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Regulatory Framework
The regulatory framework in financial risk management refers to the set of rules, guidelines, and laws that govern how financial institutions manage their exposure to risk. The framework is put in place to ensure that financial institutions operate in a safe and sound manner, and that they are able to withstand financial shocks and crises.
The regulatory framework in financial risk management typically includes both prudential regulations and supervisory practices. Prudential regulations are rules that require financial institutions to hold a certain level of capital and liquidity to buffer against unexpected losses. These regulations are designed to ensure that financial institutions have sufficient resources to absorb losses and continue operating even in times of economic stress.
Supervisory practices refer to the processes and procedures used by regulators to oversee financial institutions and ensure that they are complying with the rules and regulations. This includes conducting regular audits and examinations, assessing risk management practices, and monitoring for signs of financial instability.
The regulatory framework in financial risk management is constantly evolving in response to new risks and challenges in the financial industry. Regulators must stay up-to-date with emerging risks and adapt their regulations and supervisory practices accordingly to maintain a safe and stable financial system.
RBI Guidelines for Risk Management
The credit policy of a company should be conformant with RBI guidelines; some of the important guidelines of the RBI relating to bank credit are discussed below. According to RBI’s recent Bulletin (The Reserve Bank of India, 2012) as the country’s financial regulator RBI handles various activities, which includes:
- Licensing
- Monitoring Governance
- Prescribing for capital requirements
- Prescribing lending to certain priority sectors of the economy
- Framing appropriate regulatory norms related to Asset classification, investment valuation, income recognition, exposure limits, provisioning and so on.
- Regulating interest rates in certain areas.
- Framing prudential regulations and assuring liquidity and solvency.
- Initiation of new regulation
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