Professional Documents
Culture Documents
A PROJECT REPORT ON
Submitted by
Supervise by
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Annexure-IA
Supervisor’s Certificate
This is to certify that Mr. Ritik Agarwal a student of B.Com Honours in Accounting & Finance
in business of Shyamaprasad College under the University of Calcutta has worked under my
supervision and guidance for her Project Work and prepared a Project Report with the title
“Risk Management in Banking Sector”.
The project report which she is submitting is her genuine and original work to the best of my
knowledge.
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Annexure-IB
Student’s declaration
I hereby declare that the Project Work with the title “Risk Management in Banking Sector”
submitted by me for the partial fulfilment of the degree of B.Com. Honours in Accounting &
Finance under the University of Calcutta is my original work and has not been submitted
earlier to any other University/Institution for the fulfilment of the requirement for any course of
study.
I also declare that no chapter of this manuscript in whole or in part has been incorporated in this
report from any earlier work done by others or by me. However, extracts of any literature
which has been used for this report has been duly acknowledged providing details of such
literature in the references.
Address: Tollygunge
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ACKNOWLEDGEMENT
I would like to express my special thanks of gratitude to the principal of our college Dr. Dipak
Kar for completion of this project work in our organization Shyamaprasad College.
My sincere thanks to Taniya Dey (Project Supervisor) who have provided support directly and
indirectly for completion of my project and for giving me the Golden opportunity to do this
wonderful project on the topic “Risk Management in Banking sector”. I am really thankful
to him.
I would like to thank my Parents & Family who helped me a lot in finishing this project within
the limited time. I would also like to express gratitude to the companies for using their name as
well as their statistical data. I am making this project not only for marks but to also increase my
knowledge.
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TABLE OF CONTENT
CHAPTER 1: INTRODUCTION
4.1 CONCLUSION.................................................................................................................. 33
BIBLIOGRAPHY OR REFERENCES…..………………………………………………………………………..35
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ANNEXURE ............................................................................................................... 36.
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Chapter 1
INTRODUCTION
The word risk is derived from an Italian word “Risicare” which means “To Dare”. It is an
expression of danger of an adverse deviation in the actual result from any expected result.
Banks for International Settlement (BIS) has defined it as- “Risk is the threat that an event or
action will adversely affect an organization’s ability to achieve its objectives and successfully
execute its strategies.”
Risk Management: Risk Management is a planned method of dealing with the potential loss or
damage. It is an ongoing process of risk appraisal through various methods and tools which
continuously
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1.1 LITERATURE REVIEW:
Olamide, et al., (2012) : examined the relationship between risk management and financial
performance of banks of 14listed banks in the financial sector of the Nigerian economy over a
period of 6 years (2006-2012). The findings revealed that management of risk does not often
translate to positive financial performance of banks.
Gunduz, et al; 2000: The concentration of the credit portfolio can change the ability of hedging
the credit risk according to the companies. The deterioration of the financial statement
of the big companies will increase the amount of NPL’s of the bank.
Orduna & , et al., 2010: A bank’s balance sheet lists the bank’s assets, liabilities and shareholder
eq-uity. Each of those items is subject to risk, especially during a so-called liquidity
crisis – roughly speaking, a situation in which banks lack the cash to meet their
short-term obligations
Adriano A., et al., 2010: A replication study1 finds that the replication code provided in the
supplementary information section of the article does not reproduce some of the central
findings reported in the article. Upon reexamination of the work, the authors confirmed that
the replication code does not fully reproduce the published results and were unable to provide
revised code that does
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1.2 STUDY PROBLEM
Basel III norms came as an attempt to reduce the gap in point of views between conflict
practices. Therefore, the implementation of those resolutions emerged by the banks. Regarding
this issue the survey has been made.
To what extent banks have implemented Basel III norms related to enhancing internal
1.3 OBJECTIVES
1.4 METHODOLOGY
Data collection
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CHAPTER: 2
There are five components that make up the RMF. These components include the following:
Identification
The first component in implementing the Risk Management Framework is to identify the
risk that the organization faces. These might include strategic, legal, operational and
privacy risks.
It is important to note that risk identification is not a one-time process. The risks that an
organization faces tend to change over time, so risk assessments will need to be
performed on a periodic basis.
