Risk Management in Banks

Submitted By: Sonia, Ranju,

Palvi & Pargat
 Risks
• Chance of encountering Harm or loss
• Banks and institutions extend risk every
day by making loans,buying investment
and even accepting deposits
 Definition of risk for Bank

• Risk is the potential that events and

actions may have an adverse effect on
capital or earnings
 Banking Risks
• Credit Risk
• Liquidity Risk
• Interest Rate Risk
• Market Risk
• Foreign Exchange Risk
Asset-Liability Mgt (ALM) practices
RBI guidelines relating to ALM focus on
Interest rate risk and Liquidity risk
management systems which form part of
the ALM function. The initial thrust of the
ALM function would be to enforce the risk
mgt discipline, that is, managing business
after assessing the risks involved.
The main elements of ALM system
are

• ALM information system

• ALM organisation, and

• ALM Process
 ALM information system
• Information is the key to information
process.
• The central element for entire ALM
exercise is the availability of adequate and
accurate information.
• The problem of ALM needs to be
addressed by following ABC approach.
• The spread of Computerisation would also
help banks in accessing data.
 ALM organisation
• The Board of Directors should have the
overall responsibility for the mgt of risk and
of deciding the risk mgt policy of the
banks, besides setting limits for liquidity,
interest rate & forex risk.
• The ALCO should ensure the limits.
• A sub committee of the Board Should
oversee the implementation of the system
and review its functioning periodically.
 ALM organisation

• Composition of ALCO (Asset –Liability

Management Committee)

• Committee of Directors
 ALM Process
• Liquidity risk Management

• Currency risk

• Interest rate risk

 Evaluating returns of Banks
• Financial wealth maximisation capability is
measured on the basis of net margin
rupee invested.
• The financial productivity is affected by
two factors-
• Net Margin
• Total Assets
 Return On Total Assets

Net Margin Total Assets

Gross financial Operating Fixed Current

margin cost assets assets

Financial Financial
Income Cost
 Parameters Of Appraisal of the
return on Total Assets
• Percentage of net margin to gross capital
employed

• Percentage variation in net margin vis-à-

vis percentage variation in gross capital
employed
 Return on Net Assets
• ROI is a ratio indicating the percentage in
return on net capital employed in the
business. It can be calculated by dividing
the operating profit by the net capital
employed in the business.
 Parameters of evaluating ROI
• Percentage of EBIT to net capital
employed
• Ratio of percentage variation in EBIT
versus percentage variation in net capital
employed
Parameters for appraisal of Return
On Equity
• Percentage of profit after tax to
shareholder’s funds
• Percentage variation in PAT versus
percentage variation in shareholder’s fund