Risk management

Risk management is the process of identifying, assessing and controlling

threats to an organization's capital and earnings. These threats, or risks, could
stem from a wide variety of sources, including financial uncertainty, legal
liabilities, strategic management errors, accidents and natural
disasters. IT security threats and data-related risks, and the risk management
strategies to alleviate them, have become a top priority for digitized companies.
As a result, a risk management plan increasingly includes companies'
processes for identifying and controlling threats to its digital assets, including
proprietary corporate data, a customer's personally identifiable information (PII)
and intellectual property.
Other important benefits of risk management include:
 Creates a safe and secure work environment for all staff and customers.
 Increases the stability of business operations while also decreasing legal
liability.
 Provides protection from events that are detrimental to both the company
and the environment.
 Protects all involved people and assets from potential harm.
 Helps establish the organization's insurance needs in order to save on
unnecessary premiums.
Types of business risk
When it comes to risk management, there are steps you can take, however.
Here are seven types of business risk you may want to address in your
company.
1. Economic Risk : The economy is constantly changing as the markets
fluctuate. Some positive changes are good for the economy, which lead to
booming purchase environments, while negative events can reduce sales. It's
important to watch changes and trends to potentially identify and plan for an
economic downturn.
2. Compliance Risk : Business owners face an abundance of laws and
regulations to comply with. For example, recent data protection and payment
processing compliance could impact how you handle certain aspects of your
operation. Staying well versed in applicable laws from federal agencies like the
Occupational Safety and Health Administration (OSHA) or the Environmental
Protection Agency (EPA) as well as state and local agencies can help minimize
compliance risks.
3. Security and Fraud Risk : As more customers use online and mobile
channels to share personal data, there are also greater opportunities for
hacking. News stories about data breaches, identity theft and payment fraud
illustrate how this type of risk is growing for businesses.
Not only does this risk impact trust and reputation, but a company is also
financially liable for any data breaches or fraud. 
4. Financial Risk : This business risk may involve credit extended to customers
or your own company's debt load. Interest rate fluctuations can also be a
threat.
5. Reputation Risk : There has always been the risk that an unhappy customer,
product failure, negative press or lawsuit can adversely impact a company's
brand reputation. However, social media has amplified the speed and scope of
reputation risk. Just one negative tweet or bad review can decrease your
customer following and cause revenue to plummet.
6. Operational Risk : This business risk can happen internally, externally or
involve a combination of factors. Something could unexpectedly happen that
causes you to lose business continuity.
7. Competition (or Comfort) Risk : While a business may be aware that there is
always some competition in their industry, it's easy to miss out on what
businesses are offering that may appeal to your customers.
Management of Non-Performing Assets
NPA are bad loans with banks or other financial institutions whose interests
and or principal amounts are overdue for a long time. This time is usually 90
days or more. Like any other business, banks also must run on profits, but
NPA eats into that margin for banks.
1. Asset Classification: The advances are classified into four broad groups:
i. Standard Assets – Such assets don’t disclose any problem and don’t carry
more than normal risk attached to the business. Such an asset is not a non-
performing asset.
ii. Sub Standard Assets – It is classified as non-performing asset for a period
not exceeding 12 months. Such an asset will have well defined credit
weaknesses that jeopardize liquidation of the debt and are characterized by
distinct possibility that the bank will sustain some loss.
iii. Doubtful Assets – Assets, which have remained NPAs for a period
exceeding 12 months. It means any NPA would migrate from sub-standard to
doubtful category after 12 months.
iv. Loss Assets – A loss asset is one where loss has been identified by the
bank or internal/external auditors or RBI inspectors but the amount has not
been written off, wholly or partially Any NPA would get classified as loss asset
if it were irrecoverable or only marginally collectible and cannot be classified as
bankable asset.
2. Income Recognition: If an asset is performing, income can be recognized on
accrual basis but if the asset is non-performing, income should not be
recognized on accrual basis but should be booked only when it is actually
received (cash basis).
3. Provisioning Requirements: Impact of Non-Performing Assets on Banks:
The Non-performing Assets represent idle physical assets in the economy.
