Assignment final

1 Final Report Topic: Critical Analysis of Russlkhoz Bank with theory Course: Name: Malikat Zajraeva Student ID: Table of content: Introduction -3 General Structure of the bank -4 Opening Accounts for Natural and Legal Person Deposit Account Lending Policy & Risk Assessment -10 Reporting 14 Interbank (branch) relationship 14 Credit Risk Policy Management Russia VS Germany 14 Conclusion 15 10 Bibliography 16 Introduction The world is evolving with every passing moment in many ways, so does the system need changes Banks are backbone of an economy and with modern needs bank incorporate changes to its system Scholars, Practitioners and stake holders sit together and propose changes for economy and that drive banking policy and we study these in our courses along with theories Practice of theory in banks is less and different at lower management level as it involves routine work which doesn’t require much changes and stay stable though policy making and application of theories happen at top level of any system The bank is 100% government owned bank Its broad customer base includes 5.9 million clients It is ranked 342 in the top 1000 banks by the Banker magazine It has a strong government support in supervision and capitalization It has played a pivot role in growth of the agriculture sector of Russia It has provided more than RUB 25 billion as a part of subsidized agribusiness lending program Agriculture is one of the main contributor to Russian economic growth This helped the sector to establish good growth Ruble devaluation had a multidirectional impact on agribusiness financial standing Sharp Ruble depreciation increase the price competitiveness of domestic products Factors such as macroeconomic volatility, uncertainty over the duration of Russia’s counter sanction, growing costs from Ruble devaluation, a decline in actual domestic demand, and a shortage if long term financial resources in a context of sectorial sanctions against Russian bank will continue to operate in 2017 At the same time, Russian Government took numerous steps to stimulate investment in the sector However, investment in agriculture fixed asset are expected to show negative growth in 2017 Despite all difficulties, Russia’s agribusiness retains ample investment potential, being driven first and foremost by import substitution, growth in labor efficiency, structural reorganization and export Against the backdrop of macroeconomic and geopolitical challenges that emerged in 2015, including the extension of sanction imposed by the United States, the European Union and numerous other countries Russian Agriculture Bank maintained its position as systemically important financial institution and the main agent of Russian Government to financially support national agribusiness and ensured positive dynamics for its key business lines while maintaining sufficient capital adequacy levels Starting with the basic organizational structure of bank, I’ll discuss main aspects of my practical experience which I studied and later implemented in my practice that will be including account opening, deposits, lending policy and risk assessment and I’ll also compare credit risk policy management in Russia and Germany Thus I’ll be address How theories are implemented in Rossekhoz bank in practices? General Organizational Structure of Bank We have studied various structures of organization The main influences to shape an organization structure is includes strategic objective, nature of environment of organization, its diversity, the future strategy of organization, the technology it uses and its people Per these factors, a structure is adopted for organization However, per Mintzberg the structure of organization is formed to co-ordinate the activities of its employees and its processes and it varies depending upon the size of the organization He recommended six variants of organization structure based on building blocks A simple structure is adopted by organization if its environment is simple or dynamic, its tasks are simple and small, have strategic apex and have direct supervision of its employees He suggested that a machine bureaucracy is adopted by the organization if the environment is simple and static, have old and regulated tasks, have techno-structure of work and work is standardized A professional bureaucracy is adopted if the environment is complex and static, the organization has professional control and have simple system, is operating core and its employees are of standardized skills.1 The traditional portrait of the banking system has undergone rapid changes in recent decades The accustomed notion of a bank as a very conservative institution that offers customers an established range of products and services using traditional forms of work is a thing of the past Banking conquers the virtual space The remote access to bank accounts, anonymously rendered banking services and customer acquisition through a branch network become standard in the banking business INTERNATIONAL JOURNAL OF SCHOLARLY, ACADEMIC, INTELLECTUAL DIVERSITY VOLUME 14, NUMBER 1, 2012 Even in the age of high technology and the simplification of many processes in the banks, the traditional banking services continue to be justified, and in the future, too, traditional forms of banking services and personal customer relationships will remain and be expanded In modern society, the banks operate a variety of different transactions They therefore not only organize the money circulation and credit relationships Banks are financed by the national economy, insurances are transacted, purchases and sales of securities and foreign exchange are carried out, and in some cases, banks become intermediaries or asset