Description
This is a presentation explaining various sources of internal controls exerted by banks.
Banking Operations Chapter 11
Banking control
Sources of Controls
• External controls exerted by RBI • Internal controls i. Maintenance of Documents and Records ii. Adequate Information Storage and Retrieval Mechanism iii. Maintenance of CRAR iv. Asset-Liability Management System v. Organizational Structure vi. Audit and Vigilance.
External Operational Control
• Separation of regulation and supervision with creation of Department of Supervision (1993) followed by Board for Financial Supervision(1994) • Three pronged strategy for supervision:– On-site inspection (inspecting records) – Off-site surveillance (through periodic reports) – External Auditing (CAMELS and Comprehensive rating system)
• Along with this RBI exercise control over volume of credit
Risk based supervision(RBS)
• In future, supervision is to move from transactional based to risk based • Main purpose of RBS is allocation of scarce supervisory resources according risk profile of the company • The RBS process essentially involves
– continuous monitoring and evaluation of the risk profiles – Strengthening the risk modeling capabilities based on off-site data – Associated research for prediction supervision
Maintenance of Documents and Records
Books of Accounts • Principal Books of Accounts
– General ledger – Profit and loss ledger
• Subsidiary Books
– Personal ledgers – Bill registers
• Other Subsidiary Registers
– – – – – – – – – Bills for Collection Register Demand Draft Register Share Security Register Jewelry Register Safe Custody Register Letters of Credit Register Safe Deposit Vault Register Standing Order Register Letter of Guarantee Register.
Contd…..
• Other Memoranda Books
– Cash Department(receiving cashier cash book, paying cashier cash book, main cash book, balance cash book) – Quick Payment System (ledger cards, specimen signature card) – Outward Clearing (received cheques from customers) – Inward Clearing (received cheques from clearing houses) – Loans and Overdraft Department(securities held on behalf of customers, summery book of investments, Godown registers, bank Price register, Overdraft sanction register, Drawing power book, Delivery order book, Storage book) – Deposits Department (Account opening and closing register, Rate register for fixed deposits giving analysis of deposits according to rates, Due date diary, Specimen signature book. – Establishment Department – General
• Statistical Books
– average balances in loans and advances, Deposits, Number of cheques paid, Number of cheques, bills and other items collected.
Maintance of CRAR
• The concept is given by BASEL I • Migrate to BASEL II by 2008 for foreign operating banks, 2009 for commercial banks • Banks should furnish an annual return commencing from the year ended March 31, 1992, indicating:
– – – – Capital funds Conversion of off-balance sheet/non-funded exposures Calculation of risk-weighted assets Calculation of capital funds ratio.
• 6% CRAR for tier I capital by 2010
Asset Liability Management system
• • • Risks involved - credit risk, market risk and operational risk ALM system provides a broad guidelines for liquidity, exchange rate and interest rate risk management ALM system pillars :– ALM Information System – Management Information System – Information availability, accuracy, adequacy and expediency – ALM Organization – Structure and responsibilities – Level of top management involvement
•
ALM Process
– Risk parameters – Risk identification – Risk measurement – Risk management – Risk policies and tolerance levels.
ALM structure
• Formation of Asset liability Committee(ALCO) consisting of top management • This committee decide upon following issues
– – – – – Monitoring the market risk levels Interest rate present and future Deciding the business strategy of the FI Deciding the funding strategy Reviewing the results of and progress of decisions taken
• ALM support groups to do operational work for ALCO
ALM process
1. liquidity risk management • liquidity has to be tracked through maturity or cash flow mismatches • the use of a maturity ladder and calculation of cumulative surplus or deficit of funds at selected maturity dates • Various time buckets as maturity ladder
– – – – – – – – – – 1 to 14 days 15 to 28 days 29 days and up to 3 months Over 3 months and up to 6 months Over 6 months and up to 1 year Over 1 year and up to 3 years Over 3 years and up to 5 years Over 5 years and up to 7 years Over 7 years and up to 10 years Over 10 years.
• The investments are assumed as illiquid due to lack of depth in the secondary market • Guidelines for Trading book :– The composition and volume of the Trading Book should be clearly defined – Maximum maturity/duration of the trading portfolio should be restricted – The holding period of the trading securities should not exceed 90 days – Cut-loss limit(s) should be prescribed – Product-wise defeasance periods (i.e. the time taken to liquidate the position on the basis of liquidity in the secondary market) should be prescribed – Such securities should be marked-to-market on a daily/weekly basis and the revaluation gain/loss should be charged to the profit and loss account; etc.
