Contents
Foreword
Preface
1. Management and Audit of Banking Risks —
Introduction and Approach
n
Business Risks
n
Control Risk
n
Management of Banking Risk
n
Inspection and Audit Function
n
Risk-Based Internal Audit System
2. Credit Risk
n
Defining Credit Risk
n Need for Effective Credit Risk Management
n
Views of Eminent Bankers and Economists on Factors
Responsible for High Level of NPA
n
Credit Risk Management
n
Parameters Generally Used by Banks for Risk Scoring / Rating Systems
n
Managing Credit Risk — Policies and Procedures
n
Organizational Structure for Effective Credit Administration
and Risk Management Function
n
Approach to Credit Audit Function
n
Broad Areas to be Examined during Credit Risk Audit
Annexure
I: An
Illustrative Model of Credit Risk Scoring / Rating System
Annexure
II: Organizational
Structure for Credit Risk Management Function
Annexure
III: Audit Issues
Related to Loans / Advances to be Covered by Central Statutory Auditors in Long
Form Audit Report (LFAR)
Annexure
IV: Credit Portfolio —
Asset Classification & NPAs
Annexure
V: Risk
Categorisation of Credit Portfolio Related to Sanctions
by Various Offices
Annexure
VI:
Credit Risk Concentration,
Categorization and Migration
Annexure
VII: Credit
Risk in Off-Balance-Sheet Items [Bank Guarantee (BG)
& Letter of Credit (LC) Facilities both Inland & Foreign]
3. Market Risk with Focus on Earning and Interest Rate
Risk
n
Defining Market and Interest Rate Risk
n
Sources of Funds
n
Deployment of Funds
n
Mismatch / Gap Risk
n
Basis Risk
n
Price Risk
n
Embedded Option Risk
n
Reinvestment Risk
n
Management of Interest Rate Risk
n
Duration Gap Analysis
n
Simulation Method
n
Issues that Need to be Looked into by the Auditors while Auditing Earning
and Interest Rate Risk
Annexure
I: Gap Statement of Interest
Rate Sensitivity
4. Management of Foreign Exchange and Country Risk
n
Defining Forex Risk
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Types of Forex Risk
n
Management of Forex Risk
n
Credit Risk related to Forex Transaction
n
Country Risk
n
Management of Country and Forex Risk — Policies and Procedures
n
Issues Requiring the Auditor’s Attention
5. Liquidity Risk
n
Background
n
Defining Liquidity Risk
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The Need and Importance of Having a
Reasonable Level of Liquidity
n Items of Assets / Liabilities
n
Dynamic Liquidity Statement
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Management of Liquidity Risk
n
Management of Liquidity Risk
n
Audit of Liquidity and Asset Liability Management Function in Banks
6. Operational Risk
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Technology Risk
n
Process Risk
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Legal Risk
n
Reputation Risk
n
People Risk
n
Measuring Operational Risk
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Capital Allocation for Operational Risk
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Audit Issues related to Operational Risk
7. Organization and Management Risk
n
Background
n
Broad Guidelines of RBI
n
Role and Functions of Committees
n
Risk-Based Internal Audit Including Creation of Proper Organizational
Set-up
n
Audit of Organization and Management — Aspects to be Commented
upon by Auditors
Annexure
I: Broad Organizational
Structure for Management of Banking Risks
8. Group Risk
n
Background
n
Reasons for Unsatisfactory Functioning of Subsidiaries / Joint Venture
Companies
n
Issues Related to Group Risk to be Examined by the Auditors
9. Equity and Commodity Price Risk
n
Defining Equity Risk
n
Factors Influencing Equity Investment Decisions
n
Highlights of RBI Guidelines
n
Management of Equity Investment
n
Commodity Price Risk
n
Issues Requiring Attention of Auditors
10. Bank’s Business Strategy and Environment Risk
n
Background
n
Issues Generally Covered in Bank’s Loan Policy Documents
n
Issues Related to Business Strategy and Environment Risks to be Looked
into by the Auditors
11. Risk Related to Control Function
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Different Types of Banks’ Control and Inspection /
Audit Systems
n
Inspection / Audit Including Risk-Based Supervision Conducted by RBI to
View Bank’s Functioning
n
Highlights of RBI’s Guidelines to Banks’ on Switching over to a
Risk-Based Internal Audit System
n
Management of Control Risk
n
Issues Related to Control Risk
Requiring Examination by Auditors
12. Bank’s Internal Inspection and Risk-Based Audit of Branches
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Risk-Based Internal Audit (RBIA) System of Branches as Implemented by
Some Banks
n
Earlier Inspection and Present Risked-based Audit Systems
Annexure
I: Internal Risk-Based Audit of Credit Activity in Relation to
Business and Control Function
13.
Suggestions for Effective Management of Banking Risks with Emphasis on
HRD Issues
n
Background
n
Credit Risk — Appraisal System
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Credit Risk Rating and Scoring System
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Monitoring and Follow-up Systems
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Non-Performing Assets (NPAs)
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Bank’s Policy Documents
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Organisational and Management Aspects
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Risk-Based Internal Audit System (RBIAs)
n
Concluding Observations
14. Basel Committee on Banking Supervision — Highlights of the
Reports
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Background
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The First Basel Committee Report (1988)
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The New Basel Capital Accord
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The Basel Committee Second Accord (2004)
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Credit Risk — Approaches for
Calculating Risk-Weighted Assets
n
Operational Risk
n
Market Risk / Trading Book Exposures
n
Supervisory Review Process
n
Market Discipline
Index