Banking and financial institutions, we know, have been early adopters of digital technologies and have invested heavily both on their core-banking technologies and on their front-end customer experience solutions. This has taken their consumers’ buying experience to new levels of ease and convenience.
However, we see a dramatic shift and an increase in focus on risk management in the last couple of years. The increase in the number of cases on non-performing assets coming to light has now led regulators to force banking and financial institutions to look at risks from multiple facets of a banking process and address each of them with specific outcomes.
The top 3 areas that cannot function without risk management are:
- Non-performing assets and credit risk Increasing non-performing assets did take India by the storm and we believe this is indeed the top priority amongst risk management needs for banks today. As a result, we have seen a surge of requests for information or proposal to build an early warning system with the necessity to implement in short time frames.
Reports indicate that NPA percentage has reduced in several banks, and we continue to see more banks coming to us to build a new solution that can combine the best of internal and external data to identify incipient stress early on. While that is the case with banks, the focus now is shifting to regulate non-banking financial sectors (NBFC) and housing development corporations (HFC).
NBFCs have for long filled the gap left by the banking system in providing financial services to a wide section of the population, especially those with lower than optimal credit profiles. This has resulted in high growth rates of NBFCs over the last couple of decades. The regulator has also been more lenient towards NBFCs when compared to banks to allow this leeway to assume more risk in order to service these clients.
However, as the IL&FS and DHFL cases show, there is a need for tighter controls in the NBFC space as well, to prevent systemic risks. We expect the regulators to come up with stricter rules for tighter credit policy, liquidity risk management, operational risk control, and obviously tighter credit policy for NBFCs and HFCs.
2. Operational risk
RBI guidelines on Basel II and III, demands banks to identify risk associated with IT system failures, key banking functions, internal & external e-commerce frauds, damage to physical assets, business malpractices such as misuse of confidential customer information and improper trading activities. The challenge for banks is to identify risks, that can be managed centrally and that has to be decentralized so that the turnaround time for customers is not delayed.
Omni-channel is a convenience available to end consumers, and therefore, banks have to now ensure that operational risk assessment includes these new venues of risk, and yet continue to provide a good customer experience. Operations risk is indeed the most complex to address for banks.
Artificial intelligence, machine learning, process automation, and analytics have to be combined enabling continuous review, identification, control, and mitigation of operational risks. In addition, banks have to create awareness of operational risk, assign ownership and align risk management activities with business strategy and ensuring compliance with regulatory requirements.
3. Liquidity risks
Post the global financial crisis, there has been an increase of focus on liquidity risk management across the globe. As a result, many banks have taken steps as per RBI Basel III requirements to ensure the bank is always in a position to meet its cash flows & collateral needs and are guarded against market liquidity risks. This involves building a liquidity risk management framework, governance process for liquidity risk management and a measurement methodology to avoid liquidity risk. A robust solution should include ability to define limits, monitor, plan for future liquidity needs, and dashboards.
While we believe these are the top three priorities within the risk management portfolio, we do see the need for other forms of risk like model risk, market risk and others.
rt360, a Bahwan CyberTek Company, is a FinTech specializing in risk management solutions for banks and financial institutions and spans across credit risk, operational risk, liquidity risk, model risk, and other risks. The vision is to help banks focus on what is important for its business i.e. customer experience, growth, and profitability, while we take care of their risk and compliance management.
The entire product suite on risks under the erstwhile Asymmetrix umbrella will now be under rt360. Our products include :
- rt360 Early Warning System (EWS) is a solution that alerts bankers, to indicators of incipient stress in accounts, much before they reach the default stage so that corrective action can be taken and credit can be recovered.
- rt360 Enterprise Risk Management (ERM) is a complete platform for operational risk management covering Risk Assessment, Monitoring, and Measurement & Reporting. The solution is scalable for AMA modeling and facilitates capital charge calculation.
- rt360 Model Risk Management (MRM) helps institutions in the model life cycle including DIY performance monitoring and validation of their models for a variety of applications across corporate and retail businesses.
- rt360 Asset Liability Management (ALM)helps financial institutions balance their assets and liabilities, through data aggregation as per BCBS239, optimization and modeling capabilities for scenario analysis and stress testing.
- rt360 RAROC Calculator is a handy tool that computes the RAROC (Risk Adjusted Return on Capital) so that the bank relationship manager has the expected profitability from the account on his/her fingertips before giving a quote to a client/prospect.
- rt360 Capital Engine facilitates capital computation for credit risk based on standardized and Internal Rating Based approaches, Market Risk (SDA) and Operational risk (BIA).
- We take an “operations first, technology next” approach to risk management. This way our clients can be assured that our solution is clearly aligned to their business goals. We provide point solutions that specifically address their current pain points and scale to build integrated risk management solutions for the long term.
We understand the risk business, we understand the complexity and therefore, we are in a formidable position to build an effective Return on Investment (ROI) for each and every rupee spent on risk management based on several implementations we have delivered for prominent banks across the globe.
Secondly, while the risk management space has some players who build products and others who implement them as partners, we assure delivery certainty as we are the original equipment manufacturer (OEM) as well as the implementation team. Further, our lightweight solutions, built by bankers, address the exact issues faced by banks without adding huge overheads in terms of infrastructure requirements or engagement with external consultants.
(Views expressed in this article are a personal opinion of Jaya Vaidyananthan, President, Bahwan CyberTek)