NPA affects the profitability, liquidity and the competitive functioning of the
banking industry. NPAs impose a double burden – first while providing for them
and the second by putting a constraint on the bank’s ability to lend further. It is
very difficult to contain and manage any problem until and unless we know the
causes behind the emergence and growth of that problem. In order to recover
NPAs Lok Adalats, debt recovery tribunals, compromise/ settlement scheme,
corporate debt restructuring, asset reconstruction companies, national company
law tribunal, civil courts, credit information bureau have been established from
time to time. Earlier, it has been observed that banks were able to force
recovery from smaller borrowers but seemed utterly helpless against large
borrowers because of such large willful defaulters taking refuge under the
sluggish legal process.
Payment and Settlement Systems
The central bank of any country is usually the driving force in the development
of national payment systems. The Reserve Bank of India as the central bank of
India has been playing this developmental role and has taken several initiatives
for Safe, Secure, Sound, Efficient, Accessible and Authorised payment systems
in the country. The Board for Regulation and Supervision of Payment and
Settlement Systems (BPSS), a sub-committee of the Central Board of the
Reserve Bank of India is the highest policy making body on payment systems
in the country. The BPSS is empowered for authorising, prescribing policies
and setting standards for regulating and supervising all the payment and
settlement systems in the country. The Department of Payment and Settlement
Systems of the Reserve Bank of India serves as the Secretariat to the Board
and executes its directions. In India, the payment and settlement systems are
regulated by the Payment and Settlement Systems Act, 2007 (PSS Act) which
was legislated in December 2007. The PSS Act as well as the Payment and
Settlement System Regulations, 2008 framed thereunder came into effect from
August 12, 2008. In terms of Section 4 of the PSS Act, no person other than
the Reserve Bank of India (RBI) can commence or operate a payment system
in India unless authorised by RBI. Reserve Bank has since authorised payment
system operators of pre-paid payment instruments, card schemes, cross-border
in-bound money transfers, Automated Teller Machine (ATM) networks and
centralised clearing arrangements.
Paper-based Payments
Use of paper-based instruments (like cheques, drafts, and the like) accounts
for nearly 60% of the volume of total non-cash transactions in the country. In
value terms, the share is presently around 11%. This share has been steadily
decreasing over a period of time and electronic mode gained popularity due to
the concerted efforts of Reserve Bank of India to popularize the electronic
payment products in preference to cash and cheques. Since paper based
payments occupy an important place in the country, Reserve Bank had
introduced Magnetic Ink Character Recognition (MICR) technology for speeding
up and bringing in efficiency in processing of cheques.
Electronic Payments
The initiatives taken by RBI in the mid-eighties and early-nineties focused on
technology-based solutions for the improvement of the payment and settlement
system infrastructure, coupled with the introduction of new payment products
by taking advantage of the technological advancements in banks. The
continued increase in the volume of cheques added pressure on the existing
set-up, thus necessitating a cost-effective alternative system.
Clearinghouse
A clearinghouse is a designated intermediary between a buyer and seller in a
financial market. The clearinghouse validates and finalizes the transaction,
ensuring that both the buyer and the seller honor their contractual obligations.
Every financial market has a designated clearinghouse or an internal clearing
division to handle this function. The responsibilities of a clearinghouse include
"clearing" or finalizing trades, settling trading accounts,
collecting margin payments, regulating delivery of the assets to their new
owners, and reporting trading data. Clearinghouses act as third parties for
futures and options contracts, as buyers to every clearing member seller, and
as sellers to every clearing member buyer. The clearinghouse enters the
picture after a buyer and a seller execute a trade. Its role is to accomplish the
steps that finalize, and therefore validate, the transaction. In acting as a
middleman, the clearinghouse provides the security and efficiency that is
integral to stability in a financial market.
