Title List of content Page Chapter 1: Introduction 1 1. Introduction 2 2. Purpose of the research 3 3. Objectives of the research 4. Questions and Hypotheses of the research 4 5. Methodology of study 4 6. Scope and limitation of study 5 7. Observations and results 6 Chapter 2: Literature review 7 2.1 Introduction 9 2.2 Risk is the variability in the actual returns in relation to the estimated returns. 8 2.3 Quantifying Capital For Operational Risk 11 2.4. Basel Acceptance Criteria 11 2.5. Method for capturing Risk 12 2.6. Factors In Selecting An Approach 13 2.7. Overall Description 15 Chapter 3: Theoretical background 19 Section 3.1: Cooperative Banking 20 3.1.1. A brief historical description of cooperative banks in India 21 3.1.2 Urban Co-operative Banks 24 3.1.3 Rural Co-operative Credit Institutions 24 3.1.4 NABARD and the Co-operative Sector 28 3.1.5 Resources of NABARD 27 3.1.6. Credit extended by NABARD 29 i
Section 3.2: Introduction to Risk Management in banks 30 3.2.1 An introduction to risk management in banking system 31 3.2.2 Objective of risk management 32 3.2.3 Some definitions and declaration of objective of risk management 33 3.2.4 Reviewing of risk management methods 34 3.2.4 Risk identification 35 3.2.5 Risk assessment methods 37 3.2.6 Risk management 38 3.2.7 Risk management process 43 3.2.8 Risk Management Structure 44 3.2.9 The Risk Management Cycle 46 3.2.10 RBI guidelines in Risk management systems in banks 48 Section 3.3: Basel Committee Accords (BCA) 50 3.3.1 Introduction 51 3.3.2 History of Basel Committee 52 3.3.3 Objectives for Basel II 54 3.3.4 Key Elements of Basel II 55 3.3.5 Basel II Implementation in India: A Seven-Step Approach 58 3.3.6 Conclusion 66 Section 3.4: Operational Risk Management 67 3.4.1 Introduction 68 3.4.2 Background 70 3.4.3 Operational Risk deification 72 3.4.4 Dimensions of operational risk 74 3.4.5 Quantifying Capital For Operational Risk 75 3.4.6 RBI Guidelines 76 3.4.7 Sound Practices of Basel committee 77 3.4.8 Operational Risk Measurement 80 ii
3.4.9 Measurement Methodology 84 3.4.10 Risk Mitigation 86 3.4.11 Factors In Selecting An Approach 96 3.4.12 Operational Risk Management process 97 Section 3.5: Market Risk Management 101 3.5.1 Introduction 102 3.5.2. Specification of market risk factors 103 3.5.3. Market-type risks 104 3.5.4 Regulation market risk in bank 105 3.5.5 THE INTERNAL MODELS APPROACH 107 3.5.6 Liquidity Risk 115 Section 3.6: Credit Risk Management 119 3.6.1 Introduction 120 3.6.2 Objective of credit risk management 121 3.6.3 Difficulties face to credit risk management 121 3.6.4 Managing of credit risk 123 3.6.5 Credit Risk Environment 124 3.6.6 Credit Risk Strategy 124 3.6.7 Credit policy 125 3.6.8 Instruments of Credit Risk Management 126 3.6.9 RBI GUIDELINES ON CREDIT RISK RATING 130 3.6.10 LINKAGES OF CREDIT RISK RATING 131 3.6.11 Testing risk rating model 132 3.6.12 Risk Pricing 132 3.6.13 Portfolio Management 133 3.6.14 Loan Review Mechanism (LRM) 135 iii