• an integrated Value-at-Risk (VaR) limit for their entire balance sheet including the “Banking Book” and the “Trading Book”, for the rupee as well as foreign currency portfolio should be prescribed • the main focus should be on the short-term mismatches viz. 1-14 days and 15-28 days • The negative gap during 1-14 days and 15-28 days time buckets, in normal course, should not exceed 10 percent and 15 percent respectively, of the cash outflows in each time bucket • determining the tolerance levels, the FIs may take into account all relevant factors based on their asset-liability base, nature of business, future strategy
2. Currency risk • avoid currency risk is to ensure that mismatches, if any, are reduced to zero or near zero • an on-going basis, currency-wise Statement of Liquidity and IRS Statement, separately for each of the currencies in which the FIs have an exposure
3. Interest rate risk • the traditional Gap Analysis is considered to be a suitable method to measure the Interest Rate Risk in the initial phase of the ALM system • Gap analysis measures mismatches between rate sensitive liabilities and rate sensitive assets • Norms to consider an asset or liability sensitive
– Within the time interval under consideration, there is a cash flow; – The interest rate resets/reprices contractually during the interval; – It is contractually pre-payable or withdrawable before the stated maturities; – It is dependent on the changes in the bank rate made by the RBI.
• The interest rate gaps may be identified in the following time buckets:
– – – – – – – – – – 1 to 28 days 29 days and up to 3 months Over 3 months and up to 6 months Over 6 months and up to 1 year Over 1 year and up to 3 years Over 3 years and up to 5 years Over 5 years and up to 7 years Over 7 years and up to 10 years Over 10 years Non-sensitive.
• prudential limits should have a relationship with the Total Assets, Earning Assets or Equity. For better equipped FI’s they can go for Earnings at Risk (EaR) or Net Interest Margin (NIM) related prudential norm
Organizational structure
• The structure should be such that it facilitates smooth flow of information flows
– Upward (for directors getting aware of business risk) – Downward( to coomunicate bank’s objectives, strategies, and expectations)
Audit and Vigilance
• Audit - calls for periodic review of operations. It seeks to provide an independent assessment of the operations and at the same time verify the level of compliance with the policies and procedures that are in place • Vigilance – plays a supplementary role by coming into action to either perform preventive vigilance functions or take disciplinary action against erring staff after reports to that effect are placed before the Vigilance Committee/Chief Vigilance Officer
doc_208264618.ppt
This is a presentation explaining various sources of internal controls exerted by banks.
Banking Operations Chapter 11
Banking control
Sources of Controls
• External controls exerted by RBI • Internal controls i. Maintenance of Documents and Records ii. Adequate Information Storage and Retrieval Mechanism iii. Maintenance of CRAR iv. Asset-Liability Management System v. Organizational Structure vi. Audit and Vigilance.
External Operational Control
• Separation of regulation and supervision with creation of Department of Supervision (1993) followed by Board for Financial Supervision(1994) • Three pronged strategy for supervision:– On-site inspection (inspecting records) – Off-site surveillance (through periodic reports) – External Auditing (CAMELS and Comprehensive rating system)
• Along with this RBI exercise control over volume of credit
Risk based supervision(RBS)
• In future, supervision is to move from transactional based to risk based • Main purpose of RBS is allocation of scarce supervisory resources according risk profile of the company • The RBS process essentially involves
– continuous monitoring and evaluation of the risk profiles – Strengthening the risk modeling capabilities based on off-site data – Associated research for prediction supervision
Maintenance of Documents and Records
Books of Accounts • Principal Books of Accounts
– General ledger – Profit and loss ledger
• Subsidiary Books
– Personal ledgers – Bill registers
• Other Subsidiary Registers
– – – – – – – – – Bills for Collection Register Demand Draft Register Share Security Register Jewelry Register Safe Custody Register Letters of Credit Register Safe Deposit Vault Register Standing Order Register Letter of Guarantee Register.
Contd…..
• Other Memoranda Books
– Cash Department(receiving cashier cash book, paying cashier cash book, main cash book, balance cash book) – Quick Payment System (ledger cards, specimen signature card) – Outward Clearing (received cheques from customers) – Inward Clearing (received cheques from clearing houses) – Loans and Overdraft Department(securities held on behalf of customers, summery book of investments, Godown registers, bank Price register, Overdraft sanction register, Drawing power book, Delivery order book, Storage book) – Deposits Department (Account opening and closing register, Rate register for fixed deposits giving analysis of deposits according to rates, Due date diary, Specimen signature book. – Establishment Department – General
• Statistical Books
– average balances in loans and advances, Deposits, Number of cheques paid, Number of cheques, bills and other items collected.
