Risk Management Strategies by Bank

Risk Management Strategies by RBI Post Recession

Introduction:

Banks have changed their operational strategy in the aftermath of recession of 2008. One of the most critical reasons for the collapse of giants like Lehman Brothers, AIG and others has been the banks’ strategy of lending below the prime lending rate i.e. subprime lending rate. In order to keep the banks healthy, the Central Banks of various countries implemented Basel directive in phases. The most important factor which defines the strategy and changes the ways the banks function is the Risk Management. Basel majorly deals with Risk Management and introduces strict regulations to make the banks maintain their capital requirements.

The article initially throws light on the Basel accord and the need to shift to Basel 2. The second part of the article deals with how Reserve Bank of India has implemented the shift from Benchmark Prime Lending Rate to Base Rate. It is one of the risk mitigation strategies in Indian Banks which restricts banks from lending below the base Rate and enhances transparency. Then the article will focus on the steps that need to be taken by RBI to further strengthen the foundation of Indian banking system like the deregulation of savings rate interest and implementation of Basel 3 as a risk management tool.

Amongst the Central banks all over the world Reserve Bank of India has one of the strongest policies which made India escape unscathed from recession.

Basel Accord:

Basel Accord is a set of guidelines framed by central banks on financial innovation and risk management by banks. The main purpose behind introducing this Accord was to set the minimum standards for capital adequacy. Though Basel came into light in late 80’s, RBI adopted Basel only in 1999 in order to match the international standards followed in other banks.

Moving from Basel I to Basel II:

When Basel I was formed in 1988 it covered only credit risk. In 1996, the directive was modified such...