Risk Management Practices and Systems Followed by Banks for Complying with the Basel II Guidelines and Subsequent Guidelines Issued on These International Standards by the National Supervisor Reserve Bank of India

Risk Management Techniques

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Submitted to

Prof. Vinay Kumar Dutta

Submitted By:

Harsh Aggarwal 91022

Harshdeep Garg 91023

Harshita Periwal 91024

Karan Khanna 91026

Acknowledgement

We would like to express our heartfelt gratitude to Prof. Vinay Kumar Dutta, Faculty, FORE School of Management, under whose support and guidance we have been able to complete this project report successfully. He has been a constant source of motivation and showed immense patience in guiding us through every sphere of this project.

Lastly, I would like to thank all my friends who gave valuable inputs on how to make this study better and all the students who helped generate data for my research.

Harsh Aggarwal 91022

Harshdeep Garg 91023

Harshita Periwal 91024

Karan Khanna 91026

Contents

1. OBJECTIVE 4

2. SCOPE OF THE PROJECT 4

LITERATURE REVIEW 5

3. EXECUTIVE SUMMARY 7

4 BRIEF COMPANY PROFILE 9

4.1 INTRODUCTION: 9

4.2 BUSINESS: 9

4.3 NETWORK AND DISTRIBUTION 11

4.5 MISSION 13

4.6 STRUCTURE 13

4.7 GROWTH AND PERFORMANCE: 14

4.8 PORTER'S FIVE FORCES FRAMEWORK 19

5. BANKING INDUSTRY 21

5.1 INTRODUCTION TO INDIAN BANKING SECTOR 21

5.2 FEATURES 21

5.3 CURRENT INDIAN BANKING SCENARIO 22

5.4 CHANGING FACE OF INDIAN BANKING INDUSTRY 23

6. RISK MANAGEMENT 25

6.1 WHAT IS RISK? 25

6.2 NEED FOR RISK MANAGEMENT: 25

6.3 RISKS IN BANKING 26

6.4 OBJECTIVES OF RISK MANAGEMENT 30

7. BASEL ACCORD 31

7.1 BASEL I: INTRODUCTION 31

7.2 BASEL II : INTRODUCTION 31

7.2.1 Minimum Capital Requirement (1st Pillar) 34

7.2.2 Supervisory Review Process (2nd Pillar) 35

7.2.3 Market Discipline (3rd Pillar) 36

7.2.4 The Impact and Challenges of Basel II 37

8. PILLAR I: DIFFERENT RISKS ELABORATED 38

8.1 CREDIT RISK 38

8.1.1 Types of Credit Rating 39

8.1.2 Credit Risk Management 41

8.1.3 Building Blocks of Credit Risk Management 41

8.1.5 Importance of Credit Risk Models 44

8.1.6 Techniques for Measuring Credit Risk 44

8.1.7 Credit Risk: Basel II requirements 45

8.2 OPERATIONAL RISK 47

8.2.1 Who Should Manage Operational Risk? 48

8.2.2 Key to Implementing Bank-wide Operational Risk Management: 50

8.2.3 Four-Step Measurement Process For Operational Risk 52

8.2.4 Guidelines of BCBS of Operational Risk 58

8.3 MARKET RISK 59

8.3.1 Types of market risk 60

8.3.2 Treatment of Market Risk in the Proposed Basel Capital Accord 62

9. CREDIT RISK MITIGATION TECHNIQUES AT UNION BANK 64

9.1 CREDIT RISK MANAGEMENT 66

9.2 CREDIT RATING 66

9.3 TOOLS AND INPUTS USED FOR RATING: 68

9.4 PORTFOLIO OF RISK IN DIFFERENT SEGMENTS: 69

9.4.1 COMPOSITION OF RETAIL ASSETS 70

9.5 CREDIT GRID APPROACH TO SANCTION 70

9.6 MAJOR FUNCTIONS OF RISK MANAGER: 71

9.7 EXTERNAL RATING 71

9.8 DISTRIBUTION OF RATINGS 72

9.9 SYSTEM DRIVEN RATING: 72

9.10 INTERNAL LOAN REVIEW MECHANISM (ILRM): 72

10. RISK MANAGEMENT STRUCTURE AT UNION BANK 74

11. TRADITIONAL TO ENTERPRISE WIDE RISK MANAGEMENT 76

12. RECOMMENDATIONS: 80

13. BIBLIOGRAPHY 81

1. Objective

To understand the risk management practices and systems followed by banks for complying with the Basel II guidelines and subsequent guidelines issued on these international standards by the national supervisor Reserve Bank of India.

2. Scope of the Project

In the ensuing project, focus has been to understand the credit risk and operational risk systems and procedures followed by Union Bank of India.

Union bank of India is a prominent nationalised bank having pan India presence and is in operation since last 78 years. Credit risk is the most critical risk a bank faces and operational risk is present in all the activities a bank undertakes.

Literature Review

The