Risk Management in Vasavi MSCM Co-operative Bank
Credit Risk
Credit risk is the risk when the borrower is unable to meet its financial obligation to the lender. All credit risk related aspects are governed by a credit and recovery policy which outlines the type of products that can be offered, customer categories, targeted customer profile and the credit approval process and limits. The credit and recovery policy is approved by the Board of Directors. In order to assess the credit risk associated with any corporate financing proposal, the Bank assesses a variety of risks relating to the borrower and the relevant industry. The Bank has a structured and standardized credit approval process which includes a well-established procedure of comprehensive credit appraisal and credit rating. The Bank developed internal credit rating methodologies for rating obligors. The rating factors in quantitative and qualitative issues and credit enhancement features specific to the transaction. The rating serves as a key input in the approval as well as post-approval credit processes. The rating of every borrower is reviewed at least annually. A risk based asset review framework has also been put in place wherein the frequency of asset review would be higher for cases with higher exposure and/or lower credit rating. Industry knowledge is constantly updated through field visits and interactions with clients, regulatory bodies and industry experts.
Market Risk
Market risk is the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates, exchange rates and other asset prices. The prime source of market risk for the Bank is the interest rate risk exposed to as a financial intermediary. In addition to interest rate risk, the Bank is exposed to other elements of market risk such as liquidity or funding risk, price risk on trading portfolios, exchange rate risk on foreign currency positions and credit spread risk. These risks are controlled through limits such as value-at-Risk (VaR) and stop loss and liquidity gap limits. The limits are stipulated in Investment Policy, ALM Policy and Derivative Policy, which are reviewed and approved by the Board of Directors.
The Asset Liability Management Committee, which comprises whole time directors and executives, meets on a regular basis and reviews the trading positions, monitors interest rate and liquidity gap positions, formulates views on interest rates, sets benchmark lending rates and determines the asset liability management strategy in light of the current and expected business environment.
The Global Market Risk Management Group recommends changes in risk policies and controls, and the processes and methodologies for quantifying and assessing market risks. Risk limits including position limits and stop loss limits for the trading book are monitored on a daily basis by the Treasury Middle Office Group and reviewed periodically. Foreign exchange risk is monitored through the net overnight open foreign exchange limit. Interest rate risk of the overall balance sheet is measured through the use of re-pricing gap analysis and duration analysis.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes legal risk but excludes strategic and reputation risks. Operational risks in the Bank are managed through a comprehensive internal control framework. The control framework is designed based on categorization of all functions into front-office, comprising of business groups, mid-office, comprising credit and treasury mid-offices; back-office, comprising operations: and corporate and support functions. The Bank also aims at ensuring clear accountability, and responsibility. The Bank has constituted an Operational Risk Management Committee (ORMC) to oversee the implementation of the Operational Risk Management framework.
Risk Management in Vasavi MSCM Co-operative Bank
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