Explanation:
A core principle of effective risk management is the independence of the risk management unit (RMU). The Chief Risk Officer (CRO) should have a direct reporting line to the board of directors or the CEO to maintain objectivity and prevent conflicts of interest. Reporting to the head of credit compromises this independence, as the credit department is primarily a risk-taking unit focused on business generation. Therefore, the RMU lacks independence.
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Q.39 Prime Bank of India is one of the largest lenders to small and medium enterprises in the country. The bank recently established a risk management unit (RMU) to better manage the various risk categories and ensure that risk exposures are authorized and are in line with the bank’s risk appetite statement. The bank’s top brass have come up with a clearly outlined reporting framework for the RMU, where the chief risk officer reports to the head of credit, who in turn reports to the board. Which of the following statements is correct?
A
The bank follows the best risk management practices.
B
The bank must not have an independent risk management unit. Rather, it should establish a risk department within the credit unit
C
The RMU lacks independence
D
The bank’s risk management practices are satisfactory.