1.1 Risk is inherent in the process of financial intermediation. The major frontiers of risks to which banks exposed are - credit, liquidity, interest rate, foreign exchange rate, equity price, commodity price, operational, legal, regulatory, reputational, etc risks. These risks are highly interdependent and events that affect in one area can have adverse implications for a range of other risk categories. Thus, Board of Directors and the line management should accord the highest priority in improving the ability to identify, measure, monitor and control the overall risk profile of banks.

1.2 The broad contours of risk management function should encompass:

• An effective institutional structure.

• Comprehensive risk measurement approach.

• Risk management policies and procedures, consistent with business strategies, capital strength, managerial skill and willingness to assume risks.

• Guidelines to govern risk-taking including detailed structure of prudential limits.

• Strong MIS for reporting, monitoring and controlling risks.

• Separate risk management institutional framework, independent of business lines, with clear delineation of levels of responsibility for management of risks.

• Periodical review, reporting and independent audit.