The goal behind the measurement and assessment component is to create a risk
profile for each risk that has been identified. There are any number of different ways that
organizations might complete the measurement and assessment phase of the process. In
some cases, risk measurement might be based on something as simple as how much capital
could potentially be lost as a result of the risk. However, in other cases, measuring the
potential impact of a risk might be far more difficult. In the field of information security, for
example, an organization might attempt to quantify the cost of a security breach compared
with the cost of implementing a security mechanism that can help to mitigate the risk.
Mitigation
The third component in the framework is risk mitigation. Risk mitigation involves examining the
risks that have been identified and determining which risks can and should be eliminated, as
opposed to the risks that are deemed to be acceptable.
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Part of this process involves coming up with mitigation strategies, such as cyber insurance. For
example, if an organization identifies cyber security risks that need to be dealt with, then it
may choose to integrate security controls into its development lifecycle. Such an organization
would likely also put additional baseline security controls in place.
The fourth component in the process is risk reporting and monitoring. This essentially
means regularly reexamining the risks in order to make sure that the risk mitigation
strategies the organization has adopted are having the desired effect.
Governance
The last component in the process is risk governance. Risk governance is the process of making
sure that the risk mitigation techniques that have been adopted are put into place and that the
employees adhere to those policies.
According to the National Institute of Standards and Technology, there are seven steps that
make up the RMF. These steps include the following:
Prepare
The preparation stage of the RMF focuses on getting the organization ready to adopt a
formalized risk management strategy. This might include identifying organizational risks and
determining key risk-management roles.
Categorize
The categorize stage is where organizations begin assessing the risks that have been
identified. This may mean assessing the impact of the various risks and prioritizing the
risks that need to be addressed.
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Select
Implement
Once an organization has selected the solutions it will be adopting as part of its risk
mitigation strategy, the next stage is implementation. This is where the selected controls
are put into place in an effort to head off risks that might exist.
Assess
The assess stage comes after implementation of any selected solutions. It seeks to determine
whether the selected controls were implemented correctly and if those controls are delivering
the desired result. This means making sure any mechanisms that have been implemented are
reducing risks in a quantifiable way without accidentally introducing new risks in the process.
Authorize
In some instances, the authorize stage is tied to executive approval of the risk
mitigation mechanisms that have been put into place. More often, however, the authorize
phase is more of an overview by senior members of the organization who are looking to
make sure that risk mitigation strategies are working and that those strategies adhere to
any applicable laws and policies that may exist within the organization.
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Monitor
CHAPTER: 3
FULLY PREPARED 8 9 9
PARTIALLY PREPARED 2 1 1
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2. Have you done a gap analysis between current risk management practice and new capital
requirements?
Table 3.1.2: Gap analysis
CREDT RISK MARKET RISK OPERATIONAL RISK
YES 9 5 9
NO 1 5 1
OBSERVATIONS
A majority of banks have performed a gap analysis between their current risk management
practice and the new capital requirements.
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INTERPRETATION
The banks aim to look beyond the regulatory aspects and aim to benefit from the new
regulations as a means to enhanced risk management.
1. Do you have an assigned Credit risk, Market risk and Operational risk manager in your bank? Table
3.2.1: Assignment of risk manager
CREDT RISK MARKET RISK OPERATIONAL RISK
YES 10 9 9
NO 1 1
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CHIEF EXECUTIVE OFFICER 4 6 6
MANAGER
OTHER SPECIFY
0-20% 2 4 2
20-50% 2 1 2
>50% 6 5 6
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4. Do you have a Risk Committee?
YES 6 5 6
NO 4 5 4
OBSERVATIONS
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Slightly more attention is paid to credit and operational risk than to Market risk, as 40 % of the
banks operating do not have risk committee.
INTERPRETATION
•Despite the relatively small size of banks, they are generally well aware of the risk management
function, and for this purpose, risk managers spend over half their time performing these
functions.
RISK RISK
REGULATORY PURPOSE 3 4 4
MONITORING 7 8 8
DECISION MAKING 7 4 4
PURPOSE
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2. Does external reporting affect your decision making process?
