KPMG presentation emphasises potential for banks to enhance risk management functions

Tuesday, 19 June 2012 01:00 - - {{hitsCtrl.values.hits}}

Speaking at a forum organised by KPMG in Sri Lanka for chief financial officers and chief risk officers of banking institutions, KPMG India’s Partner and Head of the Financial Risk Management (FRM) practice, Rohit Bammi emphasised that local banks have the opportunity to further enhance their risk management functions.

In his opening remarks, Rohit discussed the increasing importance of banking sector risk management functions both in meeting emerging regulatory and compliance requirements as well as in enhancing the bank’s competitive positioning in the marketplace, providing for adequate liquidity and high quality capital.

Since banks are essentially holding public deposits and in many instances have a capital structure that is significantly leveraged, in this context it is imperative that significant attention be devoted to managing credit risk, operational risk and market risk exposures, as well as asset liability mismatches, Rohit added.

According to Rohit, commercial banks generally have the largest exposure in credit risk areas. Weak controls and unmonitored lending in several global economies resulted in significant non performing loan portfolios which was a key contributor to the global financial crisis. The more stable banks which pulled through were those with stronger risk management functions.

Having the right processes in place with adequate controls, risk evaluation and monitoring can minimise non performing loan risk exposure, and robust stress testing can allow management to take remedial action well in advance even where such instances are foreseen.

Kuntal Sur, Director for Financial Risk Management at KPMG, said that banks also have heavy dependence on information systems and technology to operate their businesses and in the generation of management information which is vital for decision making.

Systems and processes are key considerations in operational risk areas. The third area for consideration is market risk, often to do with economic circumstances such as exchange rate volatility, interest rates movement, reputation risks and related market exposures.

“I believe most of the larger banks in Sri Lanka have risk management functions in line with the Basel standardised framework and are moving towards the requirements of the advanced approaches of Basel II and in time, Basel III. Planning ahead- banks will also need to consider the implications and requirements of the Basel III framework which will set a new benchmark for risk management functions,” Kuntal added.

Jagath Perera, Partner – Head of Risk Consulting of KPMG Sri Lanka, said that Sri Lanka’s banking sector has been one of the fastest growing service sector industries in the country and is an important part of the Sri Lankan economy. He added that this growth however also brings risks which should be understood, assessed, managed and mitigated.

Sri Lanka presently has 24 licensed commercial banks, nine licensed specialised banks and over 40 licensed finance companies. The banking sector comprises over 2,000 bank branches and had a total asset base in excess of Rs. 4,000 billion as at 30 September 2011.