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P. Devarajan

A COUPLE of nationalised banks, at RBI's bidding, have started splitting the credit function from credit risk management, with general managers being put in charge. International practice has always been for a separation of the loaning job from that of working out the credit risk, and some of the top Indian banks aspiring to enter the top league have decided to abide by the first note put on the subject by RBI in 1999 followed by a guidance note in 2001.

Till date, the credit department with a general manager (credit) usually appraises a loan application and disburses funds, with provisions being made from profits when the loans turn sour.

Credit risk management could assess the future risk a borrower is subject to and also quantify its impact on the balance sheet of a bank.

"Credit risk models will have to be worked out and a credit risk management team put in place to help the top executives and the board. It cannot be learnt in a day, but we should be adept at it by 2006 when the new Basel norms with self-rating starts," said a banker at a nationalised bank.

A September 20, 2001, RBI note lists the varieties of credit risk a bank is heir to and they are: in the case of direct lending that funds will not be repaid; in the case of guarantees or letters of credit, that funds will not be forthcoming from the customer upon crystallisation of the liability under the contract; in the case of treasury products, that the payment or series of payments due from the counterparty under the respective contracts is not forthcoming or ceases; in the case of securities trading businesses, that settlement will not be effected; in the case of cross-border exposure, that the availability and free transfer of currency is restricted or ceases.

Asset volumes will have to be built but not at the cost of snubbing the credit risk department. One is not sure when an honest difference of opinion crops up between the two departments though bankers aver loan disbursement targets alone will not do for the future. Banks will shortly have to work on a Credit-Risk

Rating Framework (CRF) and the underlying logic, says a RBI note, for CRF "is the limitations associated with a binary classification of loans/exposures into a `good' or `bad' category. Such a rating framework is the basic module for developing a credit risk management system and all advanced models/approaches are based on this structure."

In turn, the concept of risk-adjusted return on capital, first introduced by Bankers Trust in the late 1970s, could get operationalised and also be tough on bankers.

The Basel Committee has proposed two approaches to estimate regulatory capital with the minimum 8 per cent capital adequacy continuing to be in place. If the sophisticated mathematics is kept aside, it will help banks to estimate and provide capital for risks better ahead of a turndown in business than today when all the provisioning does not help the bank management to avoid a bad slip-up. One fervently prays our bankers will not use it as an excuse to shrink their balance sheets or mark up lending rates.

Topping the RBI agenda on Tuesday is a look into options for mopping up dollar inflows, which could touch $100 billion much ahead of March 31, 2004, based on current trends.

Going by Mint Street whispers, the stock of special securities which can be converted into dated securities seems to have virtually dried up.

Without amending the RBI Act, the RBI could buy dollars from banks against 91 day T Bills with the Government taking on the interest burden.

As of date, RBI has about Rs 100,000-crore dated sovereign paper to run its OMO, but that may not be enough.

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