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Published by: Harshali Mohite on Jun 23, 2012
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isk management in Indian banksFrom Wikipedia, the free encyclopediaJump to: navigation, searchCategories of Financial riskCredit riskConcentration riskMarket riskInterest rate riskCurrency riskEquity riskCommodity riskLiquidity riskRefinancing riskOperational riskLegal riskPolitical riskReputational riskVolatility riskSettlement riskProfit riskSystemic riskvteRisk management in Indian banks is a relatively newer practice, but has already shown to increaseefficiency in governing of these banks as such procedures tend to increase the corporategovernance of a financial institution. In times of volatility and fluctuations in the market, financialinstitutions need to prove their mettle by withstanding the market variations and achievesustainability in terms of growth and well as have a stable share value. Hence, an essentialcomponent of risk management framework would be to mitigate all the risks and rewards of theproducts and service offered by the bank. Thus the need for an efficient risk managementframework is paramount in order to factor in internal and external risks.[1] .The financial sector in various economies like that of India are undergoing a monumental changefactoring into account world events such as the ongoing Banking Crisis across the globe. The2007–present recession in the United States has highlighted the need for banks to incorporate theconcept of Risk Management into their regular procedures. The various aspects of increasingglobal competition to Indian Banks by Foreign banks, increasing Deregulation, introduction of innovative products, and financial instruments as well as innovation in delivery channels havehighlighted the need for Indian Banks to be prepared in terms of risk management. [2]Indian Banks have been making great advancements in terms of progress in terms of technology,quality, quantity as well as stability such that they have started to expand and diversify at a rapidrate. However, such expansion brings these banks into the context of risk especially at the onset of increasing Globalization and Liberalization. In banks and other financial institution risk plays a
 
major part in the earnings of a bank. Higher the risk, higher is the return, hence, it is most essentialto maintain a parity between risk and return. Hence, management of Financial risk incorporating aset systematic and professional methods especially those defined by the Basel II norms because aessential requirement of banks. The more risk averse a bank is, the safer is their Capital base.[2]Contents1 Risk Ratio2 Total Impact of Risk3 Risk and Reward4 Types of Risk5 See also6 ReferencesRisk RatioRisk ratio would be defined as the ratio of the probability of an issue occurring as against to anissue not occurring.[3]RR= \frac {p_\text{issue occurring}}{p_\text{issue not occurring}}Total Impact of RiskTotal impact of the risk (TIR) occurring would entail as the impact (I), the risk would causemultiplied by the Risk Ratio. It is essentially how much a bank would be impacted in the chance thatthe risk did occur. This essentially helps ascertain what is the total value of their investments thatmay be subject to risk and how it would impact them.[4]TIR= I\times RRRisk and RewardThe ratio is in simplest terms calculated by dividing the amount of profit the trader expects to havemade when the position is closed (i.e. the reward) by the amount he or she stands to lose if theprice moves in the unexpected direction (i.e. the risk).To calculate the total risk ensuing with the total expected return, a favored method is the use of variance or standard deviation. The larger the variance, the larger the standard deviation, the moreuncertain the outcome. The standard deviation, E is a measure of average difference between theexpected value and the actual value of a random variable (or unseen state of nature).E = \sqrt{\sum P(n-X)^2}Here, n stands for a possible outcome, x stands for the expected outcome and P is the probability(or likelihood) of the difference between n and X occurring.[5]Types of RiskTypes of Risks in BankingThe term Risk and the types associated to it would refer to mean financial risk or uncertainty of financial loss. The Reserve Bank of India guidelines issued in Oct. 1999 has identified andcategorized the majority of risk into three major categories assumed to be encountered by banks.These belong to the clusters:[6]Credit RiskMarket RiskOperational Risk
 
The type of risks can be fundamentally subdivided in primarily of two types, i.e. Financial and Non-Financial Risk. Financial risks would involve all those aspects which deal mainly with financialaspects of the bank. These can be further subdivided into Credit Risk and Market Risk. Both Creditand Market Risk may be further subdivided.Non-Financial risks would entail all the risk faced by the bank in its regular workings, i.e.Operational Risk, Strategic Risk, Funding Risk, Political Risk, and Legal Risk.[2]See alsoRisk management toolsProbabilistic risk assessmentReferences^ Risk Management Framework for Indian Banks.^ a b c "RISK MANAGEMENT IN INDIAN BANKS: SOME EMERGING ISSUES". IJER.December 2010.^ Sistrom CL, Garvan CW (January 2004). "Proportions, odds, and risk". Radiology 230 (1): 12–9. DOI:10.1148/radiol.2301031028. PMID 14695382.^ ART, RiskAoA, RiskPath, SCHRAM^ Fundamental Analysis Workbook. National Stock Exchange of India Limited.^ "Trend and Progress of Banking in India". Reserve Bank of India. 1996–97, 1998–99, 2001–02and 2002–03.[hide]vteFinancial risk and financial risk managementCategoriesCredit riskConsumer credit risk · Concentration risk · Securitization · Credit derivativeMarket riskInterest rate risk · Currency risk · Equity risk · Commodity risk · Volatility riskLiquidity riskRefinancing riskOperational riskOperational risk management · Legal risk · Political risk · Reputational riskSettlement risk · Profit risk · Systemic riskFinancial risk modelingMarket portfolio · Risk-free rate · Modern portfolio theory · Risk parity · RAROC · Value at risk ·Sharpe ratioBasic conceptsDiversification · Systematic risk · Hedge · Risk pool · Expected return · Hazard · RiskInvestment management · Financial economics · Mathematical finance

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