Taking a cue from the abject failure of global financial powerhouses to assess risks associated with exposures, the Reserve Bank of India [Get Quote] said it will evaluate the risk management practices of commercial banks operating in the country.

The central bank said it will also enhance the bank-wide supervisory oversight to examine readiness of banks to face turbulent times like the financial crisis and downturn that has gripped the global economy.

"The root of the problems for many financial institutions around the world affected by the financial markets turmoil was their inability to adequately assess the risks associated with the exposures they held," RBI said in its report On Wednesday.

The supervisory review of exposure of the banking system to specific sectors may become an integral part of the ongoing supervision of banks, it added.

The imperfections in risk management systems and governance contributed substantially to the accumulation of exposures, whose long-term risk characteristics were not properly identified in advance, it added.

Pointing to dilution of credit standards, RBI said the recent crisis, like crises in the past, also proved that asset and financial bubbles are built during times of relative economic uptrend and availability of easy credit.

The poor credit standards during such periods also result in large delinquencies, thus contributing to the crisis.

During 2007-08, RBI had conducted supervisory review of banks' exposure to the real estate sector, capital market and advances against agricultural commodities.

Regulators and supervisors will be face such disturbances from time to time, and will have to remain vigilant to detect such developments.

Banks are confronted with various kinds of financial and non-financial risks credit, market, operational, liquidity, concentration and reputational risks, among others.

These risks are highly interdependent and events that affect one area of risk can have ramifications for a range of other risk categories.

Recognising the importance of risk management, RBI has encouraged banks to strengthen and upgrade their risk management systems.

The Basel-II framework provides opportunities to banks to further improve their risk management systems as it provides incentives by way of capital relief to well-managed banks.

RBI is examining norms that raise standards for sound liquidity risk management.

The enhancing market and institutional resilience will need capital and liquidity buffers that are large enough to face any internal and external shocks.

Such system will minimise the tendency of banks of glossing over risk during good times and becoming extremely risk averse during bad times.