The risk management division of the Bank plays an independent risk monitoring, measurement and advisory role as the second line of defense. The Bank has developed a risk management framework covering risk governance, which includes, risk management structure comprising different sub committees and clearly defined reporting lines ensuring risk management unit is functioning independently.
Risk Governance Structure of HNB
With a view of developing a high performing risk function and creating a strong risk management culture, the Bank, during the year 2016 introduced several initiatives.
Review of 2016
Following are few such key initiatives rolled out during the year.
Introduction of an Enterprise Risk Assessment Methodology
A process has been introduced to identify, assess, manage and mitigate key strategic risks in an objective and proactive manner thus the Bank established an "Overall Bank Risk Grid" and key strategic risks are identified therein
Advisory/Observer Role in Credit Approval Structure
Credit approval structure of the bank has been revised, where risk department assumed a role of a “risk observer” facilitating, identification of all material risks in a credit proposal. This practice has improved the risk-based credit culture in the Bank.
Strengthening of Loan Review Mechanism (LRM)
LRM process highlights the areas for improvement along the entire credit chain from appraisal to recovery. LRM unit is under the purview of Chief Risk Officer to ensure independence and results of the assessments are shared with the Board of Directors.
Establishment of a Centralised Credit Monitoring Unit, Strengthening Portfolio Risk Management – The Bank has strengthened the monitoring of “weakening credits” and established a centralized credit risk monitoring unit. Further guidelines covering watch-listing credits have also been revised and updated in order to facilitate a closer follow-up of such stressed advances.
Introduction of Risk and Control Self- Assessment (RCSA) Process
RCSA process was introduced through the Operational risk Management unit, which highlights all relevant and material operational risks that require attention of management and board.
Streamlining of Centre of Excellence (COE)
The process has been divided in to separate compartments and action is being taken to improve overall delivery times whilst ensuring risk controls are not diluted. Data capturing has been outsourced and data verification has been strengthened.
Centralization of Disbursements and Recovery
Granting of loans and subsequent recoveries have been scheduled to be centralized and this project has already commenced with corporate banking division, which covers nearly 40% of the advances book. The process will gradually be extended to all regions and thereafter loan disbursements and recoveries will come under one central unit.
Strengthened the ICAAP Methodology
The Bank refined and improved the ICAAP methodology of the bank where a robust mechanism is introduced to assess all material risks faced by the bank and additional capital is allocated accordingly.
While the Bank maintains Rs 594.4 Bn of a loan book yet, its gross NPA ratio remain as low as 1.8%. Quantitative credit risk parameters of the Bank have shown a notable improvement during the year. Provision cover has improved to 74.4%, by 14% compared to last year, and maintain well above the industry average. Bank’s NPA has been on a declining trend over the last decade, which is a testimony of effectiveness of processes adopted to manage credit risks.
To provide an overview of risks undertaken by the Bank, risk management department submits dashboards to BIRMC and Board of Directors covering major risks i.e. Credit, Market, Operational and Cyber risks on monthly basis.
Whilst implementing robust risk management practices and rolling out dynamic tools, the Bank recognised the importance of sustaining such improvements over the medium to long term while keeping abreast of fast-paced changes and staying robust at times of challenge.
Refer Page No 157 of the Bank’s Annual Report 2016 for the detailed Risk Management Report.