managers Credit institutions are on the advisory side, are involved in the discussion on national economic stimulus programs, carry out statistics and maintain their own subcontractors In short, the bank does not show its specificity, but presents itself as a versatile enterprise The activities carried out by the bank include those which can be carried out by other institutions The bank is an autonomous, independent commercial establishment This is the real nature of the bank The Bank, like other participants in market relations, is guided by the principle of economic interests In addition, the bank is the only institution that strives to return its product - the credit - to it Of course, the bank is not a factory, no factory, but, like every other company, it has its own products The primary product of the bank is the formation of payment (money supply), as well as the provision of a variety of services in the form of loans, guarantees, guarantees, advice, asset management The activity of the bank is therefore quite productive A divisional structure is adopted for organization if its environment is diverse or static and has very large and divisible tasks, has middle line reporting system and its output is standardized An adhocracy structure is adopted if environment is complex and dynamic, have complex tasks, have operating core and is mutually adjusted A missionary structure is adopted if environment is simple and static, have ideology and its norms are standardized Rosselkhoz Bank has a divisional organizational structure General meeting of shareholders, is followed by board of directors Board of directors have committees including, risk committees, audit committee and audit committee After board of directors, bank has the management board It includes CFO, deputy CFO and other committees including risk management committee, HR committees, credit risk management committees etc The CFO and deputy CFO supervise various departments including credit risk, portfolio quality management, risk management, finance, treasury department, AML unit, business department, marketing, HR, internal services, while the committees supervise branch network The Rosselkhoz Bank operates a good corporate governance body that ensure the decision making to be more transparent, effective and produce timely decisions The Bank operates under supervisory board under which different committees operates including audit committee, strategic planning and development committee and HR committee Its board also includes the Revision Committee which is responsible for controlling the banks activities and evaluates the activities and functioning of risk management systems Corporate Secretary checks ensure the compliance of corporate governance practices and improves the communication between shareholders and the management The credit authorization and credit policy formation is supervised and created by  The Credit Committee  The junior credit committee  The Micro Credit Committee The finance committee of the bank oversees different financial aspects the bank including analyses of financial status, pricing, profitability of banks operations etc The bank also has an Asset and Liabilities Management Committee Its duties include to raise funds, allocate funds, management of assets including making investments in various money markets including derivative market, currency market, stock market etc It also distributes funds among bank units and development of Bank’s tariff and interest policy The bank also has branch network committee that assess the performance and enhance regional branch performance The Risk Management Committee of Rosselkhoz Bank ensure the overall risk of the bank does not exceed the defined limit.2 The Chechen regional branch is a structural unit of the OAO "Rosselchosbank" and was founded on the order of the President of the Russian Federation No 75-РП of 15 March 2000.It complies, in accordance with the decision of the Commission of the Central Bank of the Russian Federation, all claims made by the Bank of Russia to credit institutions The Central Bank of the Russian Federation has granted the OAO "Rosselchosbank" a general license No 3349 for the exercise of banking transactions, which allows the bank to expand its activities In addition, the bank is kept in a register whose participants are http://www.rshb.ru/en/corporate/bodies/ subject to the Deposit Guarantee Scheme of 14 March 2006 under point 760 100% of the shares are held by the state The bank is the market leader in the Russian agrarian credit and one of the most important links in the implementation of the priority national project "Development of the agro-industrial complex" Opening bank accounts for Natural and Legal persons The Basel committee on banking supervision issued guidance on customer identification2 Customer identification is important for effective due diligence program and know your customer program which every bank should put in place to protect against reputational, operational, legal and concentration risks In today’s modern world it is important to comply with anti-money laundering legal requirements and identification of bank accounts related to terrorism The strong compliance of anti-money laundering and anti-terrorism activities is the implementation of strong customer due diligence policies and procedure for all natural and legal customers It starts with verification of customer’s identity with enhanced customer due diligence procedures for risky customers and supervision of customer’s activity.3 Management of bank shall have thorough understanding of the money laundering risks and terrorist financing risk of its customer base This can happen if the bank obtains complete