English - BMI Bank

Management Discussion and Analysis
Management Discussion and Analysis
committee. All relationships
are reviewed annually and nonperforming
accounts are reviewed
more regularly.
Through its Early Warning System,
the Bank adopts a rigorous
standard for the identification
and monitoring of non-performing
loans’ (NPL) with a view to eventual
recovery. Problematic accounts
are reviewed regularly by the
Management Credit Committee
to evaluate compliance with the
terms of the ‘work out’ strategy
with laid down lending norms and
to ensure incorporation of the
lessons learned, if any, into the
Bank’s lending guidelines.
//Liquidity risk
management
Liquidity risk is the potential
inability of the Bank to meet cash
flows of its maturing obligations
to a counterparty. Liquidity risk
management seeks to ensure
that the Bank has the ability,
under varying scenarios, to fund
increases in assets and meet
maturing obligations as they arise.
The Treasury Department of the
Bank is responsible for liquidity
management in the Bank, under
the guidance and supervision of
the Asset and Liability Committee
(ALCO). The liquidity risk policy
sets liquidity limits, targets, and
ratios, to aid robust liquidity
management.
The Bank’s funding sources are
well-diversified across funding
types and include customer
deposits, inter bank deposits,
and subordinated loans. The
sources and maturities of
assets and liabilities are closely
monitored to avoid any undue
concentrations and to ensure the
robust management of liquidity
risk. Contingency plans to meet
liquidity in order to withstand
a bank specific or market crisis
scenario are in place, these plans
are reviewed regularly by ALCO.
Positions are monitored daily
against gap limits approved by
the Board Risk Committee.
//Market risk
management
Market risk arises from fluctuations
in interest rates, foreign exchange
rates and commodity and equity
prices. As per the board directive,
the Bank does not have authority
to enter into any proprietary
position on currencies or interest
rates.
Currency and interest rate risk
is carried only on the banking
book. Currency risk, arising out
of customer positions is hedged
on a back-to-back basis. The
Bank maintains minimal open
positions on G7 and other volatile
currencies.
The treasury also operates within
the prescribed open currency
position limits approved by the
Board Risk Committee. The
management of currency risk
rests with ALCO which meets
on a monthly basis, but where
positions are monitored daily.
//Interest rate risk
management
Interest rate risk is the risk that
the Bank’s profitability or fair
value of its financial instruments
will be adversely affected by the
changes in interest rates. Interest
rate risk arises from the possibility
of changes in interest rates
and mismatches or gaps in the
amount of assets and liabilities
and off balance sheet items that
mature or are re-priced in a given
period. The responsibility for
interest rate risk management
rests with the Bank’s ALCO which
takes an integrated view of the
interest rate risk across the Bank’s
products and lines of business.
Positions are monitored daily to
ensure they are maintained within
established limits.
//Operational risk
management
Operational risk is the risk of loss
arising from causes associated
with the Bank’s processes,
personnel, information systems
and external factors such as those
arising from legal and regulatory
requirements. It is inherent in
every business organization and
covers a wide spectrum of issues.
The objective of the Bank is to
manage this risk by striking a
commercial balance between the
risk of financial loss and avoiding
excessively bureaucratic internal
procedures which limit the ability
to provide an effective service
to customers. The Bank achieves
this through a control-based
environment where processes
are documented, authorization is
independent and transactions are
monitored and reconciled. This
is supported by an independent
program of periodic internal audit
reviews.
Operational risk management
process is guided by high level
policies supported by procedures
embedded within the policies.
The policies and the procedures
captures how the Bank manages
its operational risk by identifying,
controlling and mitigating the
operational risk and implementing
any additional procedures which
may be required as dictated by
the risk identified or operational
risk loss incurred. The operational
risk processes and procedures
are dictated by the scale of
operations.
The Operational risk management
regime is guided by the following
principles:
• Management of operational
risk is the responsibility of the
senior management of each
segment of business.
• Appropriate and regular
management reports.
• Risk assessment of critical
businesses to identify risks
facing each department
and the risks inherent in its
processes and products.
Risks identified are subjected
to periodic reviews to ensure
that the circumstances under
which they were identified
have not significantly changed.
• Collection of operational
risk loss data and reporting
individual cases and trends to
senior management.
48 // BMI Bank Annual Report 2010
BMI Bank Annual Report 2010 // 49