Table 3.3.2: External reporting affect decision making process
CREDT RISK MARKET RISK OPERATIONAL RISK
VERY SIGNIFICANTLY 3 3 3
SIGNIFICANTLY 6 5 6
NOT AT ALL 1 2 1
SIGNIFICANTLY
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3. How frequent is your internal reporting?
Daily 1 1
Weekly 1 1
Monthly 8 8 7
Annually 1 1 1
OBSERVATIONS
All the Banks produce internal report.
All risk reporting is compiled largely for monitoring and Decision making purposes than
Regulatory purpose.
INTERPRETATION
Reporting for all risk still needs to be developed
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1. Which approach will best suit your organization?
RISK
STANDARD 8 9 7
FOUNDATION
ADVANCED 2 1 3
DON’T KNOW
2. Have you performed a Cost/Benefit analysis for each approach proposed by Basel III? Table 3.4.2:
Cost/Benefit analysis
CREDT RISK MARKET RISK OPERATIONAL RISK
YES 10 8 9
NO 2 1
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OBSERVATIONS
Most of the banks believe that the standard approach is most appropriate for their purposes.
On the whole, a cost/benefit analysis has been done for each approach. It appears that the banks have
completed their cost/benefit analysis only for their elected approach
INTERPRETATION
Most of the banks would prefer to adopt the standard approach, but only few of those who
would like to implement the advanced approach and they will implement.
1. Have you estimated the regulatory capital consumption for each of your individual businesses?
Table 3.5.1: Estimation of the regulatory capital consumption
YES 10 9 10
NO 1
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2. Will you outsource activities with high capital consumption?
YES 4 3 5
NO 6 7 7
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CREDT RISK MARKET RISK OPERATIONAL RISK
YES 7 5 6
NO 3 5 4
OBSERVATIONS
Most of the banks do not outsource activities with high capital consumption.
INTERPRETATION
Very few banks plan to outsource activities with high capital consumption, but the majority will insure
their credit risks, while nearly half will plan to insure their market and operational risks
1. Have you established an action plan to achieve the Basel III requirements? Table 3.6.1:
Establishment of action plan
CREDT RISK MARKET RISK OPERATIONAL RISK
YES 10 10 10
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NO
INTERNAL 7 5 8
RESOURCES
EXTERNAL 1 4 1
RESOURCES
BOTH 4 3 3
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Table 3.6.3: Largest spending area
RISK RISK
TECHNOLOGY 8 7 8
COMMUNICATION 1 4 1
OTHER (SPECIFY)
DON’T KNOW
OBSERVATIONS
All the banks established by an action plan to achieve the Basel III requirements.
Most of the banks execute the action plan with internal resources than external resources.
INTERPRETATION
The banks have generally determined an action plan to help them to meet Basel II requirements. They
have partially completed the actions required, and will continue with these action plans
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3.7 TECHNOLOGY
1. Does your current IT infrastructure allow you to meet the Basel III requirements? Table 3.7.1: IT
infrastructure
CREDT RISK MARKET RISK OPERATIONAL RISK
YES 10 8 9
NO 2 1
YES 7 7 7
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NO 3 3 3
TECHNOLOGY 5 3 4
CONSULTING 4 6 5
4.What difficulties do you foresee? Table 3.7.4: Difficulties that you foresee
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CREDT MARKET RISK OPERATIONAL RISK
RISK
INTEGRATION 3 1 1
CAPABILITIES
DATABASE DESIGN 1 1
MODELS 1 1
BUDGET 1
DATA GATHERING 4 6 4
HUMAN RESOURCE 3 3S 3
OTHER (SPECIFY)
OBSERVATIONS
More than half of the Banking industry will use their IT infrastructure in its current format.
Difficulties that banks foresee are more on Data Gathering and Human Resource.
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INTERPRETATION
The banks should train their employees, in order to overcome the difficulties in implementing
the Basel III
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CHAPTER :4
CONCLUSION AND RECOMMENDATION
4.1 CONCLUSION
Implementation of Basel III has been described as a long journey rather than a destination by
itself. Undoubtedly, it would require commitment of substantial capital and human resources
on the part of both banks and the supervisors. RBI has decided to follow a consultative process
while implementing Basel III norms and move in a gradual, sequential and co-ordinate manner.
