Risk Management Framework

DISCLOSURE FRAMEWORK (ANNUAL REPORT 2014) THE GENERAL QUALITATIVE DISCLOSURE Risk Management: Risk Management encompasses all the activities that affect its risk domain. Risks are generally defined by the adverse impact on profitability of several distinct sources of uncertainty. National Bank attaches highest priority to establish, maintain and upgrade risk management infrastructure, systems and procedures. Adequate resources are allocated in this regard to improve skills and expertise of relevant employees to enhance their risk management capacity. The risk management guideline and other policies and procedural guidelines are approved by the Board of Directors of NBL and it is regularly reviewed to bring these up to the finest satisfaction level. The degree and types of risk that a bank faces depend upon a number of factors such as its size, complexity of business activities, volume technology operations etc. Risks are normally classified within following 3 categories: Every single risk may contribute to direct and/or indirect damage to the bank, and business with financial implications that may be an issue in the short, medium and long term. Risk Management Framework: NBL has designed a risk management framework and governance structure to achieve an appropriate balance between risk and return. The risk management framework consists of a comprehensive set of policies, standards, procedures and processes designed to identify, measure, monitor, mitigate and report significant risk exposures in a consistent and effective manner across the bank. The Risk Management Policy Guidelines duly approved by the Board of Directors of the bank lays down the total spectrum of risk management in the bank. The primary goals of risk management are to ensure that the outcomes of risk-taking activities are consistent with Bank’s strategies and risk appetite, and that there is an appropriate balance between risk and return in order to maximize shareholder returns. The framework is subject to constant evaluation to ensure that it meets the challenges and requirements of the global markets in which the NBL operates, including regulatory standards and industry best practices. The Bank’s risk management framework is working on the basis of the above three key elements: Risk Governance Risk Profile/Risk Appetite, and Risk Management Technique Recognizing the impacts of internal and potential risk domains, the bank has laid down different risk managements processes consisting of definition, identification, analysis, measurement, acceptance and proper management of risk profile. 2 Risk Governance: The Bank has a well-established risk governance structure, with an active and engaged Risk Management Committee of the Board of Directors/ Board of Directors supported by an experienced senior management team and risk management group that is independent of the business lines. Decision-making is centralized through a number of senior and executive risk management committee. Bank’s risk governance structure is as follows: Risk Governance Structure of NBL Bank’s Risk Strategy: The Bank’s risk strategy is supported by the following key principles: Diversity, quality and stability of earnings Sustainable earnings growth Focus on core business, with disciplined and selective strategic investments Maintaining Capital to Risk Weighted Asset Ratio (CRAR) Maintaining strong external credit ratings Strong leadership contributes to strategic success Clear accountability, strong governance, and a robust risk culture Risk are understood, measurable and manageable Dedicated attention to credit, market, liquidity, and operational risks etc. Careful consideration of reputational, environmental, and other risks Maintaining operational control and efficiency 3 Risk Management Techniques: Effective risk management includes techniques that are guided by the Bank’s overall risk framework and integrated with the Bank’s strategies and business planning process. Policies and Limits: Policies Apply to specific types of risk or to the activities that are used to measure and control risk exposure. They are based on recommendations from risk management, internal audit, business lines, and senior executive management. Industry best practices and regulatory requirements are also factored into the policies. Policies are guided by the Bank’s risk framework, risk appetite, and set the limits and controls within which the Bank and its subsidiaries operates. Key risk policies are approved by the Board of Directors. Limits Control risk-taking activities within the tolerances established by the Board and senior executive management. Limits also establish accountability for key tasks in the risk-taking process and establish the level or conditions under which transactions may be approved or executed. 4 Guidelines, Processes and Standards: Guidelines Guidelines are the directives provided to implement policies. Generally, they describe the facility types, aggregate facility exposures and conditions under which the Bank is prepared to do business. Guidelines ensure that the Bank has the appropriate knowledge of clients, products, and markets and that it fully understands the risks associated with the business it underwrites. Guidelines may change from time to time, due to market or other circumstances. Risk taking outside of guidelines usually requires approval of the Bank’s senior management committees. Processes Processes are the activities associated with identifying, evaluating, documenting, reporting and controlling risk. Standards Define the breadth and quality of information required to make a decision, and the expectations in terms of quality of analysis and presentation. Processes and standards are developed on overall bank-wide basis, and documented in a series of polices, manuals and handbooks. Key processes cover the review and approval of new products, model and stress testing. Measurement, Monitoring, and Reporting: Measurement Risk measurement techniques include the use of models and stress testing. The Bank uses models for a range of purposes including estimating the value of transactions, risk exposures, credit risk ratings and parameters, and economic and regulatory capital. The use of quantitative risk methodologies is balanced by a strong governance framework and includes the application of sound and experienced judgment. Regular Monitoring Ensures that business activities are within approved limits or guidelines, and are aligned with the Bank’s strategies. Breaches, if any, of these limits or guidelines are reported to senior management. Risk Reports Aggregate measures of risk across products and business, and are used to ensure compliance with policies, limits, and guidelines. They also provide a clear statement of the amounts, types, and sensitivities of the various risks in the Bank’s portfolios. Senior management and the Board use this information to understand the Banks’ risk profile and the performance of the portfolios. 5 Risk Management Process: Following are the components of the Risk Management Process Steps Activity Identify Establish the process for identifying and understanding business- level risks Assess Agree and implement measurement and reporting standards and methodologies. Control Establish key control processes and practices, including limit structures, impairment allowance criteria and reporting requirements Monitoring Monitor the operation of the controls and adherence to risk direction and limits. Provide early warning of control or appetite breaches Ensure that risk management practices and conditions are appropriate for the business environment. Report Interpret and report on risk exposures, concentrations and risk- taking outcomes. Interpret and report on sensitivities and Key Risk Indicators. Communicate with external parties Manage Review and challenge all aspects of the risk profile Challenge Assess new risk-return opportunities Review and challenge risk management practices. 6 Risk Management Policy & Procedure: Policies and procedures covering all the risk ensures that risks are properly addressed and protected for sustainable growth of the bank. National Bank has approved policies and procedures in line with the Bangladesh Bank’s Guidelines on managing Core Risks on Credit Risk Management, Foreign Exchange Risk Management, Internal Control and Compliance, Asset and Liability Management, Information Risk Management and Money Laundering Risk Management. The Board of Directors also approved “Risk Management Guidelines of NBL” in its 350th meeting held on October 01, 2014. These policies are periodically reviewed and updated to keep pace with the changing operating and business environment, technology and regulatory implications. Risk Management Organization Risk management is practiced at multiple levels within the bank. At the top, the Board of Directors determines the risk strategy, policy principles and limits, as per recommendation and suggestion by the Assets and Liabilities Committee (ALCO), Management Committee as well as the Credit Committee/ Supervisory Review Process Team [SRP]. The MANCOM, ALCO& SRP regularly reviews the risk exposure of NBL’s activities and portfolio. The MD, who is also a member of the Board, is responsible for the implementation of NBL’s risk policy. NBL Risk Management is responsible for the policy regarding interest rate, market, liquidity, currency and operational risk, as well as for the credit risk policy at portfolio level. Apart from this, implementation policy for risk management is embedded

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