With the progressive deregulation and liberalization of the Indian financial sector, banks are increasingly exposed to various kinds of risk-both financial and non-financial. Efficiency of every bank depends on how effectively it is managing the risks and ensuring a competitive risk adjusted return on capital. For this it is essential to have in place effective risk management and internal control systems, which are crucial to the conduct of banking business not only to lead the bank more profitably but also in compliance of prudential guidelines, for which a professional approach in risk management is called for.

A sound internal audit function plays an important role in contributing to the effectiveness of the internal control system. It should provide the management with accurate information on the effectiveness of risk management and internal controls including regulatory compliance by the bank. At present, there are various types of internal audit, which basically adopt the methodology of transaction testing, testing of accuracy and reliability of accounting records and financial reports, integrity, reliability and timeliness of control reports, and adherence to legal and regulatory requirements. However, all these do not provide any opinion on the qualitative dimension of business management including risk management. As such, there is a need for redefining and redirecting the scope of audit so as to take care of adoption of modern tools of risk management, adequacy and effectiveness of such tools, as well as to assist the business units to mitigate the risks.

• Basic Indicator Approach

• Standardized Approach

• Advance Measurement Approach.