Banking is the business of managing risks and the role of risk management is to balance the trade-off between risk and return. It entails the identification, measurement and management of risks across the various businesses and effective utilization of capital. Risk is managed through a framework of policies and principles approved by the Board of Directors and supported by an independent risk function that ensures the Bank operates within its risk appetite. The risk management function attempts to anticipate vulnerabilities at the transaction level or at the portfolio level, as appropriate, through quantitative or qualitative examination of the embedded risks. The Bank continues to focus on refining and improving its risk measurement systems.
The main Risk faced by Axis Bank are
Credit Risk
Market Risk
Operational Risk
Liquidity Risk
Credit Risk
Credit risk is the risk to earnings or capital due to borrowers' late or non-payment of obligations. It includes both Transaction risk as well as Portfolio Risk i.e. risk within an individual loan and risk inherent in the composition of full portfolio. Credit exposures may arise from direct lending, off-balance sheet products such as bank guarantees, letters of credits and derivative transactions in the trading book, and from the holdings of debt securities in the trading or banking book.
Market Risk
Market risk is the risk to the Bank's earnings and capital due to changes in the market level of interest rates, prices of securities, foreign exchange and equities, as well as the volatilities of those changes. For market risk management, the Bank uses both non-statistical measures like position, gaps and sensitivities (duration, PVBP, option greeks) and statistical measures like Value at Risk (VaR), supplemented by Stress Tests and Scenario Analysis.
Liquidity Risk
Liquidity risk is defined as the risk that a bank faces due to lack of cash on hand to meet its current or immediate obligations. The liquidity profile of the Bank is analyzed on a static basis by tracking all cash inflows and outflows in the maturity ladder based on the expected occurrence of cash flows. The liquidity profile of the Bank is also estimated on a dynamic basis by considering the growth in deposits and loans, investment obligations, etc. for a short-term period of three months.
Operational Risk
Operation risk arises from individual or technology error within the system. It is the risk which can be controlled by bank it's a function of internal controls, information systems, employee integrity, and operating processes.
Risk Mitigation at Axis Bank
Credit Risk Mitigation
To manage credit risk Axis Bank has its Credit Risk Management Committee (CRMC) made of senior management who are expert in credit and investment. The Bank continuously monitors portfolio concentrations by borrower, groups, industry and geography, where applicable. Portfolio level delinquency matrices are tracked at frequent intervals.
The Risk Management Committee of the Board periodically reviews the impact of the stress scenarios resulting in rating downgrades, or drop in asset values in case of secured exposures on the portfolio. The portfolio level risk analytics provide insight into the capital allocation required to absorb unexpected losses at a defined confidence level.
Market Risk Mitigation
The Bank uses Historical Simulation and its variants for computing VaR for its trading portfolio. VaR is calculated at a 99% confidence level for a one-day holding period. The VaR models for different portfolios are back-tested at regular intervals and the results are used to maintain and improve the efficacy of the model. The VaR measure is supplemented by a series of stress tests and sensitivity analysis that estimates the likely behaviour of a portfolio under extreme but plausible conditions and its impact on earnings and capital.
Liquidity Risk Mitigation
For National banks liquidity stress tests are conducted under different scenarios at periodical intervals to assess the impact on liquidity to withstand stressed conditions. The liquidity positions of overseas branches are managed in line with the Bank's internal policies and host country regulations. Such positions are also reviewed centrally by the Bank's ALCO along with domestic positions.
Operation Risk Mitigation
To manage the operational risk in an effective, efficient and proactive manner, the Bank has an Operational Risk Management (ORM) Policy, which is reviewed annually by the Risk Management Committee of the Board (RMC). In addition to the ORM policy, operational risk management framework, loss data collection methodology, risk and control self-assessment framework, key risk indicators framework and roles and responsibilities of operational risk management function are approved by the RMC.
The Bank has an Operational Risk Management Committee (ORMC), which oversees the implementation of the planned framework. In terms of the ORM policy, the Risk Department identifies, assesses, monitors and mitigates/controls the risk to an acceptable level. New products, processes and services introduced by the Bank are subject to rigorous risk review and sign-off process by the Product Management Committee where all relevant risk are identified and assessed by the departments, independent of the risk-taking unit.
Similarly, changes proposed in the existing product/processes/services are also subject to review by the Change Management Committee. Outsourcing arrangements are examined and approved by the Outsourcing Committee.
The IT Security Committee of the Bank provides directions for mitigating the operational risk in information systems.
