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INTRODUCTION

The best bank is one, who manages its credit risk most effectively and
efficiently.
Risk is a very important part of banking operations and risk management main aim is
enhancing the stakeholders value besides maintaining sound capital: managing assets and
liabilities in lending investment activities
. The Indian banking system has been undergone significant structural transformation since
July 1964 ( 14 commercial banks were nationalized) An controlled regime under state
ownership till the initiation of financial sector reforms in 1992, the sector was opened for
new private banks and more liberal entry of foreign banks in line with the recommendations
of the Report of the Narasimham Committee-I on the Financial System
After reformation banks started expanding their operations, exploring new markets and
trading in new asset types. The changes in financial system products and structures have
created new opportunities along with new risks.
The banking business consists of numerous risks that can affect the
profitability and stability of the banks. This different kind of risk gives rise
to a range of different issues. In an environment where t the quantitative
management of risks has become a major banking function, it is of lesser
importance to speak of the generic concepts. The different types of risks
needs to be carefully analyze, defined and such analyses definitions
provide a first basis for measuring risks on which the risk management
can be implemented.
There have been a number of factors that can be attributed to the stabilization of the banking
business in nineties. Before to that period, majority of the industries were fully regulated.
Commercial banking operations were basically restricted towards collecting fund and
lending operations. The regulators were more concerned for the safety of the industry and the
control of its money creation power. There were limited the scope of the operations of the
various credit institutions and limited their risks as well. During the nineties that banks
experienced the first drastic waves of change in the industry. Among the main driving forces
that played an important role in the changes were the inflating role of the financial markets,

deregulation of the banking sector and the increase competition among the existing and
emerging banks
The floating foreign exchanges rates accelerated the growth of
uncertainty too. Monetary policies favouring high levels of interest rates
and stimulating their intermediation was by far the major channel of
financing the economy, disintermediation increased at an accelerated
pace. Those changes turned into new opportunities and threats for the
players.
These waves of changes generated risks. Risks increased because of new
competition, product innovations, the shift from commercial banking to
capital markets increased market volatility and the disappearance of old
barriers which limited the scope of operations for the various financial
institutions. There was a total and radical change in the banking industry.
Here it is worth mentioning that this process has been a continuous one
and has taken place in an orderly manner. Thus it is no surprise that risk
management emerged strongly at the time of these waves of
transformation in the banking sector.

Types of Bank Risk


I.

II.

Credit Risk : is the risk of negative effects on the financial result and
capital of the bank caused by borrowers default on its obligations to the
bank.
Solvancy Risk :

III.

Liquidity Risk : is the risk of negative effects on the financial result and
capital of the bank caused by the banks inability to meet all its due
obligations.

IV.

Interest Rate Risk :

V.

Price Risks :

VI.

Operational Risk : is the risk of negative effects on the financial result


and capital of the bank caused by omissions in the work of employees,
inadequate internal procedures and processes, inadequate management
of information and other systems, and unforeseeable external events.