Risk management in banks

Risk management in Indian banks

From Wikipedia, the free encyclopedia
Categories of

Financial risk

Credit risk

Concentration risk

Market risk

Interest rate risk

Currency risk

Equity risk

Commodity risk

Liquidity risk

Refinancing risk

Operational risk

Country risk

Legal risk
 Model risk

Political risk

Valuation risk

Reputational risk
Volatility risk
Settlement risk
Profit risk
Systemic risk

Risk management in Indian banks is a relatively newer practice, but has already shown to
increase efficiency in governing of these banks as such procedures tend to increase the corporate
governance of a financial institution. In times of volatility and fluctuations in the market,
financial institutions need to prove their mettle by withstanding the market variations and
achieve sustainability in terms of growth and well as have a stable share value. Hence, an
essential component of risk management framework would be to mitigate all the risks and
rewards of the products and service offered by the bank. Thus the need for an efficient risk
management framework 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 change
factoring into account world events such as the ongoing Banking Crisis across the globe. The
2007present recession in the United States has highlighted the need for banks to incorporate the
concept of Risk Management into their regular procedures. The various aspects of increasing
global competition to Indian Banks by Foreign banks, increasing Deregulation, introduction of
innovative products, and financial instruments as well as innovation in delivery channels have
highlighted the need for Indian Banks to be prepared in terms of risk management.[2]

Indian Banks have been making great advancements in terms of technology, quality, as well as
stability such that they have started to expand and diversify at a rapid rate. 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 institutions, risk plays a major part
in the earnings of a bank. The higher the risk, the higher the return, hence, it is essential to
maintain a parity between risk and return. Hence, management of Financial risk incorporating a
set systematic and professional methods especially those defined by the Basel II becomes an
essential requirement of banks. The more risk averse a bank is, the safer is their Capital base.[2]

Contents
1 Risk Ratio

2 Total Impact of Risk

3 Risk and Reward

4 Types of Risk

5 See also

6 References

Risk Ratio
Risk ratio would be defined as the ratio of the probability of an issue occurring as against to an
issue not occurring.[3]

Total Impact of Risk

Total impact of the risk (TIR) occurring would entail as the impact (I), the risk would cause
multiplied by the Risk Ratio. It is essentially how much a bank would be impacted in the chance
that the risk did occur. This essentially helps ascertain what is the total value of their investments
that may be subject to risk and how it would impact them.

Risk and Reward

The ratio is in simplest terms calculated by dividing the amount of profit the trader expects to
have made when the position is closed (i.e. the reward) by the amount he or she stands to lose if
the price 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
more uncertain the outcome. The standard deviation, E is a measure of average difference
between the expected value and the actual value of a random variable (or unseen state of nature).

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.[4]
Types of Risk

Types of Risks in Banking

The 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 and
categorized the majority of risk into three major categories assumed to be encountered by banks.
These belong to the clusters:[5]

Credit risk

Market risk

Operational 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
financial aspects of the bank. These can be further subdivided into Credit Risk and Market Risk.
Both Credit and 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 also
Risk management tools

Probabilistic risk assessment

References
1.

Srinivas Nallamothu & Fayaz Ahmed. "Risk Management Framework for Indian Banks".
Dr. Krishn A. Goyal, Prof. Sunita Agrawal (December 2010). "RISK MANAGEMENT IN
INDIAN BANKS: SOME EMERGING ISSUES" (PDF). IJER.
Sistrom CL, Garvan CW (January 2004). "Proportions, odds, and risk". Radiology. 230
(1): 129. doi:10.1148/radiol.2301031028. PMID 14695382.
Fundamental Analysis Workbook. National Stock Exchange of India Limited.

1. "Trend and Progress of Banking in India". Reserve Bank of India. 199697,

199899, 200102 and 200203. Check date values in: |date= (help)

[hide]

Financial risk and financial risk management

Categories
Concentration risk

Consumer credit risk

Credit risk
Credit derivative

Securitization

Market risk
Commodity risk (e.g. Volume risk, Basis risk, Shape risk,
Holding period risk, Price area risk)

Equity risk

FX risk

Margining risk
 Interest rate risk

Volatility risk

Liquidity risk (e.g. Refinancing risk)

Operational risk management

Legal risk
Operational
Political risk
risk
Reputational risk

Valuation risk

Profit risk

Other Settlement risk

Systemic risk

Market portfolio

Modern portfolio theory

RAROC

Risk-free rate
Modeling
Risk parity

Sharpe ratio

Value-at-Risk (VaR) and extensions Profit at risk, Margin at risk, Liquidity at

risk
 Diversification

Expected return

Hazard
Basic
Hedge
concepts
Risk

Risk pool

Systematic risk

Financial economics

Investment management

Mathematical finance

Categories:

Financial risk management

Banking in India

Navigation menu
Not logged in

Talk

Contributions

Create account

Log in

Article

Talk
 Read

Edit

View history

Search

Main page

Contents

Featured content

Current events

Random article

Donate to Wikipedia

Wikipedia store

Interaction

Help

About Wikipedia

Community portal

Recent changes

Contact page

Tools

What links here

Related changes

Upload file

Special pages
 Permanent link

Page information

Wikidata item

Cite this page

Print/export

Create a book

Download as PDF

Printable version

Languages

Add links

This page was last modified on 23 February 2017, at 20:32.

Text is available under the Creative Commons Attribution-ShareAlike License; additional

terms may apply. By using this site, you agree to the Terms of Use and Privacy Policy.
Wikipedia is a registered trademark of the Wikimedia Foundation, Inc., a non-profit
organization.

Privacy policy

About Wikipedia

Disclaimers

Contact Wikipedia

Developers

Cookie statement

Mobile view