Despite moving on for a decade, there is always a hounding question as to whether we have buried the demons of the nightmarish 2008 economic crisis in which the economy nosedived.
Banks are required to address the issue of bad loans big time. In the last five years or so, the banks have been hit most hard by the Non Performing Assets or NPA; so much so that the figure has almost tripled. Neither has it increased significantly in other countries. It is apparent that they have not been able to adequately assess the risks they are exposing themselves to. Is this risk worth it?
Why stress testing
This is exactly why the banks should have stress tests come in. Stress tests are a tool of observation using various verticals to ascertain whether banks have enough capital to survive adverse economic conditions. Stress tests can help identify banks’ risk appetite and mitigate the impact of market changes. If we look back at the 2008 global financial meltdown which caused the bloodbath in the markets, it could be construed that it was a direct result of suboptimal stress testing in banks. Shaken, most global banks have adopted stringent stress testing practices to help manage their risks and protect themselves from economic meltdowns. They have also adopted modern and more professional approach to recruit bankers by making banking training in Delhi a yardstick.
Top-down or bottom-up approach?
Given the volatile economy in the country, the banks in India realize stress testing as crucial for safety. Some are already doing their bit to improve risk assessment. However, they aren’t doing it right. Following just the traditional top-down approach has led to inadequate analyses. The right mix of top-down and bottom-up approaches is the secret sauce to building resilience and keeping NPAs at bay. But to successfully implement the mixed approach, banks and financial institutions must address the following issues: cultural inertia, data quality, and standardization of industry and sector classification.
Get the most out of stress tests
Stress testing is not a mere regulatory exercise anymore. It’s not just about managing risks or surviving stressful times. Banks can use the insights from stress tests to make smarter business decisions and strategic choices, and boost profitability.
As bankers with a certification from academies like assk academy of business management can help banks set up the right framework to strengthen their financial systems across
- Risk appetite
- Risk management
- Balance sheet management
- Capital management
The banks can work with the businesses to implement the right stress testing framework—one that can capture complex risk sensitivities as well as help address data quality issues. By bringing together the expertise across people, technology and process, the banks can focus on the core areas to mitigate risks and strengthen your financial systems.
Banking is a flourished and the most well managed sector in any country but some of the financial crisis or even lack of proper implementation can hinder the progress on an intermittent basis. Therefore, the banks are to be governed at the grass root level to keep their business operations productive for a longer period of time regardless of the economic slowdown.