Module: | MODULE B: RISK MANAGEMENT
Q274: Scenario: To reduce operational costs, a bank proposes merging its Risk Management Department with its Corporate Credit Assessment wing. The Chief Risk Officer will now directly report to the Head of Corporate Lending, who actively targets aggressive monthly loan sanction targets. Based on structural risk management principles, consider the following statements regarding the correct regulatory actions:
1. This proposed merger strictly violates RBI prudential norms, because the Risk Management Department must operate with absolute functional independence from all business generation lines.
2. The Chief Risk Officer must have direct, unhindered reporting access to the Board of Directors, ensuring unbiased risk reporting without operational interference.
3. Merging these departments is actively encouraged by Basel guidelines, as it accelerates the loan sanctioning process and reduces administrative overhead.
Which of the statements given above is/are correct?
2. The Chief Risk Officer must have direct, unhindered reporting access to the Board of Directors, ensuring unbiased risk reporting without operational interference.
3. Merging these departments is actively encouraged by Basel guidelines, as it accelerates the loan sanctioning process and reduces administrative overhead.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The most fundamental structural rule of a Risk Management Framework is absolute independence.
The Risk Management Department (RMD) must be functionally and structurally separated from the business origination and credit sanctioning departments to prevent a massive conflict of interest.
Statement 2 is correct: To ensure the Chief Risk Officer (CRO) can report negative risk findings without fear of retaliation from revenue-generating heads, regulatory guidelines mandate that the CRO must have direct, unhindered reporting lines to the Risk Management Committee of the Board (RMCB) and the Board of Directors.
Statement 3 is incorrect: Basel guidelines strictly prohibit merging risk oversight with business generation.
Accelerating loan sanctions by removing independent risk assessment is a recipe for catastrophic non-performing assets (NPAs). Cost reduction can never justify compromising structural independence.
The Risk Management Department (RMD) must be functionally and structurally separated from the business origination and credit sanctioning departments to prevent a massive conflict of interest.
Statement 2 is correct: To ensure the Chief Risk Officer (CRO) can report negative risk findings without fear of retaliation from revenue-generating heads, regulatory guidelines mandate that the CRO must have direct, unhindered reporting lines to the Risk Management Committee of the Board (RMCB) and the Board of Directors.
Statement 3 is incorrect: Basel guidelines strictly prohibit merging risk oversight with business generation.
Accelerating loan sanctions by removing independent risk assessment is a recipe for catastrophic non-performing assets (NPAs). Cost reduction can never justify compromising structural independence.