The operating environment of banks is fast changing. The key policy documents – Union Budget – 2023-24, Economic Survey 2022-23 and the aspirations set under India@100 during the Amrit Kaal – 2022-47 when seen together with the changing forms of geopolitical and external sector risks reflect massive fusion of challenges and opportunities for financial intermediaries, more importantly banks. Further a recent EY report estimates that Indian economy will reach GDP size of US $ 26 trillion by 2047 while the Confederation of Indian Industry (CII) estimates the economy to hit a size of US $ 40 trillion by 2047.
The fiscal and monetary policy measures will logically drive and support the economy to explore the potentiality to attain the size and volume to become a developed economy by 2047 when India@100 will be celebrated. The monetary policy on February 8, maintained its focus on inflation control by hiking repo rate by 25 basis points taking the incremental rise in repo rate to 250 basis points during the current spell. The banks as key financial intermediaries will have to remain robust with upgraded internal risk management systems to manage the changing shape of risks to stay relevant and competitive.
When the whole business ecosystem is poised to witness a phenomenal surge with redistributed priorities, the new projects, changed product profiles, borrower needs and higher volumes will pose increased systemic risks to banks amid the ongoing economic transformation. Banks will be required to efficiently manage the increased magnitude of risks to make the most out of the buoyancy.
While the regulatory changes and Basel Committee norms get upgraded to sync with the rising risks, the internal architecture of risk management systems have to recalibrated to (i) effectively manage the elevated risks (ii) and be able to grow while balancing the emerging risks. It needs an inclusive strategic thinking in collaboration with the board and senior management to work out risk management systems and strategies to withstand the onslaught of rising risks.
- Tectonic shift in business risk:
The higher allocations of Rs.10 lakh crores to infrastructure, capex thrust and enabling rise in private investment in the budget should lead to many new infrastructure projects. The thrust on green and sustainable finance will increase range of medium to long term developmental projects related to energy conservation, renewable energy, non-conventional energy, carbon neutral activities and so on. Attaining UN sustainable development goals – 2030 will also be adding to the challenges.
The progress in National Monetisation Pipeline (NMP) and National Infrastructure Pipeline (NIP) when seen together with the recent policy priorities, a new set of demand for lending and credit risk management systems will be needed. These projects will be under the monitoring system by using newly envisaged Pradhan Mantri Gati Shakti National Master Plan. This control system will be able to remove hurdles in implementation faster than earlier. The ease of doing business for the enterprises will also have to be galvanised to complete projects in time.
While the low ticket loans move to app based digital lending, the medium and corporate sector loans will have to be well evaluated. Credit risk makes bigger difference to banks that needs more attention to handle the emerging segment of loans.
- Risk Management in Banks:
With the integration of improved technology tools, the increasing rigor of regulations and enhanced prudential norms, the systemic controls of risk management have improved and thrust is on improving governance, risk and compliance (GRC).
Generally, commercial banks are exposed to diverse financial and non-financial risks. The predominant of them relate to credit risk, market risks comprising interest rate risks, foreign exchange risks, liquidity, equity price, commodity price, legal, regulatory, reputational and a host of interdependent risks. With technology and digitalization taking the centre stage of banking operation, operational risk is increasing.
The credit and market risks are quantifiable and some potential risk control have been developed. But the operational risk is difficult to assess as it is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The regulators and banks work in tandem to innovate methods to control operational risks better.
The oversight of subcommittee of the board on risk management has improved with the institutionalisation of Chief Risk officer (CRO) and Chief compliance officer (CCO) and better bottom up data flow to enable timely interventions. The systematic and timely use of heat maps, risk registers, risk appetite and tolerance levels can improve the monitoring and control of risks.
But among others, the most important risk management strategy could be to develop the skill sets and competency of employees who should understand and manage risks better. Reference of some of the case studies – failure of PMC Bank, IL & FS, Lakshmi Vilas bank, Yes Bank and some cases of conflict of interest in several instances indicate the glaring weaknesses in implementing GRC despite institutionalising best policy framework.
It crystallises into a key factor – role of employees in implementing risk management practices. The missing link may be due to lack of compatible skill sets that exacerbates the risks. The risk assessment of new infrastructure projects, their monitoring and control needs a different perspective, level of understanding and risk assessment system. In this context, the report of Shri Gopalakrishnan committee (2014) on capacity building calls for certification of knowledge before deploying staff in risk sensitive areas. While some banks have followed, others are yet to implement it. In the current heightened risk environment, the staff will have to be well trained. Online methods have to supplement to keep the knowledge well in sync with the business risks.
- Way forward:
Identification and measurement of risks in the new businesses and projects. Review of risk management policy framework to factor new forms of risks. Development of granular risk management manuals for each sector to meet the kind of risks. Prompting documentation of standard operating procedures(SOPs). Review of risk reporting framework and data feed from operations for early detection of risks. Exposure norm to be made as granular as possible to avoid sectoral spill over risks. Development of domain risk management experts of different sectors. Creating a cadre of restructuring teams and debt resolution experts to prevent failure of borrowers and take up NPA resolution on fast track, if and when warranted. Proper incentivization for learning and development. Grooming, coaching and mentoring of risk leadership cadre. Rewriting the frequency of reviews and data flows to ensure that risk does not build up. Specific time bound skill development and systemic controls will have to be organised as the present risk management systems may not be adequate to cope with higher risks in pipeline when some of the policy interventions show up in growth. Lot of strategic and thoughtful reforms will be needed to upgrade risk management systems in line with the rising riskiness to shape up the aspirations built in India@100.
