It is no surprise that the economic crisis that hit the world in year 2008 was an outcome of poor Risk Management in the banking industry. The effect of this global crisis was seen in the form of downsizing in companies, increased unemployment and reduce in goods/services demands. The banks across the world were found to be adopting liberal lending practices. Taking corrective actions became the need of the hour. Hence, the governments of several nations including India stepped in to figure out strict policies and laws as a part of risk management in banks. Banks must attend to these regulations and new demands to effectively control risks.
Here’s a quick snapshot on the 2008 economic crisis.
How are banks responsible for managing risks?
The fundamental responsibility of banks and financial institutions is to manage the risks and then provide returns to the shareholders. A financial crisis like that in year 2008 signify that banks fail tremendously in performing its core business, which could have been controlled if they adhered to the risk management policies. Let us further study the 3 tips for banks to master risk management.
1. Preparing a Credit Risk Environment
The key stakeholders and the board of directors in a bank must be responsible to monitor and review the current risk policies and amend it as per the present market scenarios, as required. An ideal policy is the one that clearly highlights the risk tolerance levels and the interest rates linked with them. A credit strategy that is classified, monitored, measured and regulated must be followed religiously at all levels.
2. Structuring a stable Credit Lending Process
For a bank to operate, it becomes crucial for them to underline a pre-set criteria for lending credits to the borrowers. The criteria include a number of factors such as the target market, credit lending requirements, credit limits, purpose of loans, repayment modes etc. On the other hand, banks are also responsible to structure the course of actions for renewals, switching loans, premature closure and new credits. In any case, ignoring these guidelines must not be permitted.
3. Integration of Information System to Manage Risks
Banks must incorporate a full-fledged information system in place to mitigate all associated risks effectively. An information system allows banks to use analytical tools to get insights on customers, high exposures, credit limits and account performance.
A.T. Kearney Analysis has listed down certain basic elements of maintaining risk management culture in banks. Have a look on the image below…
Does your bank adapt these best practices for risk management? Do you wish to upgrade to banking solutions that help you take charge of your standard and sub-standard assets and mitigate risks for maximising revenues? Sesame software solutions can assist you in implementing and following a credit and risk management policy that is robust and delivers tangible benefits to your organisation.