Non-Financial Risks : Do Banks Treat Them on Par with Financial Risks?

In their pursuit of maximising business volume and profit, banks appear to be concerned more about the financial risks like credit risk, market risk, liquidity risk, interest rate risk and so on. For them, financial risks pose a far more significant threat to achieving their financial objectives. This makes banks prioritise their efforts in measuring and managing the financial risks. Little do they realise the significance of non-financial risks (NFRs), such as operational risk, conduct risk, and compliance risk. These NFRs have a potential to wreak havoc on their financial objectives, apart from questioning the very existence of banks. It is not the case that banks do not have policies to manage NFRs. In fact, banks set aside capital for measurable NFRs and have policies in place to manage other NFRs. But mere holding of capital or putting in place NFR policies is of little value unless effective management of NFRs percolates down the line in a bank with senior management oversight. NFRs are seldom seen on par with FRs, and this is presumably due to a disquieting fact that risk and compliance divisions are seen as stumbling blocks to the growth of business by functional divisions like credit or investment. A plethora of guidelines like fair practices code, truthful lending practices, operational risk management, and compliance codes set the boundaries for banks while dealing with their customers in sale of products and services. Non-adherence to these NFR guidelines invites punitive action from customers and regulators. In worst case scenarios, it may even jeopardise the reputation of banks. There is thus a case for integrated management of NFRs for an orderly business growth within the ambit of an overall compliance framework that rewards compliance-abiding performers and penalises others. The purpose of this paper will be to analyse how NFRs could potentially impact financial objectives and how they could be managed in an integrated manner