3.6.15 Credit risk in off-balance sheet Exposure 136 3.6.16 Role of Analytical Techniques and MIS in Credit Risk Management 137 3.6.17 Training 138 Section 3.7: Interest rate risk management 139 3.7.1 Introduction 140 3.7.2 The most common target accounts for managing interest rate risk 140 3.7.3 Components of interest rate risk 142 3.7.4 Interest Rate Risk (IIR) management 142 3.7.5 Sources of Interest Rate Risk 144 3.7.6 Type of Interest Rate Risk 146 3.7.7 Supervisory guidelines 147 3.7.8 Interest rate risk measurement techniques 149 3.7.9 Adequate risk management policies and procedures 157 3.7.10 Internal controls 163 3.7.11 Information for supervisory authorities 166 3.7.12 Capital adequacy 167 3.7.13 Disclosure of interest rate risk 167 3.7.14 Supervisory treatment of interest rate risk in the banking book 168 3.7.15 Conclusion 170 Section 3.8: Asset liability management (ALM) 172 3.8.0 Introduction 173 3.8.1 Objectives of asset and liabilities 174 3.8.2 Help of ALM 175 3.8.3 Previous Research 175 3.8.4 General ALM approaches at the country level 177 3.8.5 Proactive ALM at Banks 178 3.8.6 Asset Liability Management in Indian banking system 179 3.8.7 ALM Organization 180 3.8.8 ALM process 180 iv
3.8.9 A general analytical framework for ALM 181 3.8.10 Integrated ALM Approach 181 3.8.11 Advantages of the integrated ALM approach 182 3.8.12 Reporting Requirements 183 Section 3.9: None performing assets (NPA) 184 3.9.1. Introduction 185 3.9.2. Indian economy and NPAs 185 3.9.3. Global Developments and NPAs 186 3.9.4 Meaning of NPAs 186 3.9.5 Asset Classification 187 3.9.6. A huge levels of NPAs exist in the Indian banking system (IBS 188 3.9.7 Credit Risk and NPAs 191 3.9.8 The importance of credit rating in assessing the risk of default for lenders 191 3.9.9 Usage of financial statements in assessing the risk of default for lenders 192 3.9.10 Capital Adequacy Ratio (CAR) of RBI and Basle committee on banking supervision (BCBS) 193 3.9.11 Excess of liquidity 194 3.9.12 High cost of funds due to NPAs 194 3.9.13 Need for effective asset management policies 195 3.9.14 Asset management 196 Section 3.10: Foreign Exchange Management (FOREX): 200 3.10.1 Foreign Exchange (Forex) Risk 201 3.10.2 Forex Risk Management Measures 201 3.10.3. Capital for Market Risk 202 Section 3.11: New technology and its risk in banks 204 3.11.1 Introduction 205 3.11.2. What is Technology Risk and it s importance? 206 v
3.11.3 Technology-Related Risk Management Process 207 3.11.4. Measure and Monitor Performance 213 3.11.5. Internet Banking Risks 214 3.11.6. Risk Management Tools 218 Section 3.12: Value at Risk (VaR) 222 3.12.1 Introduction 224 3.12.2 What is VaR? 225 3.12.3 VaR parameters 228 3.12.4 Use of VaR in Risk Measures 229 3.12.5 Determining VaR 231 3.12.6 Risk Metrics 237 Chapter 4: Methodology of study 240 4.1 Questionnaire Structure 241 4.2. Population and Sampling method 241 4.3 Data Analysis 242 4.4 Scope and limitation of study 243 Chapter 5: Data analysis 244 Chapter 6: Result and Conclusion and recommendations 250 6.1 Observations and results 251 6.2 Conclusions and recommendations 252 Chapter 7: Bibliography 253 Appendix I: Questionnaire of study vi
List of tables Title Page Table 3.1: The cooperative credit institutions 23 Table 3.2: Select Indicators of Non-Scheduled Urban Co-operative Banks ñ Centrewise (As at end-march 2006) 26 Table 3.3: Net Accretion in the Resources of NABARD 28 Table 5.1: Status of applying risk programme in cooperative banks 245 Table 5.2 Weight of risk in cooperative bank 246 Table 5.3: Percentage of risk kind in cooperative banks 247 Table 5.4: One-Sample Test for all kind of risk 248 Table 5.5 One-Sample Test for differences by the weight of risk factors between cooperative banks in Pune 248 Table 5.6: Paired sample Test for the banks all kind of risk 249 Table 5.7: One Sample Test for differences between cooperative banks by all kind of risk 249 vii