Electronic Funds Transfer (EFT)
This retail funds transfer system introduced in the late 1990s enabled an
account holder of a bank to electronically transfer funds to another account
holder with any other participating bank. Available across 15 major centers in
the country, this system is no longer available for use by the general public, for
whose benefit a feature-rich and more efficient system is now in place, which is
the National Electronic Funds Transfer (NEFT) system. National Electronic
Funds Transfer (NEFT) is an electronic funds transfer system maintained by
the Reserve Bank of India (RBI). Started in November 2005. NEFT is a facility
enabling bank customers in India to transfer funds between any two NEFT-
enabled bank accounts on a one-to-one basis. It is done via electronic
messages. Unlike Real-time gross settlement (RTGS), fund transfers through
the NEFT system do not occur in real-time basis. NEFT settles fund transfers
in half-hourly batches with 23 settlements occurring between 8:00 AM and 7:30
PM on week days and the 1st, 3rd and 5th Saturday of the calendar month.
Transfers initiated outside this time period are settled at the next available
window. No settlements are made on the second and fourth Saturday of the
month, or on Sundays, or on public holidays. NEFT facilities are available at
74,680 branches offices of 101 banks across the country (out of around 82,400
bank branches) as of January 2011, and well as online through the website of
NEFT-enabled banks and work on a batch mode. NEFT has gained popularity
due to its saving on time and the ease with which the transactions can be
concluded, This reflects from the fact that 42% of all electronic transactions in
the 2008 financial year were NEFT transactions.
Electronic Clearing Service (ECS)
The Electronic Clearing Service (ECS) is an electronic mode of payment for
transactions that can be used for making bulk payments or receipts.
This facility is used by by institutions for making bulk payment of amounts
towards distribution of dividend, interest, salary, pension, etc. or for bulk
collection of amounts towards telephone / electricity /water dues, cess / tax
collections, loan installment repayments, periodic investments in mutual funds,
insurance premium etc. Essentially, ECS facilitates bulk transfer of monies from
one bank account to many bank accounts or vice versa. There are two variants
of ECS - ECS Credit and ECS Debit.
ECS Credit : This is used by institution for affording credit to a large number
of beneficiaries (for instance, employees, investors etc.) having accounts with
bank branches at various locations by raising a single debit to the bank
account of the user institution. ECS Credit enables payment of amounts
towards distribution of dividend, interest, salary, pension, etc., of the user
institution.
ECS Debit : ECS Debit is used by an institution for raising debits to a large
number of accounts (for instance, consumers of utility services, borrowers,
investors in mutual funds etc.) maintained with bank branches at various
locations for single credit to the bank account of the user institution. ECS Debit
is useful for payment of telephone / electricity / water bills, cess / tax
collections, loan installment repayments, periodic investments in mutual funds,
insurance premium etc., that are periodic or repetitive in nature and payable to
the user institution by large number of customers etc.
REAL-TIME GROSS SETTLEMENT
Real-time gross settlement systems are specialist funds transfer systems
where the transfer of money or securities takes place from one bank to another
on a "real time" and on a "gross" basis. Settlement in "real time" means a
payment transaction is not subjected to any waiting period, with transactions
being settled as soon as they are processed. "Gross settlement" means the
transaction is settled on one-to-one basis without bundling or netting with any
other transaction. "Settlement" means that once processed, payments are final
and irrevocable. RTGS systems are typically used for high-value transactions
that require and receive immediate clearing. In some countries the RTGS
systems may be the only way to get same day cleared funds and so may be
used when payments need to be settled urgently. However, most regular
payments would not use a RTGS system, but instead would use a
national payment system or network that allows participants to batch and net
payments. RTGS payments typically incur higher transaction costs and usually
operated by a country's central bank.
Operation
RTGS systems are usually operated by a country's central bank as it is seen
as a critical infrastructure for a country's economy. Economists believe that an
efficient national payment system reduces the cost of exchanging goods and
services, and is indispensable to the functioning of the interbank, money, and
capital markets. A weak payment system may severely drag on the stability
and developmental capacity of a national economy; its failures can result in
inefficient use of financial resources, inequitable risk-sharing among agents,
actual losses for participants, and loss of confidence in the financial system
and in the very use of money. RTGS system does not require any physical
exchange of money; the central bank makes adjustments in the electronic
accounts of Bank A and Bank B, reducing the balance in Bank A's account by
the amount in question and increasing the balance of Bank B's account by the
same amount. The RTGS system is suited for low-volume, high-value
transactions. It lowers settlement risk, besides giving an accurate picture of an
institution's account at any point of time.