information from its customer whether it be a natural person or a legal person at the time of account opening Possible use of existing bank accounts of natural and legal person Customer due diligence with effective controls and policies enables the bank to comply with regulatory requirements and to report any suspicious activity in customer’s bank account It can help in  Detection of unusual transaction/activity in customer’s account that can prevent the bank from exposing the bank to financial loss, terrorism activity or reputational risk  Prevent the bank from natural or person that may be involved in criminal activity trying to use banks products The information acquired by the bank at the time of account opening, enables the bank to monitor the risky customers by regularly monitoring the suspicious activities of 3The BCBS issued in February 2016 customers If any of the activity appears before the bank, it shall reassess the risk profile of the customer and if it is considered riskier than the bank shall report such activities to relevant authorities Customers that poses higher risk in the form of money laundering or terrorist activities shall be monitored more closely at the time of account opening and during the relationship with the bank as they pose higher risk The bank shall obtain extensive information at the time of account opening as per the enhanced due diligence of customers and know you customer policies The information can include purpose of the account opening, sources of the funding, occupation or type of the business financial statement etc.4 Rosselkhoz Bank also implements customer due diligence policy and obtains all the necessary information required from the customers The information obtained from natural person includes:           Legal Name Correct Address Contact number Date and place of birth Nationality Occupation Identity number Letter of occupation Type of account Signature Information is also obtained from the legal person for opening the account including       Name of the company/institution Mailing address Contact number Identification number Nature of the business Source of funding Deposit Account Deposit accounts normally carries liquidity funding risk Liquidity risk means the ability to settle obligations immediately, synchronization of revenue and outflow are not Federal financial institution examination council for bank secrecy act/anti money laundering matched A bank will be illiquid if it is unable to pay off its obligation and bank is considered to default Deposit accounts mainly carries the risk of withdrawals by consumers creating the liquidity risk for banks.5 The deposit account consumers in banks are normally constitute of small depositors each of which chose to deposit their money into deposit account in bank of their choice The bank determines the interest rate to be offered on deposit accounts taking in the factors including the current interest rate of the bank, market interest rates offered by other banks, the likely response by other banks and expected behavior of the existing and future customers and the rate being administrated by central bank In this case Russia has Central Bank of Russian Federation which administrate the interest rate being offered by the banks and monitor the activities of banks There has been penalty of studies carried out to provide insight about customer behavior in banking sector and interest rates offered by the bank Generally, it has been observed that banks follow the interest rates offered by other banks and central bank This is supported by studies Cooperman, lee and wolfe (1992), which shows that interest rate on deposit accounts closely follows the interest rate offered by other banks The behavior of deposit account consumers allows the banks to act monopolistically and set the interest rate independently Depositors usually accepts the interest rates lower than market interest rate depending upon various reasons including switching cost, nonfinancial services offered by other banks Changing the banks could be time consuming process Gilkeson and Ruff (1996) presented a theory about the early withdrawals on deposit portfolio They argued that the reasons for early withdrawals are caused by four factors including i ii iii iv Investment incentive of depositor The size of deposit The collateral pledged against deposit if any Change in depositors need for liquidity.6 5BIS working paper no 36 Funding liquidity risks: definition and measurement by Mathias Drehmann and Kleopatra Nikalalou 6Journal of Financial Services Research (1999) 10 RosselKhoz Bank offers the interest rate to its deposit customers at interest based on market rates It also offers other services bundled with interest rate to retain existing and attract new customers It also follows policies of central bank and maintains reserve based on customer expected behavior to meet its obligations and minimize funding liquidity risks Lending Policy & Risk Assessment The risk faced by the bank in lending the money to its customers is known as credit risk which is the risk of non-payment of the money by consumer to the bank which it lends This is the main risk faced by the banks and it occurs due to poor risk management, relaxed credit standards of the bank and lack of attention to change in the economy As the major source of income for banks is the return earned on the loan and it is also the main reason of credit risk The goal of the bank shall be to maximize the rate of return while maintaining the risk exposure to the minimum There also other sources of risk other than lending which includes swaps, bonds, options, commitments and guarantees etc The Basel committee encourage the banks worldwide to promote