“AN EMPIRICAL STUDY ON APPLICATION OF RISK

MANAGEMENT POLICIES, TOOLS AND TECHNIQUES IN

INDIAN BANKS”

A PROJECT STUDY SUBMITTED IN PARTIAL FULFILLMENT

FOR THE REQUIREMENT OF THE TWO YEAR (FULL-TIME)
POST GRADUATE DIPLOMA IN MANAGEMENT 2008-2010

BY

AMIT BATRA
24 / 2009-11

UNDER THE GUIDANCE OF

(Dr. Deepak Tandon)

LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT, DELHI

DECEMBER 2010
 INTRODUCTION
RISK
‘Risk’ is the possibility of something unpleasant happening or the chance of encountering loss or
harm. Risk provides the basis for opportunity. The terms risk and exposure have subtle
differences in their meaning. Risk refers to the probability of loss, while exposure is the
possibility of loss, although they are often used interchangeably. Risk arises as a result of
exposure.
RISK MANAGEMENT PROCESS
The process of financial risk management is an ongoing one.Strategies need to be implemented
and refined as the market and requirements change. Refinements may reflect changing
expectations about market rates, changes to the business environment, or changing international
political conditions, for example. In general, the process can be summarized as follows:
• Identify and prioritize key financial risks.
• Determine an appropriate level of risk tolerance.
• Implement risk management strategy in accordance with policy.
• Measure, report, monitor, and refine as needed.

Risk Management in INDIAN BANK

Risk faced by the bank can be segmented into three separable types from the management
perspective viz.
a. Risks that can be eliminated or avoided by simple business practices
b. Risks that can be transferred to other business participants (eg. Insurance policy) and
c. Risks that can be actively managed at the Bank level.
Risk is any real or potential event, action or omission, internal or external, which will have an
adverse impact on the achievement of Bank’s defined objectives. Risk is inherent in every
business. Risk cannot be totally eliminated but is to be managed. Risks are to be categorised into
high risk, medium risk and low risk and then managed.
Risks can be classified into three broad categories:
1. Credit Risk
2. Market Risk (Interest Rate Risk, Liquidity Risk)
3. Operational Risk
 OBJECTIVES OF THE STUDY

 To analyze the various risk management policies used by Syndicate Bank.

 To analyze the usefulness of risk modeling techniques in Syndicate Bank.
 To evaluate the risk methodology used for measuring volatility in Syndicate Bank.
 To analyze the risk exposure of syndicate Bank.

REVIEW OF LITERATURE

 Credit risk policy - Syndicate Bank’s circular dated 29-11-2007

This circular contains the revised credit risk policy of bank to suit the regulatory requirements
and sections in line with Basel II requirements. The circular broadly covers the following things:

i. An overview of credit risk management.

ii. Assessing credit risk of individual borrowal accounts.
iii. Assessment and management of portfolio credit risk.
iv. Credit risk measurement and analytics
v. Risk monitoring and control.
vi. Credit risk mitigation and collateral management.
vii. Risk based pricing.
viii. Credit risk in investments and country risk.
ix. Basel II accord
x. Risk MIS.

 Risk management in Banks – book by S Singh and Yogesh Singh.

The book covers the following aspects
i. Introduction about the commercial banking in India.
ii. Financial sector reforms in India.
iii. Risk management: concept and application.
iv. Application of Risk management policies and its application.
v. Corporate governance and risk management.

 Using Market Information for Banking System Risk Assessment – By Helmut

Elsingera, Alfred Leharb and Martin Summerc, aDepartment of Finance, University of
Vienna, bHaskayne School of Business, University of Calgary, cEconomic Studies
Division, Oesterreichische Nationalbank.

The research paper covers the following aspects :

i. An Overview of the Model and Main Results.
ii. A System Perspective on Risk Exposure for Banks.
iii. The Role of Correlation and Interlinkages.
 iv. Risk Analysis: Stress Testing.

