Risk Management
 
1.0 Risk Management

1.1 Risk is inherent part of Bank’s business. Effective Risk Management is critical to any Bank for
achieving financial soundness. In view of this, aligning Risk Management to Bank’s organizational
structure and business strategy has become integral in banking business. Over a period of year, Union
Bank of India (UBI) has taken various initiatives for strengthening risk management practices. Bank has
an integrated approach for management of risk and in tune with this, formulated policy documents
taking into account the business requirements / best international practices or as per the guidelines of
the national supervisor. These policies address the different risk classes viz., Credit Risk, Market Risk
and Operational Risk. 

1.2 The issues related to Credit Risk are addressed in the Policies stated below; 

1.2.1 Loan Policy. 

1.3 The Policies and procedures for Market Risks are articulated in the ALM Policy and Treasury Policy. 

1.4 The Operational Risk Management involves framework for management of operational risks faced
by the Bank. The issues related to this risk is addressed by; 

1.4.1 Operational Risk Management Policy. 

1.5 Besides, the above Board mandated Policies, Bank has detailed ‘Internal Control Principles’
communicated to the business lines for ensuring adherence to various norms like Anti-Money
Laundering, Information Security, Customer complaints, Reconciliation of accounts, Book-keeping etc.

2.0 Oversight Mechanism:

 2.1 Our Board of Directors has the overall responsibility of ensuring that adequate structures,
policies and procedures are in place for risk management and that they are properly
implemented. Board approves our risk management policies and also sets limits by assessing
our risk appetite, skills available for managing risk and our risk bearing capacity. 

2.2 Board has delegated this responsibility to a sub-committee: the Supervisory Committee of
Directors on Risk Management & Asset Liability Management. This is the Apex body /
Committee is responsible for supervising the risk management activities of the Bank. 

2.3 Further, Bank has the following separate committees of top executives and dedicated Risk
Management Department: 

2.3.1 Credit Risk Management Committee (CRMC): This Committee deals with issues relating to
credit policies and procedure and manages the credit risk on a Bank-wide basis. 
2.3.2 Asset Liability Management Committee (ALCO): This Committee is the decision-making
unit responsible for balance sheet planning and management from the angle of risk-return
perspective including management of market risk. 
2.3.3 Operational Risk Management Committee (ORMC): This Committee is responsible for
overseeing Bank’s operational risk management policy and process. 
2.3.4 Risk Management Department of the Bank provides support functions to the risk
management committees mentioned above through analysis of risks and reporting of risk
positions and making recommendations as to the level and degree of risks to be assumed. The
 department has the responsibility of identifying, measuring and monitoring the various risk
faced the bank, assist in developing the policies and verifying the models that are used for risk
measurement from time to time. 

3.0 Credit Risk

 3.1 Credit Risk Management Policy of the Bank dictates the Credit Risk Strategy. 

3.2 These Polices spell out the target markets, risk acceptance / avoidance levels, risk
tolerance limits, preferred levels of diversification and concentration, credit risk measurement,
monitoring and controlling mechanisms. 

3.3 Standardized Credit Approval Process with well-established methods of appraisal and rating
is the pivot of the credit management of the bank. 

3.4 Bank has comprehensive credit rating / scoring models being applied in the spheres of
retail and non-retail portfolios of the bank. 

3.5 The Credit rating system of the Bank has eight borrower grades for standard accounts and
three grades for defaulted borrowers. 

3.6 Proactive credit risk management practices in the form of studies of rating-wise
distribution, rating migration, probability of defaults of borrowers, Portfolio Analysis of retail
lending assets, periodic industry review, Review of Country, Currency, Counter-party and Group
exposures are only some of the prudent measures, the bank is engaged in mitigating risk
exposures. 

3.7 The current focus is on augmenting the bank’s abilities to quantify risk in a consistent,
reliable and valid fashion, which will ensure advanced level of sophistication in the Credit Risk
Measurement and Management in the years ahead. 

4.0 Market Risk

 4.1 Bank has well-established framework for Market Risk management with the Asset Liability
Management Policy and the Treasury Policy forming the fulcrum for procedures, processes and
structure. It has a major objective of protecting the bank’s net interest income in the short run
and market value of the equity in the long run for enhancing shareholders wealth. The
important aspect of the Market Risk includes liquidity management, interest rate risk
management and the pricing of assets and liabilities. Further, Bank views the Asset Liability
Management exercise as the total balance sheet management with regard to its size, quality
and risk. 

4.2 The ALCO is primarily entrusted with the task of market risk management. The Committee
decides on product pricing, mix of assets and liabilities, stipulates liquidity and interest rate risk
limits, monitors them, articulates Bank’s interest rate view and determines the business
strategy of the Bank. 

4.3 Bank has put in place a structured ALM system with 100% coverage of data on both assets
and liabilities. To measure liquidity and interest rate risk, Bank prepares various reports such
as Structural Liquidity, Interest Rate Sensitivity, Fortnightly Dynamic Statement etc. Besides
RBI reporting many meaningful analytical reports such as Duration Gap analysis, Contingency
Funding Plan, Contractual Maturity report etc. are generated at periodic intervals for ALCO,
which meets regularly. Statistical and mathematical models are used to analyze the core and
volatile components of assets and liabilities. 

4.4 The objective of liquidity management is to ensure adequate liquidity without affecting the
profitability. In tune with this, Bank ensures adequate liquidity at all times through systematic
funds planning, maintenance of liquid investments and focusing on more stable funding
sources. 
 4.5 The Mid Office group positioned in treasury with independent reporting structure on risk
aspects ensure compliance in terms of exposure analysis, limits fixed and calculation of risk
sensitive parameters like VaR, PV01, Duration, Defeasance Period etc. and their analysis. 

5.0 Operational Risk

 5.1 Operational Risk, which is intrinsic to the bank in all its material products, activities,
processes and systems, is emerging as an important component of the enterprise-wide risk
management system. Recognizing the importance of Operational Risk Management, Bank has
adopted a Comprehensive Operational Risk Management Policy. This would entail the bank to
move towards enhanced level of sophistication in the years ahead and to capture qualitative
and quantitative measures of Operational Risk indicators in management of operational risk. 

5.2 Bank has comprehensive system of internal controls, systems and procedures to monitor
and mitigate risk. Bank has also institutionalized new product approval process to identify the
risk inherent in the new product and activities. 

5.3 The Internal audit function of the Bank and the Risk Based Internal Audit, compliments the
banks ability to control and mitigate risk. 

6.0 Bank’s Preparedness to meet Basel II norms

 6.1 Bank carried out a comprehensive Self-Assessment exercise spanning all the risk areas and
evolved a road map to move towards implementation of Basel II as per RBI’s directions. The
program in implementation of Risk Management, Organizational Structure, Risk measures, risk
data compilation and reporting etc. is as per this laid down road map. 

6.2 The Polices framed and procedures / practices adopted are benchmarked to the best in the
industry on a continuous basis and the Bank has a clear intent to reach an advanced level of
sophistication in management of risks in the coming year. 

6.3 The ever-improving risk management practices in the Bank will result in Bank emerging
stronger, which in turn would confer competitive advantage in the Market. 

6.4 Bank will implement New Capital Accord w.e.f. 31/03/2008. The parallel run, till
implementation, is currently underway.