As foreign banks, lured by the promise of rising incomes and a huge unbanked population, make their way into the Indian market, the country’s home-grown banks will need to adopt more sophisticated methods of measuring and assessing risk to match up and compete with their risk management models.

Adopting advanced practices to ascertain risk is the biggest challenge confronting Indian banks today, according to Usha Thorat, deputy governor of the Reserve Bank of India (RBI), the banking regulator of Asia’s fastest growing major economy after China. “The major challenge is to move towards advanced approaches in credit risk and operational risk,” says Thorat. “That is an area where one would like to see the Indian baking system trying to go ahead.”

Indian banks follow the Standardised Approach (TSA) to Basel II, a slightly modified version of the Basic Indicator Approach (BIA), the simplest of three risk based methods under the 2004 framework. While TSA, unlike the BIA, stipulates specific percentages of a bank’s gross income to be set apart for specific business lines, it does not allow banks to develop internal models to quantify risk using elements such as internal and external loss data, scenario analysis and bank specific business and internal control factors. Usha Janakiraman, deputy general manager at the RBI, in a 2008 paper on operational risk in the context of Basel II, to which Indian banks were to comply by March 2009, surveyed 22 Indian banks and noted that insufficient internal data, difficulties in collection of external loss data and modeling complexities stand in the way of implementing sound operational risk frameworks.  “I’d like to see at least the large international banks in India moving towards more advanced approaches towards risk management,” Thorat says.

Indian banks’ current risk management approaches, for instance, do not reflect the true credit r...

Categories:

India, Risk And Regulation Working Group

India,risk,

India,Risk And Regulation Working Group,

Keywords: