Risk Managment


Banking industry, in the position of the most important economical, monetary and financial entity, faces various challenges. The increase in competition between the banks, intensification of disciplinary and control policies by the Central Bank, the opposition between the outer and inner factors and the expectations of beneficiaries for the present and future of the banks of country, brings up a number of risks in a way they have always taken into account the issue of risk and its management.

The effects of the decisions made by the rivals of the bank on their market share, the effects of the fluctuations of different assets like gold, foreign currencies and stocks (which will in turn influence on the bank’s portfolio and its profit) and the application of disciplinary policies by the Central Bank such as prohibiting over-withdrawal from the bank’s account with the Central Bank and the application of heavy fines on the banks’ borrowing has obliged the banks to administer more self-control, analysis and management of risk indices in different operational fields such as liquidity, credit, operational, etc. Furthermore, the world financial crises which occurred in 2008 and the effect of the dangerous behavior of the banks and credit and financial institutes in its formation has caused supervisory and regulatory entities to increase their sensitivity to the banks’ performance proof and assurance of their avoidance of banking system’s risks.

With regard to the above-mentioned issues and taking continuous changes in environmental causes and economical systems into account, the financial construction of the banks have been facing various risks. In this connection, Bank Refah Kargaran has taken measures to establish risk management. The system, organizational chart, process and procedures, measures taken in the fiscal year 2016-2017 and the programs for the year 2017-2018 of Risk and Compliances Department will be followed.

Risk Management System at Bank Refah Kargaran

The risk management system of Bank Refah Kargaran as a sub-set of the corporate governance of the bank includes the goals and strategies, different organizational levels such as the board of directors, risk management supreme committee, supervision affairs directorate, risk and compliance department, risk liaison officers, process of risk management and risk culture.


Pillars of the System Risk Management


· Supreme Committee of Risk Management

Supreme Committee of Risk Management is a specialized committee organized by the board of directors for helping them in supervision of effective management of the risks to which the bank may be exposed. The committee has been organized in the framework of authorities, regulations, policies and the defined duties by the board of directors in order to supervise the processes of defining the bank’s risk condition, to assess the performance of risk-defining systems, to analyze and interpret the bank’s risks and their control. It consists of a number of the board members, directors and the managers of head offices of the bank and the secretariat of the committee has been established in the Risk and Compliance Department of the bank.

· Secondary Committee of Operational Risk and Compliance

Secondary Committee of Operational Risk and Compliance is a committee for the analysis of the status of the bank’s operational risks, its affiliated companies, preparing periodical and up-to-date reports by other executive units concerning the issues related to operational risks such as information security, job continuity, etc.

· Secondary Committee of Liquidity Risk

Secondary Committee of Liquidity Risk is organized for the prevention of affording funds with remarkable costs such as obligatory sales of assets and keeping a proper level of liquidity to be responsible for the unexpected outgoing cash flows based on previous experience, keeping a proper level of liquidity in accordance with the defined limits in the bank’s internal rules and paying the debts and fulfilling the commitments in a continuous and timely manner.

· Secondary Committee of Credit Risk

Secondary Committee of Credit Risk is organized with the aim of making a proper environment for controlling credit risks, defining a suitable way for the identification, evaluation and control of credit risks and also devising controlling processes regarding the

compliance between the processes of facility allocation and considering the defined limitations and moreover the principles, instructions, internal bylaws and supervisory organizations.

·    Secondary Committee of Market Risk Management

One of the duties of Secondary Committee of Market Risk Management is to compare and study the inflation rates on timed deposits and foreign exchange currencies as the profitability of the bank; however, for more readiness, the committee measures the endangered resources and utilizes indispensable instructions and the advised orders in order to administer the BALL II in the bank.

Executive Section

Risk and Compliance Department

The Organizational chart of Risk and Compliance Department is as follows:

Approaches and Measures Taken for Risk Management

Approaches and measures taken in regard to the fields of credit risk management, liquidity risk management, market risk management, operational risk management and compliance risk management are as follows:

A.      Credit Risk Management

While credit risk management benefits from credit-rating process and different collaterals for reducing the said risk, in order to continuously analyze and control the related risks and to provide the board of directors and the supreme committee of risk with monthly reports, it also takes measures in line with modeling and calculating the probability of facilities’ dishonoring, claims’ recovery rate, the expected loss and a study of credit portfolio risk using credit information and financial statements.

Approaches and measures taken in this field are as follows:

1.  Approaches and Measures

1.1.                Revision of the banks’ collateral adequacy:

The status of the amount and quality of the collateral which is taken from the customers to guarantee the allocated facilities in IR Rials and the commitments (LG’s) go under investigation. And also some information and statistics about the portfolio of the collaterals of the bank, the status of the collateral while compared with the facilities and the commitments and the status of claims based on submitted collateral. Finally the facilities and commitments which are in danger of loss and the degree of their coverage with collaterals (the proportion of the balanced collaterals with risk indices to facilities and commitments) throughout he bank and its regions affairs directorates is calculated in a 3-month period of time.

1.2.                Claims’ Recovery Rate:

The recovery rate in its general term means the amount of total receivables divided by the total claims of the bank in a definite period of time, in other words, recovery rate is stating the fact that how much the bank has been capable of recovering its claims and on the other hand, it shows the loss out of dishonoring (LGD) of the unrecovered claims. During different chronological periods, this report is prepared with the purpose of calculating the said indices for the bank, regions’ affairs, and all the head offices of the bank. The data of all the receivables of the bank and the total claims classified into various kinds of claims (matured date, pending and suspicious claims) are used and the received amounts out of such trans measures or any other needed claims to be received, are calculated in separate classifications record by record with an annual rate of 20 percent (the rate of participation bonds) and will be discounted. It is worth mentioning that, the above-mentioned report is prepared monthly.

1.3.                The Bank’s Expected Loss in Different Periods of Time:

In this section, in order to study the status of the portfolio of the bank’s credit facilities, the calculation of one of the main parameters which values credit risk is the expected loss

during a definite period of time which is usually taken into account concerning the type of the related scenario. It is worth mentioning that the calculation of the expected loss and the loss out of dishonoring the claims and the amount which is in danger of being dishonored, also have been done during the considered period of time.

By the bank’s expected loss, we mean the loss which the bank is going to bear during a definite period of time in future and considering the present conditions. In other words, the expected loss demonstrates the group of facilities which will be changed into non-current claims.

1.4.                Revision of Claims during Different Periods


One of the bank’s sources of revenue incomes is the credit and allocated facilities and a part of the hazards which it confronts with is the increase in the bank’s pending claims. A revision of the status of allocated facilities in this report has been prepared in different payable periods and the pathology of the created claims classified as the branches affairs’ departments and the bank countrywide.

B.      Liquidity Risk Management

With the aim of analysis and continuous control of the risks related to the field of liquidity and assets management and the debts, the following approaches have already been taken:

1.  Approaches and measures

1.1.        Predicting the resources and uses: predicting the total resources and the net uses and the regions’ affairs have been under focus in this report using time series data existing in the bank’s balance sheet. In order to do so, by the use of time series regression methods, neural networks and second degree of flattening of total resources and the total uses of the bank; it is worth mentioning that in the beginning and at the end of the report, the average of the above-mentioned methods are announced and the results of the predictions and the degree of their compatibility with the reality of the predicted figures in the previous reports and their deviance has been studied and the related report is submitted once in two months.

1.2.        Resources and Uses Duration: one of the most important issues in liquidity risk management is the compliance of maturity date of assets and debts which is also called the waiting period or the effective maturity time. Duration is a technique used for measuring all the features of the liquidity current at their maturity date. In order to calculate the duration of an asset or the debts, the sum of discounted liquid currents is divided by the total discounted liquid currents. Therefore, in order to manage liquidity and stimulate the input and output currents of the bank, the concept of duration is utilized. Based on the information received through the analyses done on the bank’s systems such as Hamrah, the input and output currents of the bank, the assets and the debts of the bank have been designed in the framework of a software and stimulated and then the duration of assets and debts of the bank have been calculated based on the kind of facilities paid.

1.3.        LCR Calculation: one of the most remarkable points mentioned by the Basel Committee III has been the calculation of liquidity coverage ratio which must be taken into consideration by the banks in order to control the liquidity risk.

1.4. NSFR Calculation: The net stable funding ratio has been proposed within Basel III, the new set of capital requirements for banks, which will over time replace Basel II. Basel III has been prepared within the Basel Committee on Banking Supervision of the Bank for International Settlements. Basel III has not been implemented yet. This funding ratio seeks to calculate the proportion of long-term assets which are funded by long-term, stable funding. Stable funding includes: customer deposits, long-term wholesale funding (from the interbank lending market), and equity.

"Stable funding" excludes short-term wholesale funding (also from the interbank lending market). These components of stable funding are not equally weighted Long-term or "structural term assets" means:

·            100% of loans longer than one year;

·            85% of loans to retail clients with a remaining life shorter than one year;

·            50% of loans to corporate clients with a remaining life shorter than one year;

·            20% of government and corporate bonds.

·            Off-balance sheet categories

1.5.        Interest Rate Risk: The assessment of interest rate risk is a very large topic at banks, thrifts, saving and loans, credit unions, and other finance companies, and among their regulators. The widely deployed CAMELS rating system assesses a financial institution's: (C)apital adequacy, (A)ssets, (M)anagement Capability, (E)arnings, (L)iquidity, and (S)ensitivity to market risk. A large portion of the (S)ensitivity in CAMELS is interest rate risk. Much of what is known about assessing interest rate risk has been developed by the interaction of financial institutions with their regulators since the 1990s. Interest rate risk is unquestionably the largest part of the (S)ensitivity analysis in the CAMELS system for most banking institutions. When a bank receives a bad CAMELS rating equity holders, bond holders and creditors are at risk of loss, senior managers can lose their jobs and the firms are put on the FDIC problem bank list.

In addition to being subject to the CAMELS system, the largest banks are often subject to prescribed stress testing. The assessment of interest rate risk is typically informed by some type of stress testing.

Therefore, one of the most influential factors on the banks’ profit-making is to benefit from the interest rate risk control. In this regard, for the purpose futurism and a proper process of decision-making, the gap between the assets and the debts which are sensible to the interest rate in a one-year or more period of time will be calculated. It is worth mentioning the fact that such a report is prepared in the bank with in order to analyze the procedure of effectiveness.

1.6.        Focused Risk: Managing the focused risk in financial institutions, particularly the banks is an inevitable issue and in addition to theoretical reasoning, it is accepted by the legal supervisory authorities. Therefore, the effects of resources,

uses, claims and investments focused risks of the bank in different periods of the fiscal year are under analysis and investigation.

C.      Market Risk Management

Market risk is due to unexpectedly sudden fluctuations in prices or exchange rates and is managed in a short-term manner by the use of avoiding the transformation of losses from one day to the next one which will in turn lead to less losses in the long-term.

1.  Approaches and Measures

1-1.      Analysis of the banks’ Shares’ Portfolio (Macro-economic Variables)

Fluctuation plays an important role in financial markets and the management of a money basket. However, the said fluctuations are utilized for the calculation of risks. In this approach, the value which is at the risk of the bank’s portfolio, is calculated and the related alerts pertaining to the investments will be given. In the process of the bank’s portfolio’s price analysis, the calculation of the value at risk and also the investment performance of the bank in the stock exchange will be reviewed and the related monthly report will be prepared.

1.2.        Analysis of the bank’s FX portfolio

Considering the fact that different currencies are a part of the bank’s assets, therefore the measurement of the FX portfolio of the bank can avoid any losses caused by the fluctuations of FX exchange rates. The related report is prepared once in 6 month and the status of the FX open market is studied to cover the risk of the calculation of foreign currencies.

1.3.        Crisis Testing

Nowadays, banking and financial institutions are more willing to detect, measure and reduce the probable risks using effective management methods of risk which have been very common like the Crisis Testing Technique in the field. In order to do so and by the use of various probable scenarios such as using different methods. The effects of sudden leave of resources on the proportion of liquidity to cash and the balance of Current Acc. with the Central bank (liquidity risk), the transportation of the classifications of the bank’s assets, reduction and increase, improvement and the stagnation of the inflation rate or worsening the Economic Stability which has to be submitted as a 6-month report once.

D.     1-5. Operational Risk Management

Operational Risk Management is done through thorough recognition, detection, evaluation and the analysis of the existing here methods and procedures. The method underutilization here has been based on the framework of Comprehensive Risk Management and is measured based on the basic index. The most highlighted approaches and measures are as the following:

1-   Approaches and measures

1-1- Holding FMEA sessions

Due to the importance of operational risks and its effect on creating other types of risks, regular sessions are being held in order to trace, remind, complete and amend FMEA forms.

1-2- Calculating required capital to cover operational risk

Due to the importance of operational risks and its effect on creating other types of banking activities related risks, applying proper methods such as a base standard index for calculating the required capital are essential. The method of base index is now being used. 

1-3- Calculating banking health indices’ trend regarding CAMELS indices and comparing it with some commercial banks

Stability of a sound banking system is of great importance due to its key role in the economy of countries. Banks are among those institutions which are vulnerable with regard to attracting and allocating resources. In their assets’ column they are confronted with non-payment of the allocated credit facility and in their debts column they are dependent on depositors’ trust on them. The scale is much more expanded in Refah Bank which is responsible for extending services to a special category of people and therefore will have great influence in the whole country. This necessitates the fact that some indices are required for supervising the bank’s activities permanently in a macro level for making right decisions and adopting proper policies. One of the important indices are the CAMELS which include the following indices proposed by Ivanz (200) in order to present a visual report on the banks’ soundness status and their overall performance:

Capital adequacy

Asset quality

Management competence

Earning & profitability

Liquidity risk exposure

Market risk sensitivity

E.      Managing the Compliance Risk

Compliance risk management investigates the procedures and instructions in order to supervise the observation of rules and regulations, maintaining stability in banking operations, preventing risks which will cause legal penalties or supervisory punishments and harm the bank’s reputation.

Approaches and measures

Preparing a data base for analyzing approvals

A data base has been provided in order to adjust the bank’s activities with rules, regulations and the C.B.I. standards and to prevent legal punishments. The data base includes all the Board members’ approvals and the instructions and by laws issued by external authorities.

1-2-Compliance risk report

One of the key factors in banking industry is the issue of compliance risk management which refers to the risk of supervisory measures and will result in financial harm for the bank due to noncompliance with rules and regulations and executive standards. This kind of risk is one of the key factors in risk management which must be considered. In this connection, observing precautionary and compliance regulations advised by the C.B.I. is carried out on monthly basis.

1-3-Compliance risk committee

This committee is established in order to investigate the Bank’s procedures and services with regard to risk issue firstly with the aim of investigating issued approvals by the board members.

1-4- Circulars Commission

By the presence of mangers of some departments this commission performs its tasks in order to investigate the bank’s internal rules and their compliance with supervisory authorities which has been always an important issue in the Bank.

Culturalizing risk management system

Risk management has culturalized the issue of risk management through training the personnel and informing them via the Bank’s systems which is quoted below. In the meantime it must be noted that a great part of the Bank’s risk is due to cultural issues and is based on individuals’ inappropriate measures and can lead to loss is disregarded by the management.

Farad Center

Risk and compliance issues are regularly discussed and reported in the bank’s communicative channels in the form of articles, brochures, reports and etc.

Holding training courses

With the cooperation of training department, risk and compliance department holds different training courses in order to update the level of knowledge in personnel.