Monday, October 8, 2012

Banks should be aware of credibility risk


Credibility risk is the serious risk for the banks as it would be sensitive and difficult to manage unlike other risks, according to central bank governor.
"All types of risks will culminate into credibility risk," central bank governor Dr Yubraj Khatiwada said addressing 'Risk Management Conference,' orgainsed by National Banking Training Institute (NBTI), here in the Valley today.
Other risks can be managed but without following macro prudential measures and seriousness, the credibility risk will be difficult to manage, he said, adding that some of the bank's boards are not yet serious on mitigating risks.
The board should regularly access its risk appetite, Khatiwada suggested.
"The central bank is also heading towards risk-based supervision to prevent and check likely weaknesses and incoming risk and correct on time, he said, adding that regularly checking the risk appetite will help mitigate the risk.
Capital adequacy — one of the indicators — is only a cushion, whereas Non-Performing Assets (NPA) — another indicator to check risk — is key and depends on correct reporting from the banks, the governor said, adding that the foreign exchange volatility has also posed threat a month ago but India's reform-led stability of the Indian currency has helped it stabilise and mitigate the risk.
“Similarly, market risk related to cost of product should also be taken seriously," he said, asking the banks to comply with the risk mitigation directives. "Some of the banks are not complying with the directives," he said, reminding the banks to regular stress testing that will help gauge risk appetite.
Following the central bank directives on risk mitigation will help strengthen financial institutions, Nepal Bankers Association (NBA) president Ashoke Rana said.
"The rating agencies will also help financial institutions mitigate risks," he said, adding that the country is getting its first credit rating agency, which will help adopt risk mitigation measures and check from spreading the risk. "Lack of corporate governance has also exposed Nepali banks to risk."
Similarly, presenting his paper on 'Risk management and central bank's perspective', deputy governor Maha Prasad Adhikari said that banking is a business of risk, however, the banks have to access their risk appetite regularly before taking risk. "Otherwise excessive risk taking will lead to systemic failure," he suggested.
NBTI chairman Sashin Joshi welcomed the participants in the conference that highlighted on credit risk, operational risk, liquidity risk and strategic risk management.

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