These steps are part of the risk management guidelines which the RBI is likely to finalise at a meeting with the chief executives of select banks in the last week of June. The central bank has recently circulated the draft guidelines among senior bankers.

As a first step towards creating a risk management structure, the RBI wants banks to set up independent risk management departments which will directly report to the CEO or the board of directors. The functions of the department should essentially be to identify, monitor and measure the risk profile of the banks concerned.

Ithas also advised banks to evolve a suitable framework for monitoring market risks, especially the forex risk exposure of corporates which have no natural hedges. "Banks should also appoint portfolio managers to watch their loan portfolios' degree of concentration and exposure to counterparties," it said.

According to the RBI, banks must appoint relationship managers to monitor the overall exposure to a single borrower. The relationship managers should service mainly high-value loans so that a substantial share of the loan portfolio, which can alter the risk profile, would be under constant surveillance.

The RBI has also advised banks to firmly put in place a framework on inter-bank exposure and country risks. "Bank-wise exposure limits could be set on the basis of assessment of financial performance, (and) operating efficiencies... Like corporate clients, banks should (also) be rated," it said.

Regarding exposures on overseas banks, the RBI said that banks can use the country ratings of internationalrating agencies and classify the countries into low, moderate and high-risk categories.

Banks have also been advised to devise risk management strategies for off-balance sheet items like forex forward contracts, swaps, options, etc. According to the RBI, banks can divide the off-balance sheet items into three broad categories: full risk (standby letters of credit, guarantees), medium risk (bonds and warrants) and low risk (reverse repos, currency swaps, options).

It has also asked banks to have a relook at the existing prudential limits and set up new limits for single corporate borrowers and groups at a level lower than RBI-stipulated limits to provide a "filtering mechanism". Going by present norms, banks are allowed to take exposure to a single borrower to the extent of 25 per cent of their net worth while exposure to a group has been pegged at 50 per cent of net worth. "The limits to sensitive sectors like advances against shares, real estate, etc., which are subject to a high degree of asset pricevolatility and to specific industries which are subject to frequent business cycle changes may necessarily be restricted," the draft guidelines said.

"Similarly, high-risk industries should also be placed under lower portfolio limit and any excess exposures should be fully backed by adequate collateral or strategic considerations," it added.