usha thorat : risk management – priorities for the indian banking sector opening remarks by smt usha thorat, deputy governor of the reserve bank of india, at the panel discussion on “ risk management : priorities for the indian banking sector ”, at “ bancon – indian banking conclave 2009 – 10 ”, mumbai, 12 january 2010. * * * 1. the new decade is predicted to be more transformational than the first decade of this millennium for the indian economy and the indian financial system. if the last ten years have seen transformation in terms of consistently higher growth rates, adoption of core banking solutions, transformation in the payments systems and greater integration with the global economy, the coming decade will see unprecedented volume of business for the indian financial system as it tries to meet the challenges and requirements of rapid and inclusive growth. information technology ( it ) has made it possible for banks to deal with large numbers and such growth in volume and value of business will obviously imply huge challenges for risk management, which in turn will have to depend on human resources and it in dealing with the new normal – a theme so apt for this conference. 2. the major challenge is, clearly, having the human resources of the right kind and numbers and the ability to retain skilled personnel. from having personnel to deliver banking services to the poorest, to having the expertise to deliver sophisticated financial products and adopt consistent risk management practices across the organisation, will be the key to managing huge organisations optimally. 3. if one of the reasons for the global financial crisis was that the financial sector grew out of sync with the real sector in the advanced economies, in india the position is different in that the financial system has to ensure that it meets the requirements of the growing real sector. risk is inherent in banking as banks essentially trade in risk in the process of maturity transformation. therefore, banks cannot afford to be risk avoiders. at the same time “ banker ’ s prudence ”, something that is critical to safety of the depositors ’ funds, has to be the underlying philosophy at all times. the risk return relationship has to be optimally balanced for welfare enhancing outcomes. 4. the crisis has thrown up some critical issues relevant to risk management policies : • the business model matters. banks that were extremely aggressive in the trading books were clearly more affected. those that had a fair degree of traditional banking were less affected. • there has to be an intuitive approach to risk. despite huge growth in leverage and huge expansion of “

. meanwhile, in november 2014, guidelines on monitoring tools for intraday liquidity management were issued. lcr intends to promote the short - term resilience of banks to potential liquidity disruptions. it requires that the banks have adequate high quality liquid assets ( hqla ) to withstand a 30 - day liquidity shock. these hqlas should be available with the bank to cover net cash outflows that are expected to occur in a severe stress scenario. nsfr on the other hand supplements the lcr and has a time horizon of one year. it has been developed to provide a sustainable maturity structure of assets and liabilities. i will now delve in some detail into these standards. i want to touch upon some of the regulations, our views on them and provide the rationale for the rules as accepted by us. the indian framework for lcr requirements was issued on june 9, 2014 through the publication of final guidelines on the lcr, liquidity risk monitoring tools and lcr disclosure standards, where implementation of the lcr has been phased in from january 1, 2015 with a minimum mandatory requirement at 60 per cent, which will gradually increase to 100 per cent by january 1, 2019. the nsfr draft guidelines were issued in may 2015 and india is committed to the scheduled implementation of nsfr from january 1, 2018. whenever there is a discussion on lcr the reference to slr requirements running parallel is inevitable. as i have already mentioned, slr has been the mainstay for liquidity risk management for indian banks. slr is similar to lcr in composition except that lcr is a more sophisticated tool to ensure liquidity under stressed conditions that takes account of the liquidity profile of both assets and liabilities. lcr does not impound the funds of banks for lending beyond what is assumed to be necessary to maintain their liquidity on an on - going basis. moreover, as lcr permits other securities apart from g - secs, it is expected to give a fillip to markets other than g - sec market, especially the corporate bond market. furthermore, lcr is an internationally accepted standard and its implementation brings convergence with global standards. non - compliance with basel rules can have major ramifications for the banks of a jurisdiction. of course, every jurisdiction factors in the domestic conditions to the extent permissible. with the advent of peer review under bcbs ’ regulatory consistency assessment program ( rcap ), the guidelines put in place by each jurisdiction