sound practice to manage credit risk Although risk management policies and procedures differs in different banks depending upon the nature of their consumers and economy of their environment, as per Basel committee a sound risk management practice shall include i ii iii iv To establish an appropriate and effective credit risk environment where risk is identified and assessed before incurring Operate a scrutinized and effective credit risk assessment and granting process for customers before lending them the money To maintain an effective credit administration, measurement and monitoring process of ongoing credit risk management Ensure adequate controls over credit risk.7 Individual Lending Consumer credit is an important part of any economy When income of an individual falls below the permanent level and assets are either not available or not easily accessible, the main source of income to maintain the consumption level is the credit/loan obtained from the bank However, the loan to individual carries the risk of defaulting The banks therefore need to make their process of evaluating the applicant effective and more thorough The "Principles for the Management of Credit Risk - final document" Basel Committee on Banking Supervision BIS September 2000 11 starting point of each loan is the application submitted by the individual The application is then evaluated by the credit officer The credit officer then approves the applications and refers the application exceeding the limit to the loan committee The information is obtained from the applicant on the prescribed form The applicant is evaluated for his income, property and feasibility of lending the money Terms of agreement is then explained to the customer Obtain any previous history of applicant to assess the credit history and repayment duration A payment schedule is calculated and included in the agreement Loan is then granted per the customer according to his application, credit rating, collateral The risk of default can be minimized at the time of evaluation with the help of credit rating Instead of using subjective and informal evaluation process, the lending institution shall use statistical credit rating models The applicants with lower credit rating score shall not be granted any loan or loan shall be granted on higher interest rate.8 Same is the case with loan to small and medium enterprises The loan shall be granted to them after assessing their credit rating The credit ratings show the ability of debtor to repay their debt by making the timely payment of principle and interest amount The ratings can be issued by the lending institutions itself or it can be issued by independent credit rating agencies The institutions rate the creditworthiness of debtors These includes the Moody’s, Standard and Poor’s and Fitch ratings.9 The credit rating of Rosselchos bank as per Moody’s is: Long-term foreign and local currency IDRs — ‘BB+’, outlook stable Short-term IDR — ‘B’ Viability Rating — ‘b-’ Support Rating — ‘3’ Senior unsecured debt — ‘BB+ 10 Banking sector is one of most risky sector where many risks are managed jointly Bank manages multiple and opposite needs of consumers The customers avail the services of credit from bank and at the same time deposit the money into banks to earn return The bank is all the time ready to extend the amount to its customers in form of withdrawal Bank Lending Policy, credit scoring & value at risk – Tor Jacobson & Kasper Roszbach – 30 July 1998 Norderstedt, Germany: Druck und Bingdung 10 https://www.moodys.com/credit-ratings/Russian-Agricultural-Bank-credit-rating-807603798 12 to deposit customers and through credit (Kashyap 2002) Due to these services the bank always faces issues like insolvency and liquidity The bank maintains the reserve to maintains the liquidity and to guard against unexpected withdrawals from customers and defaulting of customers.11 Rosselkhoz bank has developed and operates an effective internal control department which reports directly to the Supervisory Board The internal control department develops a plan to assess and evaluate the bank’s risks and internal controls This specifically includes monitoring of the branches of the bank to review their controls Internal audit is carried out of branches of banks including:      Credit operations Operation with payment cards Information technology Human resource management Anti-money laundering and terrorism financing The audit committee assists the supervisory board in oversight of effectiveness of risk management process of the bank Rosselkhoz Bank complies with Russian laws and regulations as well as international laws of anti-terrorism and anti-money laundering principles Bank has developed and operates a system based on the recommendations of Basel Committee On daily basis Rosselkhoz Bank monitors the transactions of individual accounts using an automated system and monitors if any transaction exceeds the limit highlighting unusual activity and forward the information to Federal Financial Monitoring Service in accordance with Russian legislation Operation risk relates to matters that can go wrong on a day to day basis while the organization in carrying out its business Operation risk include:      Losses from internal control systems and audit inadequacies Non-compliance with regulations Information technology failure Human error Loss of key person 11 Risk management, capital structure and lending at banks 13  Fraud  Business interruptions The operational risk of business includes risk in payment received from customers in the form of cheques and online transfers The risk in receiving the cheques from customers including:  The cheques shall always be kept in safe custody  Ensure that