State-run National Bank for Agriculture and Rural Development (Nabard) has asked regional rural banks (RRBs), state cooperative banks (SCBs) and district central cooperative banks (DCCBs) to formulate their risk management policy and constitute risk management committee.
Nabard in its communication on January 20 to all RRBs, SCBs and DCCBs said the design of risk management framework should be oriented towards the institutions’ own requirements based on the size and complexity of business, risk philosophy and market perception.
Further, a Nabard official told Business Standard that the effective management of credit risk was a critical component of comprehensive risk management and was essential for the long-term success of these banks.
Credit risk management encompasses identification, measurement, monitoring and control of the credit risk exposures. “In a bank’s portfolio, losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. Alternatively, losses result from reduction in portfolio value arising from actual or perceived deterioration in credit quality.” Nabard said.
According to Nabard, banks should devise a grading system to enable comparisons of risks for purposes of analysis and top management decision-making. It should also reflect regulatory requirements of the supervisor on asset classification (the RBI asset classification). It is anticipated that over a period of time, the process of risk identification and risk assessment will be further refined. The grading system should, therefore, be flexible and should accommodate the refinements in risk categorisation.