A local perspective: The HNB way

There are a few key areas of relevance of risk management in the Sri Lankan context, said Hatton National Bank (HNB) Deputy General Manager – Risk Management and Credit Quality Dilshan Rodrigo.

“The main area of concern is the misconception that risk management is about managing the downside. It is not just that, but also capitalising on the upside.”

Recalling that the situation in the country six to seven years ago was not a happy one, Rodrigo stated that HNB then considered lending to the Maldivian industries – the resort hotels which were booming at that time.

“We were one of the first banks to do that. We also had an idea of how far we should go there and what exposure and size of the balance sheet we needed to commit the venture. We then kept a ceiling – this percentage of our capital will be allocated to grow the business. It’s an opportunity we took in capitalising on the upside in terms of potential,” he expressed.

Stressing on the importance of risk identification, he said that companies should look at quantifying what are considered as key risks.

“Understand first what the high impact extremely low probability events are. We insure our head office building against the most unexpected natural disasters that are likely to hit, such as earthquakes. It’s an extremely low probability but will have a high impact if it happens.

“The companies should also understand the risk appetite: What is it you want to do as an institution and how much of a risk are you willing to take. It is a fundamental question and as managers and agents for shareholders, you need to have an understanding of this. This risk appetite then needs to be quantified against a risk dashboard, which is just like a monthly PNL statement; a multi risk dashboard statement which sets out the key areas of risks, what is the appetite the board has given you and how much you have taken.”

The other extremely relevant point is the understanding and implementation of the compensation or the incentive policies/structures in the institutions, Rodrigo said. “If you have short-term instinct performance based incentive schemes, then you will only encourage short term behaviour.”

He stated that in the Sri Lankan context, it was the reverse: “With most companies having a larger percentage of senior people’s income coming in, the salaries are for the fixed income brochure.”

In Sri Lanka the act is more of a traditional one, however it discourages the upside risk taking in companies. “When you are bringing in share options, the performance base, bonuses and other incentive programmes, it is very important that you build in a long-term or medium-term perspective, so that you encourage the right form of risk taking.”

Companies should also develop risk principles vs. rules. “If you had common guiding principles in terms of how you want to operate in, then it’s up to you in your ethical perspective to interpret it in the proper way,” Rodrigo said.

It is important when you set the risk directions to set it in terms of principles and tell them to interpret it and give them guidelines in terms of how to interpret it in the right way for the organisation. “Then you become more sustainable and your corporate governance builds in, in the right frame,” he stressed.