The scale
of frauds across the Banks in India, from cooperative banks to commercial banks
crossing half a trillion rupees, ballooning NPAs, slow and untimely resolve of
bankruptcy cases have exacerbated the credit and operational risks. Finance
specialists add to them the impending climate risks.
The PMC
Urban Bank is just the tip of the iceberg viewing from regulatory perspective.
Lack of oversight is clearly visible. Appointment of Directors failed to honor
the ‘fit and proper criteria’. IL&FS and DHL in NBFC space shook up the
shadow banking as well. This situation raises more questions than answers and
require a firm resolve to warding off financial risks sooner than later, much
before they translate into macro-economic risks.
Post-recession
(2008), when the regulators hurried to drive risk management and governance of
risks relied on Basel Committee. The industry’s new-found focus on risk
management was ‘driven largely by a survival mentality and regulatory
requirements’, as pointed out by Clifford Rossi and not by internalizing the
risk assessment processes and governance improvements.
Rating
institutions gave exemplary ratings and yet there was collapse of corporate
credit. Risk management committees were set up and Chief Risk Officers were
appointed and yet the risk mitigation did not take place. Both the government –
the owner of the largest banking space and the Banks do not speak of risk
management as a factor that led to the recent surge in frauds. Every product
and process in these institutions is put for risk assessment.
New schemes
and new programs do not get assessed for all the risks. Institutional failure
to unlearn from the past and complacence on the part of Banks and FIs would
appear to be the main reason for the current imbroglio. Time is not unripe for
a 3600 thinking on the subject to put in place a mechanism for risk
management and governance. Noticeably,
it is the absence of risk culture that is to blame for the absence of risk
governance, process, analytics and expertise.
Banks sit on
a mountain of data and claim AI and MML are receiving their immediate
attention. The questions that come to my mind are: why then the Banks and FIs
are unable to put in place a risk-based pricing system for all their loan
products? How is it they fund start ups in manufacturing and services at the
same level of interest rates? Again, why an owner-driven or proprietary or
partnership micro and small enterprise and a medium enterprise driven by a
Board with competent directors are also charged the same price? Why the Banks
that claim latest technologies in place failed to transmit the rate cuts of the
regulator to the clients requiring a mandatory compliance to pare the rates of
interest with the Repo rate?
First and
foremost for correction, is the tacit acceptance of failure of governance
unabashedly and move to a thorough clean up. The four regulatory institutions –
RBI, SEBI, IRDA, PFRDA should sit together and review the rating processes of
all the Rating institutions they approved. Rating should not lead to a
regulatory arbitrage. A simple uncompiled directive like the corporate
institutions should reflect the dues beyond Rs.2lakh per vendor MSMEs did not
reduce the rating of many a corporate. Had this been done, many MSMEs would not
have become NPAs. There would not have been any need for the FM to give
specific mandates to clear the dues to MSMEs before October 15, 2019.
Institutions
that are adept at rating corporates have a myopic view of MSMEs and such
thinking is largely driven by false risk perception driven by the lenders!
Watch out the data – micro and small enterprises constitute around 8% of the
credit to them as NPAs and every NPA is not unrecoverable. Rating is also
influenced by the collateral rather than the enterprise, entrepreneur and environment
over which the Banks have data but with no required behavioral analytics.
I agree with Clifford Ross, the leading risk professional
when he says: “Risk professionals need to use disruptive technologies and
perhaps find other tools to more effectively assess non-financial risks (e.g.,
cyber and operational), which have grown substantially over the past five
years.
For both financial and non-financial risks, the continued
development of risk expertise is vital. A great risk professional possesses the
following qualities: (1) a balanced and logical temperament; (2) experience,
over-the-cycle; (3) critical thinking; (4) analytical leanings; and (5) an
action-driven mindset. What's more, on-the-job training is essential, because
we are all at least accidental risk managers.”
*The author of ‘Risk Management – The New Accelerator’,
economist and risk management specialist. Can be reached through www.yerramraju1.com