For this purpose, dialogue has already been initiated with the stakeholders. As envisaged by the
Basel Committee, the accounting profession too, will make a positive contribution in this
respect to make Indian banking system still stronger.
Credit risk is generally well contained, but there are still problems associated with loan
classification, loan loss provisioning, and the absence of consolidated accounts.
Market risk and Operational risk are clear challenge, as they are relatively new to the
areas that were not well developed under the original Basel Capital Accord.
The new regulations will allow banks to introduce substantial improvements in their
overall risk management capabilities, improving risk based performance measurement,
capital allocation as portfolio management techniques.
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particularly fee-based income i.e. non interest income, to improve returns.
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Basel III leads to increase in Data collection and maintenance of privacy and security in
various issues.
The banks that would prefer to adopt the Standard Approach should try to adopt
Advanced Approach.
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BIBLIOGRAPHY OR REFERENCES
WEB SITES
www.bis.org
www.rbi.org
www.kpmg.com
www.cognizant.com
BOOKS
ARTICLES
REPORTS
Paper on Risk Assessment and Risk Management -- Santosh Deoram Watpade & Siddhi
Shrikant Vyas MET’s Institute of Management Nashik.
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ANNEXURE:
QUESTIONNAIRE
I am RITIK Agarwal studying 6TH semester B.COM (HONS) THE SHYAMAPRASAD COLLEGE . I
am working on a project titled “RISK MANAGEMENT IN BANKING SECTOR”. In this regard I
request you to spend your valuable time in filling this questionnaire (Tick the appropriate box).
This information will be used only for academic purpose and will be kept confidential.
INSTITUTIONAL INFORMATION
1.Name of your bank:
AWARENESS OF REGULATIONS
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1. What is your assessment of your readiness for the new Basel proposals with respect to
capital requirements?
CREDT RISK MARKET RISK OPERATIONAL RISK
FULLY
PREPARED
PARTIALLY
PREPARED
NOT YET
PREPARED
2.Have you done a gap analysis between current risk management practice and new capital
requirements?
CREDT RISK MARKET RISK OPERATIONAL RISK
YES
NO
ORGANISTIONAL STRUCTURE
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1. Do you have an assigned Credit risk, Market risk and Operational risk manager in your
bank?
CREDT RISK MARKET RISK OPERATIONAL RISK
YES
NO
CHIEF
EXECUTIVE
OFFICER
CHIEF FINANCIAL
OFFICER
ASSETS AND
LIABLITY
MANAGER
CREDIT RISK
OFFICER
OTHER SPECIFY
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3.What is the assigned manager’s time dedicated to this activity?
CREDT RISK MARKET RISK OPERATIONAL RISK
0-20%
20-50%
>50%
YES
NO
REPORTING ABILITY
REGULATORY
PURPOSE
MONITORING
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DECISION
MAKING
PURPOSE
VERY
SIGNIFICANTLY
SIGNIFICANTLY
NOT AT ALL
SIGNIFICANTLY
Daily
Weekly
Monthly
Annually
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COMPLIACE WITH BASEL III
STANDARD
FOUNDATION
ADVANCED
DON’T KNOW
2.Have you performed a Cost/Benefit analysis for each approach proposed by Basel III?
CREDT RISK MARKET RISK OPERATIONAL RISK
YES
NO
CAPITAL ALLOCATION
1. Have you estimated the regulatory capital consumption for each of your individual
businesses?
CREDT RISK MARKET RISK OPERATIONAL RISK
YES
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NO
YES
NO
YES
NO
YES
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NO
INTERNAL
RESOURCES
EXTERNAL
RESOURCES
BOTH
TECHNOLOGY
COMMUNICATION
OTHER (SPECIFY)
DON’T KNOW
TECHNOLOGY
1. Does your current IT infrastructure allow you to meet the Basel II requirements?
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CREDT RISK MARKET RISK OPERATIONAL RISK
YES
NO
YES
NO
TECHNOLOGY
CONSULTING
RISK
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INTEGRATION
CAPABILITIES
DATABASE DESIGN
MODELS
BUDGET
DATA GATHERING
HUMAN RESOURCE
OTHER (SPECIFY)
PLACE:
DATE: Signature.
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