 Risk Assessment for Banking Systems - By Helmut Elsingera, Alfred Leharb and
Martin Summerc, aDepartment of Finance, University of Vienna, bHaskayne School of
Business, University of Calgary, cEconomic Studies Division, Oesterreichische
Nationalbank.
This paper suggests a new approach to risk assessment for banks. Rather than looking at them
individually we analyze risk at the level of the banking system. Such a perspective is necessary
because the complicated network of mutual credit obligations can make the actual risk exposure
of the entire system invisible at the level of individual institutions. A framework is applied to a
cross section of individual bank data as they are usually collected at the central bank. Using
standard risk management techniques in combination with a network model of inter-bank
exposures, paper analyses the consequences of macro-economic shocks for bank insolvency risk.
In particular paper considers interest rate shocks, exchange rate and stock market movements as
well as shocks related to the business cycle. The feedback between individual banks and
potential domino effects from bank defaults are taken explicitly into account. The model
determines endogenously probabilities of bank insolvencies, recovery rates and a decomposition
of insolvency cases into defaults that directly result from movements in risk factors and defaults
that arise indirectly as a consequence of contagion.

 A gentle introduction to the RM 2006 methodology Gilles Zumbach – by RiskMetrics

Group, Av. des Morgines 12, 1213 Petit-Lancy, Geneva, Switzerland,
gilles.zumbach@riskmetrics.com.
Paper presents the basic concepts used in market risk evaluations, as well as the standard
methodologies to compute quantitatively the risk. A new methodology is introduced with the
goal to incorporate the state-of-the-art knowledge about financial time series. The performance
evaluation of risk methodologies is explained, and the performance measures of the main risk
methodologies are compared. The presentation stays at the conceptual level and uses the
minimum number of formula needed for clarity.

 Evaluating the RiskMetrics Methodology in Measuring Volatility and Value-at-Risk

in Financial Markets – By Szil_ard Pafkaa, Imre Kondor a, aDepartment of Physics of
Complex Systems, Eotvos University, P_azm_any P. s_et_any 1/a, H-1117 Budapest,
Hungar, bMarket Risk Research Department, Rai_eisen Bank, Akad_emia u. 6, H-1054
Budapest, Hungary.

Paper analyses the performance of Risk Metrics, a widely used methodology for measuring
market risk. Based on the assumption of normally distributed returns, the Risk Metrics model
completely ignores the presence of fat tails in the distribution function, which is an important
feature of financial data. Nevertheless, it was commonly found that Risk Metrics performs
satisfactorily well, and therefore the technique has become widely used in the financial industry.
However, that the success of Risk Metrics is the artifact of the choice of the risk measure. First,
the outstanding performance of volatility estimates is basically due to the choice of a very short
(one-period ahead) forecasting horizon. Second, the satisfactory performance in obtaining Value-
at-Risk by simply multiplying volatility with a constant factor is mainly due to the choice of the
particular significance level.
 METHODOLOGY
The methodology which to be used for analysis would be through the use of software for Value
at Risk, Ed Altman and many more. The research is qualitative as well as quantitative. As a part
of the qualitative research various books, research papers and journals will be studied and
analyzed. This will involve collecting information though discussions with executives from
different Banks. As a part of quantitative research, risk metrics, modeling and valuation
techniques will be applied on the data collected from different banks.
Firstly, a conceptual framework will be formed so as to get an overall idea about the risk metrics,
modeling and valuation techniques this will involve reading of case studies, going through
articles, journals and research papers written by people from the domain of finance and risk
management. Following the conceptual framework the qualitative data and quantitative data will
be used to fulfill the above mentioned objectives.

Chapter Plan
1. Introduction and brief history about risk modeling, valuation and metrics.
2. Conceptual framework.
3. Analysis.
4. Major findings and conclusion.
5. Suggestions.

Bibliography

1. Singh, S., and Singh Yogesh. (2008). Risk management in banks (1st ed). New Delhi:
Excel Books.
2. Department, Risk management and monitoring. (2007). Credi risk policy. Bangalore
3. Zumbach, G. (2006a). Back testing risk methodologies from 1 day to 1 year. Technical
report, RiskMetrics Group.
4. Elsinger, H. (2006). Using Market Information for Banking System Risk Assessment.
www.ijcb.org/journal/ijcb06q1a4.pdf.
5. Pafkaa, S. (2001). Evaluating the RiskMetrics Methodology in Measuring Volatility and
Value-at-Risk in Financial Markets. www.colbud.hu/pdf/Kondor/riskm.pdf.