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The Economic Times

Banks need adequate skills for emerging risks: RBI

NEW DELHI: During the current global meltdown, the major problems which banks and financial institutions are facing internationally are illiquid assets, capital shortages and collapse of counter-party trust. And the challenge for banks is to develop adequate skills for managing emerging risks resulting from innovations in financial products as well as technological advancements, says the Reserve Bank in its latest report on Trend and Progress of Banking in India, 2007-2008.

The crisis suggests that risk management and supervisory practices lagged behind financial innovations and emerging business models. The report notes that the RBI has already put in place a system to mitigate liquidity risks at the very short-end, risks at the systemic level and at the institution level.

Liquidity risk management in India has been made more granular and prudential norms for off-balance sheet exposure of banks have been prescribed. In order to further strengthen capital requirements, the credit conversion factors, risk weights and provisioning requirements for specific off balance sheet items, including derivatives, have been reviewed. Furthermore, in India, complex structured products such as synthetic securitisation have not been permitted so far. Introduction of such products, when found appropriate, would be guided by the risk management capabilities of the system.

The report indicates that the challenge for banks is to develop adequate skills for managing emerging risks resulting from innovations in financial products as well as technological advancements. The RBI has been encouraging banks to develop an integrated approach to managing risk and also undertake stress testing exercises, both for liquidity and credit risk management. In this context, the availability of reliable information is crucial for both banks and regulators/supervisors of the banking system. The RBI took the first step in the direction of a more efficient financial data reporting system by implementing the online returns filing system. Another important step was the adoption of XBRL-based data reporting for Basel II reports from banks.

The report notes that a major challenge is how to meet the credit demand without impairing credit quality. Banks have to monitor their credit portfolios closely in the context of persisting high growth in bank credit at the system level and take corrective action as appropriate in order to prevent undue asset-liability mismatches or deterioration in the quality of credit, recognising the reality of business cycles and counter-cyclical monetary policy measures.

���Banks, on their part, would need to ensure that their business strategies and decisions are guided by the longer-term perspective of systemic and macroeconomic developments and are not unduly influenced by the current stream of exceptional events,��� the RBI says.
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