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Take a risk only after evaluation, say bankers. For high quality business and growth, banks need to properly assess risk, allocate capital prudently, identify bad customers early and improve their ability to recover bad loans, said experts at a discussion on managing risk at Bancon 2011.
For successfully managing risk, the top management of banks should take a holistic approach and lead the way, said the panel. Half the problem is addressed if risk assessment is done thoroughly while signing up a new customer, said those in the panel.
For this to happen, the frontline staff should understand what would happen if they get a customer who has the potential to turn bad in the future.
“To create a risk-oriented mindset in employees, banks should evaluate frontline employee performance on the basis of number of customers acquired minus the number of bad customers,” said Mr Kaizad Barucha, Head – Credit and Market Risk, HDFC Bank. It pays to have business managers heading the risk management function in banks as they understand the compulsions of acquiring new businesses, said experts.
“Risk should be used as an opportunity to educate and train employees,” said Mr A.P. Verma, Chief Credit and Risk Officer, SBI. “There are issues with the quality of data captured by banks. In addition, the models used to manage risk have not been tested under real life conditions.”
Banks should look at return on capital after adjusting for risk, said the panel experts. “There are a few areas which use capital without providing the minimum required return and hence capital needs to be allocated skilfully so that growth expectations and capital to be set aside for risk are well balanced,” said Mr Barucha.
“If you do proactive self-regulation, RBI will not have to do anything other than take care of risks related to the global economic shocks,” said Ms V.R. Iyer, Executive Director, Central Bank of India.
Banks should also communicate their risk management practices to the outside world, the panel concluded.
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