cheques are authorized by the account holder by matching their signature specimen  Ensure that cheques are not time barred and are yet available  Ensure that cheques are original and are not fake by examining MICR line of the cheque as the ink used in this line is special The number of MICR can be traced to Federal Reserve Bank Services Credit portfolio management is the key functions of the banks as the banks includes a diversified and large portfolio including domestic, corporate and agriculture credit The role of the bank is therefore to assess the credit risk and improves the return on these risks This can be done with the help of hedging, trading of loans and managing concentration of risk Concentration of risks means the effect of risk that could affect the bank adversely whether due to individual transaction or number of it 12 Harry Markowitz in early 1950 presented the modern theory, per this by combining assets in the portfolio bank can expect higher return 13 Per the operative instructions of the common Bank of Russia in relation to typical banking risks, the banking risk is a possibility of credit institutions incurring credit institution losses and the deterioration of the liquidity of adverse events related to internal and external factors.14 Reporting There are several reports that are being formulated daily and quarterly in bank Daily reports include cash reconciliations, cheque and deposit reports Quarterly reports include loan approvals, recoveries, and new account opening reports as well Beside these the report system at the bank is very strong 12 The evolving role of credit portfolio management by Luis Nario, Tamara Thomas and Uwe – July 2016 13 Credit portfolio management – Charles Smithson 14 Derective CB RF on 23.06.2004 № 70-T “Typical banking risks” 14 Interbank Relations Coordination between different branches of the bank plays very vital role in good performance Cheque clearance, deposits, withdrawals and other matters are critical to interbank branch to branch relationship At RosselKhoz Bank special controls are applied to avoid duplication of data, clients and specially for loans are implemented to prevent fraud activities Credit Risk Policy Management Russia vs Germany The international sanctions have put pressure on Russian’s economy in general which has weakens the banking sector in Russia This results in strict banking credit risk policy and lower profit States subsidy may be needed to help the sector and avoid any crisis Rosselkhoz bank is also a government owned bank The Fitch’s credit rating of Russia as of April 2017, is BBB- with stable outlook economy and 43 TE rating On the other hand, banking sector in Germany is strong and backs the financial market Household banks is a key idea of relationship lending and provide safety in case of decreasing borrower’s credit rating Strong interconnection with European market have exposed them to market risk Owing to economy largely based on manufacturing and transportation credit risk tends to turn higher for banks The Fitch’s credit rating of Germany as of April 2017, is AAA with stable outlook economy and 100 TE rating Conclusion: A Bank can survive in the market, if the risk is identified and minimized on time The credit risk does not exceed the limit defined The main business of Rosselkhoz Bank is lending the money to agricultural sector, domestic consumers and corporate sector, like any other bank It needs maintain and manage its liquidity, manage lending and borrowings, monitoring and collection of creditors At last it worth mentioning that as Rosselkhoz bank is a Russian bank, their information isn’t published openly as it is and not all the information was delivered to be able to make this paper successful, therefore this paper is more of a general nature due to the lack of accurate or transparent information.15 15 http://www.scienceforum.ru/2014/667/6666, Date: 29.11.2016 15 The designation at which I worked in Rosselkhoz bank is in lower management and the practices are very regular and is just very little of what we study in theory in course thus it is very tough to relate theory with the practice which I had at bank Bibliography 1- INTERNATIONAL JOURNAL OF SCHOLARLY, ACADEMIC, INTELLECTUAL DIVERSITY VOLUME 14, NUMBER 1, 2012 2- http://www.rshb.ru/en/corporate/bodies/ 3- The BCBS issued in February 2016 4- Federal financial institution examination council for bank secrecy act/anti money laundering 5- BIS working paper no 36 Funding liquidity risks: definition and measurement by Mathias Drehmann and Kleopatra Nikalalou 6- Journal of Financial Services Research (1999) 16 7- "Principles for the Management of Credit Risk - final document" Basel Committee on Banking Supervision BIS September 2000 8- Bank Lending Policy, credit scoring & value at risk – Tor Jacobson & Kasper Roszbach – 30 July 1998 9- Norderstedt, Germany: Druck und Bingdung 10- https://www.moodys.com/credit-ratings/Russian-Agricultural-Bank-credit-rating807603798 11-Risk management, capital structure and lending at banks 12-The evolving role of credit portfolio management by Luis Nario, Tamara Thomas and Uwe – July 2016 13-Credit portfolio management – Charles Smithson 14-Derective CB RF on 23.06.2004 № 70-T “Typical banking risks” 15- http://www.scienceforum.ru/2014/667/6666 Date: 29.11.2016 ... evaluating the applicant effective and more thorough The "Principles for the Management of Credit Risk - final document" Basel Committee on Banking Supervision BIS September 2000 11 starting point of... Journal of Financial Services Research (1999) 16 7- "Principles for the Management of Credit Risk - final document" Basel Committee on Banking Supervision BIS September 2000 8- Bank Lending Policy,