Maintance of CRAR
• The concept is given by BASEL I • Migrate to BASEL II by 2008 for foreign operating banks, 2009 for commercial banks • Banks should furnish an annual return commencing from the year ended March 31, 1992, indicating:
– – – – Capital funds Conversion of off-balance sheet/non-funded exposures Calculation of risk-weighted assets Calculation of capital funds ratio.
• 6% CRAR for tier I capital by 2010
Asset Liability Management system
• • • Risks involved - credit risk, market risk and operational risk ALM system provides a broad guidelines for liquidity, exchange rate and interest rate risk management ALM system pillars :– ALM Information System – Management Information System – Information availability, accuracy, adequacy and expediency – ALM Organization – Structure and responsibilities – Level of top management involvement
•
ALM Process
– Risk parameters – Risk identification – Risk measurement – Risk management – Risk policies and tolerance levels.
ALM structure
• Formation of Asset liability Committee(ALCO) consisting of top management • This committee decide upon following issues
– – – – – Monitoring the market risk levels Interest rate present and future Deciding the business strategy of the FI Deciding the funding strategy Reviewing the results of and progress of decisions taken
• ALM support groups to do operational work for ALCO
ALM process
1. liquidity risk management • liquidity has to be tracked through maturity or cash flow mismatches • the use of a maturity ladder and calculation of cumulative surplus or deficit of funds at selected maturity dates • Various time buckets as maturity ladder
– – – – – – – – – – 1 to 14 days 15 to 28 days 29 days and up to 3 months Over 3 months and up to 6 months Over 6 months and up to 1 year Over 1 year and up to 3 years Over 3 years and up to 5 years Over 5 years and up to 7 years Over 7 years and up to 10 years Over 10 years.
• The investments are assumed as illiquid due to lack of depth in the secondary market • Guidelines for Trading book :– The composition and volume of the Trading Book should be clearly defined – Maximum maturity/duration of the trading portfolio should be restricted – The holding period of the trading securities should not exceed 90 days – Cut-loss limit(s) should be prescribed – Product-wise defeasance periods (i.e. the time taken to liquidate the position on the basis of liquidity in the secondary market) should be prescribed – Such securities should be marked-to-market on a daily/weekly basis and the revaluation gain/loss should be charged to the profit and loss account; etc.
• an integrated Value-at-Risk (VaR) limit for their entire balance sheet including the “Banking Book” and the “Trading Book”, for the rupee as well as foreign currency portfolio should be prescribed • the main focus should be on the short-term mismatches viz. 1-14 days and 15-28 days • The negative gap during 1-14 days and 15-28 days time buckets, in normal course, should not exceed 10 percent and 15 percent respectively, of the cash outflows in each time bucket • determining the tolerance levels, the FIs may take into account all relevant factors based on their asset-liability base, nature of business, future strategy
2. Currency risk • avoid currency risk is to ensure that mismatches, if any, are reduced to zero or near zero • an on-going basis, currency-wise Statement of Liquidity and IRS Statement, separately for each of the currencies in which the FIs have an exposure
3. Interest rate risk • the traditional Gap Analysis is considered to be a suitable method to measure the Interest Rate Risk in the initial phase of the ALM system • Gap analysis measures mismatches between rate sensitive liabilities and rate sensitive assets • Norms to consider an asset or liability sensitive
– Within the time interval under consideration, there is a cash flow; – The interest rate resets/reprices contractually during the interval; – It is contractually pre-payable or withdrawable before the stated maturities; – It is dependent on the changes in the bank rate made by the RBI.
• The interest rate gaps may be identified in the following time buckets:
– – – – – – – – – – 1 to 28 days 29 days and up to 3 months Over 3 months and up to 6 months Over 6 months and up to 1 year Over 1 year and up to 3 years Over 3 years and up to 5 years Over 5 years and up to 7 years Over 7 years and up to 10 years Over 10 years Non-sensitive.
• prudential limits should have a relationship with the Total Assets, Earning Assets or Equity. For better equipped FI’s they can go for Earnings at Risk (EaR) or Net Interest Margin (NIM) related prudential norm
Organizational structure
• The structure should be such that it facilitates smooth flow of information flows
– Upward (for directors getting aware of business risk) – Downward( to coomunicate bank’s objectives, strategies, and expectations)
Audit and Vigilance
• Audit - calls for periodic review of operations. It seeks to provide an independent assessment of the operations and at the same time verify the level of compliance with the policies and procedures that are in place • Vigilance – plays a supplementary role by coming into action to either perform preventive vigilance functions or take disciplinary action against erring staff after reports to that effect are placed before the Vigilance Committee/Chief Vigilance Officer
doc_208264618.ppt