RBI embraces risk management practices

Capital adequacy and asset liability management are familiar aspects of a bank's balance sheet. Going one step ahead, the Reserve Bank of India is planning to incorporate risk management processes in every aspect of its activities. This is in line with international best practices.

An internal RBI committee is being appointed to look into risk management practices and prescribe norms for adequate reserve maintenance.

Sources close to the development said risk management in reserve management is critical at this point of time since forex reserves have far outstripped domestic reserves.

Citing global practices, sources added that most central banks in developed economies "" including Bank of England and Federal Reserve "" have identified the importance of risk management.

The Reserve Bank of New Zealand has even set up two units with specific responsibilities relating to monitoring and managing risk.

While one department deals with risk monitoring of internal audit, the other is a risk unit within the bank's financial markets.

Sources said risk management is becoming a necessity as the current regime has opened up capital flow, advocates on-line clearing and settlement of funds and accounts and greater integration of financial markets across the globe.

As far as reserve management is concerned, balance of payment statistics show that global depreciation of the dollar as well as falling interest rates have led to less appreciation (or rather a loss in interest earnings) on the foreign exchange reserves.

On the other hand, sterilisation activity pursued by the central banks to ward off an appreciation of the rupee dollar exchange rate has led to huge liquidity in the system.

This in turn is getting parked in intra-day liquidity adjustment facility (LAF) provided by the RBI owing to the lack of credit pick up or any other lending opportunities.

Thus, while forex reserves are not earning much, the central bank has to bear an extra cost for sterilisation. As per the figures released by the weekly statistical supplement of the RBI, while foreign currency assets have gone up from Rs 4,85,101 crore on February 14, 2003, to Rs 5,39,649 crore for the same period in 2004, rupee securities have fallen from Rs 1,05,247 crore to Rs 35,284 crore.

Such mismatches could be addressed in greater detail as foreign exchange management "" be it inflows or outflows "" will be an ongoing phenomenon with greater opening of financial sectors and economy, banking sources added.

They said that market stabilisation bonds which could replace rupee securities will act as a very temporary measure.

There should be more structural measures required to combat the problem instead of sterilisation, they added.