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RISK MANAGEMENT

Risk Management Information

RISK MANAGEMENT

Risk management in the Bank includes risk identification, measurement, monitoring and controlling, and its objective is to minimize negative effects that risks can have on the financial result and capital of the bank. Risk management strategies include the transfer of risk, avoidance of risk, reduction of the negative effect of the risk and acceptance of the consequences of a particular risk. The design of a risk management system depends among other things, on its size, capital structure, complexity of functions, technical expertise, and quality of Management Information System (MIS) and is structured to address both banking as well as nonbanking risks to maximize shareholders’ value.

 

Risk Governance Structure

The Bank has a separate and independent Risk Governance Structure:

 

The Bank’s risk management framework has following components:

 

Active Board and Senior Management Oversight

The Board has the ultimate responsibility for monitoring and managing the risk profile of the Bank. Bank has a Risk Management Committee of the Board (RMCB) comprising of one non-executive director of the Bank as Coordinator, Chairman of Audit Committee of the Bank as Ex-officio member, non-executive director representing general public as a member, Chief Operating Officer of the Bank as a member and Chief Risk & Compliance Officer of the Bank as Member Secretary. The RMCB meets at least once in a quarter.

Risk committees at executive level for Credit, Market and Operational Risks have been formed for the management of various risks in the Bank in their areas. They ensure the effective implementation of policies and procedures. They also review the policies, process, reports for making relevant decisions. Liquidity Risk is overseen by the Asset Liability Management Committee (ALCO) which is headed by the Managing Director. The decisions of the all the management level committees are reviewed by Risk Management Committee of the Board. Chief Risk and Compliance Office (CRCO) shall be the Member Secretary and convener of Credit/Operational/ Market Risk Management Committee of the Bank.

Chief Risk & Compliance Officer (CRCO) independently looks after overall risk and compliance of the Bank with solid line reporting to the Risk Management Committee of the Board. Under Chief Risk and Compliance Officer, Integrated Risk Management Department, Compliance Department, Information Security Department and Treasury Mid-Office take their charges.

 

Policies, Procedures and Limits

All policies and manuals are reviewed, updated and approved by the Board on annual basis to reflect any changes in the nature of our business and external regulations, law, corporate governance and industry best practice. This helps us to ensure we continue to meet our responsibilities to our customers, shareholders and regulators.

The Bank has defined risk appetite levels which are expression of the amount of risk that the Bank is willing to accept to achieve its objective. Similarly, the policies provide framework for identification, assessment, measurement, monitoring and reporting of the risk.

 

Appropriate Management Information System

In view of the growing information requirements of regulators, departments and operational units, MIS in the Bank is being constantly assessed, upgraded and fine-tuned. All Branches of the Bank are networked on Core Banking Solution (CBS). The system regularly generates separate reports for Branches / Controllers to analyze various risks faced by the Operating Units.

 

Effective Internal Controls

The Bank has robust internal control systems with well-defined responsibilities at each level. The Internal Audit Department (IAD) of the Bank carries different types of audits covering different facets of the Bank’s activities. Bank has fixed limits on exposure, substantial exposure, delegation of financial power, internal communication system etc. and implementation of four/six eyes system. Bank has adopted three-line defense system (i.e. First Line of defense, Second line of defense & Third Line defense)

Product Development and Vetting Committee (PDVC) assesses the risk in new products/Services prior to the launch of such products/services and mitigation measures are adopted accordingly

Internal Audit Department (IAD) is headed by senior level staff and is functionally independent. It reports directly to the Audit Committee of the Bank’s Board (ACB). Internal Controls in place for identified risks are detailed in the ‘Internal Controls’ Section of individual Risk Reviews.

 

Stress Testing Practices

Stress testing is considered as a key and integral components of risk management by the Bank. The stress testing is performed in order to assess the impact of severe economic downturn on financial position & capital. It covers the assessment of material risk (i.e. Credit Risk, Market Risk, Operational Risks, Interest Rate Risk in Banking Book and Liquidity Risks) as realized by the senior management and the Bank’s Board as well as guided by the regulatory requirement of NRB.

 

The most significant risks which could impact the delivery of our long-term strategic objectives and our response, are detailed below:

Principle Risks

Key Mitigating Actions

Credit Risk

The risk that customers and/or other counterparties whom we have either lent money to or entered into a financial contract with, or other counterparties with whom we have contracted, fail to meet their financial obligations, resulting in loss to the Bank. Adverse changes in the economic and market environment we operate in or the credit quality and/or behavior of our customers and counterparties could reduce the value of our assets and potentially increase our write downs and allowances for impairment losses, adversely impacting profitability.

  • Robust risk assessment and credit sanctioning to ensure we lend appropriately and responsibly.
  • Extensive and thorough credit processes and controls to ensure effective risk identification, management and oversight.
  • Monitoring of quality of credit portfolio on a periodical basis, identify problems and correcting deficiencies.
  • Risk rating of borrower through Credit Risk Assessment scoring model/Retail Scoring Model
  • Delegation of financial power for sanctioning of loans and arrangement for submission of control report to higher level authority at regular interval.
  • Monitoring of sector wise credit concentration.

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. We face significant operational risks which may result in financial loss, disruption of services to customers, and damage to our reputation. These include the availability, resilience and security of our core IT systems and the potential for failings in our customer processes.

  • Implementation of Business Continuity Plan (BCP) to ensure the Bank’s continued operability in the face of any emergency, disaster, crisis.
  • Continual review of our IT environment to ensure that systems and processes can effectively support customers’ requirements.
  • Enhancing the resilience of systems that support critical business processes with independent verification of progress on an annual basis.
  • Each desktop is implemented with Active Directory System (ADS) for end user management of computers
  • Implementation of Loss Data Management Policy to record the loss.
  • Improving early warning information through implementation of Key Risk Indicators (KRIs).

Market Risk

Market risk the risk that our capital or earnings profile is affected by adverse market rates, in particular, changes in interest rates, foreign exchange rate, equity and commodity prices.

  • Equity and interest spread risks are closely monitored and, where appropriate, asset liability matching is undertaken to mitigate risk.
  • Stress testing of risk exposures.
  • Ensure that there is clear accountability, responsibility and adherence to the regulatory guidelines including best practices for management and mitigation of market risk.
  • Monitoring of mark-to-market positions of trading book, Net Open Position, counterparty exposure limits, breaches, if any, by Treasury Mid Office and reporting to the Chief Risk & Compliance Officer.

Liquidity Risk

Liquidity risk refers to the ability of a bank to access cash to meet funding obligations. Obligations include allowing customers to take out their deposits. The inability to provide cash in a timely manner to customers can result in a snowball effect. If a bank delays providing cash for a few of their customer for a day, other depositors may rush to take out their deposits as they lose confidence in the bank. This further lowers the bank’s ability to provide funds and leads to a bank run.

  • Net Liquid Assets to Total Deposit is being monitored daily and reported to the regulator on regular interval.
  • Bank has established limits on maturity mismatch for better management of liquidity risk. Gaps are required to be computed and monitored
  • The Bank has contingency funding plan for the management of the negative gaps.

 

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