The Hindu : RBI asks banks to improve risk management

Online edition of India's National Newspaper
Wednesday, Dec 10, 2003

Business

Business

RBI asks banks to improve risk management

By Our Special Correspondent

NEW DELHI DEC. 9. The Reserve Bank of India has called upon banks to improve their risk management system by building an investment fluctuation reserve (IFR), provisioning for problem assets and putting in place systems that monitor unhedged external liabilities.

The Deputy Governor of the RBI, K. J. Udeshi, told an international conference on banking and trade finance here today that along with risk-based internal audit, banks must also put in place proper risk management architecture, strengthen information technology, address human resources and set up compliance units. These steps would enable a smooth transition to risk-based supervision that was being implemented in India at present. Risk-based supervision provides incentives to banks for adoption of more sophisticated risk management techniques and this, together with sound corporate governance, should lead to the creation of a worldclass banking system, Ms. Udeshi said.

The RBI, on its part, would continue to ensure financial stability, strengthening of prudential norms with the strategy of convergence of international best practice, consistent with the country's specific needs, and also progressive strengthening of the supervisory framework, the Deputy Governor said. "Accordingly, the focus would be on streamlining banking operations in order to reduce transaction costs, infusing flexibility into the system, upgrading risk-management systems and enhancing the level of compliance by banks with accounting standards,'' she said.

Ms. Udeshi also drew attention to money laundering, a "critical issue of increasing international concern.'' The impact of money laundering was now beginning to extend from economic crimes to international terrorism and as financial transactions became more complex, it was becoming difficult for banks to maintain a customer profile, the Deputy Governor said.

The RBI had issued several guidelines to banks and non-banking financial companies to implement the `know your customer' principle, the basic aim of which was to prevent banks from being unwittingly used as channel of funds derived from criminal activity or financing terrorism, the Deputy Governor said.

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