RBI is all set to direct banks to set up an independent risk management department which will report directly to the chief exective officer (CEO) or to the board of directors of the banks. The functions of the department will essentially be to identify, monitor and measure the risk profile of the bank apart from developing policies and procedures.

The RBI guidelines will also provide a structure for the management of credit risks which, according to the central bank, should receive the top management's attention. The structure should encompass the measurement of risks through credit rating, quantifying the risk through estimating expected loan losses (through tracking portfolio behaviour over five or more years) and unexpected loan losses, risk pricing on a scientific basis and controlling the risk through loan review mechanism and portfolio management.

The RBI will also direct banks to lay down prudential limits in order to restrict the magnitude of credit risks. Among the guidelines that banks should follow are rules that stipulate benchmark current/debt equity and profitablity ratios, debt service coverage ratio or other ratios with flexiblity for deviations.

The central bank is also likely to direct banks to set up a framework for monitoring the market risks, especially forex risk exposures of corporates who have no natural hedges on a regular basis. The banks are likely to appoint portfolio managers to watch loan portfolio's degree of concentrations apart from appointing relationship managers for evaluation of customer exposure.

The banks, under the new risk management guidelines, will be required to formulate loan review policy which will have to be reviewed annually by the board. The RBI will also direct banks to evolve adequate framework for managing their exposure in off-balance sheet products like forex forward contracts, swaps, options as a part of overall credit to individual customer relationship.