MANAGING RISK IN BANKS

Issue of risk management in banks and financial institutions would, however, continue to be at the centre of an ongoing search for the right policy prescription.

While newer skill set for managing newer areas and unfamiliar elements of risks would continue to pose questions even to the most savvy of banks.

Banks will have to adopt a converged approach to risk where they will reevaluate their risk management acumen in a manner that calls for higher levels of transparency, structural integrity and operational control.

To combat internal fraud and protect clients and accounts, behavior and rules-based tools will have to be brought in.

Better risk management and surveillance applications that address systemic and customer-oriented risks, potential conflicts of interest, financial valuation, volatility of market movements and regulations will have to be embedded into the operational structure.

Future pricing will be dependent on risk minimization even while relationship-based pricing will continue to hold sway.

Today banks and FIs are facing with the risks of mis-pricing, adverse selection and mis-selling.

On the one hand, banks are operating in the market where only about one-third of the adult population are within the banking fold leaving out the market potential to grow twice the current size and, on the other, banks’ propensity to take banking services to the silent majority is very slow.

While expanding market is a matter of survival, further challenge for the banks would be to ring-fence its operations by establishing a sound risk management system that is not only protective but also inclusive and acts as a business enabler.

But for this to happen, analytics have to be developed and data integrity has to be improved.

Going forward, more focused approach would have to be given to strict adherence of AML / KYC norms so as to prevent the elements of fragility to come into the system.

Strong tracking system for verifying the movement of funds, especially cross border transaction and skillful analytical capabilities will be the prescription of the future.

Along with that, the most important issue will be customer protection.

When I talk of the customer protection, I mean making banking services or banks economically feasible for the customers and protect them from the bad banking practices. Can we devise a system by which poor subsidizing the rich can be reversed?

When banks make huge profit, it is because the customers paying through their nose.

When the banks incur loss, again it is the customers who are made to take less for their deposits or pay more the loans.

When the banks go out of business, it is the millions of tax payers’ hard-earned money that goes down the drain.

Customer protection also needs to be seen from protecting customer information and transaction security.

The writing on the wall is clear: ‘keep your customers happy and survive’.