Risk Management in PNB

By,T.Sairam singh 131103

G.Sasidhar 131114L.Mahesh 133144

G.Raghavender kumar 131206

TYPES OF RISKS:

• CREDIT RISK

• LIQUIDITY RISK

• MARKET RISK

• OPERATINAL RISK

• RISK RELATED TO COUNTRY OF ORIGIN

CREDIT RISK MANAGEMENT

Credit risk is the risk of negative effects on the financial result and capital of the bank caused by borrower’s default on its obligations to the bank.

Group Aggregate 2012-2013 : 2.0

All Bank’s Aggregate 2012-13: 1.68

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

Net NPA ratio 0.17 0.53 0.85 1.52 2.35 2.85

0

0.5

1

1.5

2

2.5

3

Net NPA ratio of PNB

Standardized approach

Assignment of Risk Weights:

all the exposures are first classified into various customer types defined by Basel committee or RBI. Thereafter, assignment of standard risk weights is done, either on the basis of customer type or on basis of the asset quality as determined by rating of the asset, for calculating risk weighted assets.

External Credit Assessments:

Advanced Approach:

These approaches rely heavily on a banks internal assessment of its borrowers and exposures. These advanced approached are based on the internal ratings of the bank and are known as Internal Rating Based (IRB) approaches.

• A)Foundation Internal Rating Based (FIRB) Approaches.

• b) Advanced Internal Rating Based (AIRB) Approaches.

Data Input Foundation IRB Advanced IRB

Probability of Default Provided by bank based on

own estimates

Provided by bank based on

own estimates

Loss Given Default Supervisory values set by

the Committee

Provided by bank based on

own estimates

Exposure at Default Supervisory values set by

the Committee

Provided by bank based on

own estimates

Effective Maturity Supervisory values set by

the Committee

Provided by bank based on

own estimates Or At the

national discretion, provided

by bank based on own

estimates

Initiatives taken during FY'14

The Bank has launched a Special NPA Reduction Campaign from 01.12.13 to 31.03.2014. The campaign’s progress is monitored on daily basis. Besides this the Bank has a regular staff Incentive Scheme called “Prayaas” to promote recovery in NPAs.

During FY’14, in 4891 Rin Mukti Shivirs, cash recovery of 269 crore was obtained from 70263 accounts and up-gradation of 19501 accounts with balance outstanding of ` 266 crore. Thus, NPA of 534 crore were resolved in these shivirs.

OTS(one-time settlement) was marketed as a product for faster resolution of NPAs and OTS in 61,398 accounts was approved.

Accounts with aggregate outstanding of 1429 crore were upgraded to standard category. Total cash recoveries in NPA accounts amounted to 2611 crore.

Through well defined recovery policy 588 crore were recovered in approved OTS cases through negotiated settlements.

Liquidity risk

• Gap analysis• Asset management strategy.• Liability management strategy• Liquidity ratios with prudential time limits.o Loan to deposit ratio.o Incremental loan to deposit ratio.o Medium term funding ratio.o Cash flow coverage ratio.o Liquid assets ratio.o Contingent liabilities ratio.o Liquid asset coverage ratio.• Stress techniques, Simulation, Sensitivity analysis are used for

contingency fund planning.

Strategic risk management

• Change in direction of credit from corporate to retail, agriculture and Msmes.

• Concentrated on low cost deposits, less risky advances and businesses which are profitable from grassroots.

• Business (14.3%) , assets (14.9%), deposits (15.3%), and credit (13.1%)

• Quality more than on quantity.

• Low risk and profitable businesses.• It has highest operating profit among nationalized

banks.• Gross NPA (5.25%) , net NPA(2.85%).• Special NPA reduction program – Prayaas.• PNB pragathi intitative, ppp, msme.• Reduction of turn around time.• IT Products – bks , automation fund transfer

order, hornet , xoom –rda.• “Profitable growth from grassroots”

Interest Risk:

It is the risk that arises from fluctuating interest rates in market.

Interest rate risk depends percentage of rate sensitive assets and liabilities.

The sensitivity depends on two things, the time to maturity, and the interest

rate.

• GAP is used as a tool to control interest risk.

Measures to reduce risk:

• Increase short term borrowings

• Increase fixed rate borrowings

• Maintaining zero GAP

• Hedging interest rates through various tools like interest options,

forward rate agreements, futures.

• Financing assets with same duration liabilities.

• Fee based income.

• Fee based income as a percentage to interest income for PNB bank

is 8.5% (previous year is 8.05%)

• Maintaining decent CASA ratio.

• CASA ratio of PNB

• Banks forms committee to look after and reduce market risk.

• PNB is having Asset Liability Management Committee (ALCO) is

primarily responsible for establishing the market risk management and

asset liability management of the bank, procedures thereof,

implementing risk management guidelines issued by regulator, is held

at least once in a quarter.

• RBI prescribed Standardized Measurement Method (duration based) for

computation of capital charge for market risks been adopted by Bank

Risk Categeory Amount

Interest risk 1700

Equity risk 559

Foreign risk (including gold) 18

Total charge to capital 2277

Operational Risk

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Definitions

Operational risk (Op Risk) has been defined by the Basel Committee on Banking Supervision as “the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”.

Management of Operational Risk means and includes identification, assessment, monitoring and control/mitigation of this risk.

18

Causes of Op Risk

Internal fraud / External fraud.

Employment practices and workplace

safety.

Clients, products and business practices.

Business disruption and system failures.

Execution, delivery and process

management.

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Causes of Op Risk

Highly Automated Technology

Emergence of banks acting as very large

volume service providers

Outsourcing

Large-scale acquisitions, mergers, de-

mergers and consolidations

Management of operational risk in PNB

• Three lines of defense

1. HO Divisions (Control Units ,Business Units).

2. Operational Risk Management Department (ORMD).

3. Inspection & Audit Division/Management Audit Division. (Challenge function)

Risk Measurement

o Analysis of historical internal loss data

(including near miss events, attempted frauds

& robberies, external loss events).

o Total number of risk events.

o Office Accounts Status: such as changes in

balances, etc.

RBI directives

• The bank has been maintaining capital for operational risk under Basic Indicator approach (BIA).

• The Standardized Approach (TSA).

The capital requirement for operational risk: (` in crores)

Capital requirement for operational risk 31.03.2014 31.03.2013

i) Basic indicator approach 2723.82 2521.21

ii) The Standardized approach (if applicable) 2688.75 2477.78

Thank you