
the risks are taken consciously and after perceiving all 4 Guidelines and other parameters used to govern risk
types of possibilities and with full knowledge of all facts taking including detailed structure of prudential lim-
and all aspects of the risk involved. its;

4 Strong MIS for reporting, monitoring and controlling
risks;

Higher the risk, higher is the return; hence, it is essential 4 Well laid out procedures, effective control and com-
prehensive risk reporting framework;
to maintain parity between risk and return. So, manage-

ment of Financial risk,incorporating a set of systematic 4 Separate risk management framework independent

and professional methods especially those defined by the of operational Departments and with clear delinea-
Basel II norms become an essential requirement of banks. tion of levels of responsibility for management of risk;

The more risk averse a bank is, the safer is their Capital and

base. 4 Periodical review and evaluation

Risk management underscores the fact that the survival Fig.1. Risk Governance structure in the State
of an organization depends heavily on its capabilities to Bank of India
anticipate and prepare for the change rather than just
waiting for the change and react to it. The objective of
risk management is not to prohibit or prevent risk taking
activity, but to ensure that the risks are consciously taken
with full knowledge, clear purpose and understanding so
that it can be measured and mitigated.

5. Risk management practices in SBI - A An independent Risk Governance Structure, in line with
bird's eye view international best practices, has been put in place, in the
context of separation of duties and ensuring indepen-
Banks in the process of financial intermediation are dence of Risk Measurement, Monitoring and Control func-
confronted with various kinds of financial and non-financial
risks viz., credit, interest rate, foreign exchange rate,
liquidity, equity price, commodity price, legal, regulatory,
reputational, operational, etc.

These risks are highly interdependent and events that

BANKING FINANCE | OCTOBER | 2015 | 47

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