Madhuban Institute of

Professional Studies, Indore

(DEVI AHILYA VISHWAVIDYALAYA INDORE)

A MAJOR RESEARCH PROJECT ON:

“RISK MANAGEMENT IN
BANKING SECTOR”
(For the partial fulfillment of the requirement for award of the degree of Masters of
Business Administration [Full Time] 2years Programme 2021-23)

Submitted to
DEVI AHILYA VISHWAVIDHALAYA, INDORE

GUIDED BY: PREPARED BY:

Prof. Divya Tiwari Anuj Thakkar

(Assistant Professor) MBA (FT) III SEM
Madhuban Institute of Roll No. 212630035
Professional Studies, Indore Enroll. No. DX1701978
 DECLARATION
I, the undersigned Anuj Thakkar hereby declare that this Research
Project “Risk Management in Banking Sector” is based on my original
work and me in-depthness to other work, publications have been duly
acknowledged at relevant places.

Anuj Thakkar
MBA (FT) 3rd Sem.
Roll no. – 212630035
Enrollment No. DX1701978
Madhuban Institute of Professional Studies, Indore
 CERTIFICATE
This is to certify that Anuj Thakkar a student of MBA (FT) 3rd Semester
2nd years in the year 2021-2023 with Finance and Marketing.
Specialization from Madhuban Institute of Professional Studies, Indore has
completed his Research Project on the topic “Risk Management in
Banking Sector” under my guidance and supervision and his work is
original and genuine.

Internal Examiner External Examiner

Prof. Divya Tiwari

Head
Madhuban Institute of Professional Studies, Indore
 ACKNOWLEDGEMENT
The duration of the project report was the one etched in my memory for the long
time to come. I do have certain people to thank for it being a memorable
experience.

Dr. Vibha Sharma (Principal) has been a source of inspiration and I would like
to thank him in all my humbleness.

Prof. Divya Tiwari my guide during the project period has been the ever
present pillar of support and guidance throughout. I am indeed indebted to him
for the experience and information he shared with me. His suggestions and
comments have made the report more valuable.

I would like to thank my family members, my friends and entire staff of

Madhuban Institute of Professional Studies, Indore for making the
atmosphere amicable and makes me feel at ease at the time of stress.

At last I am thankful to all those persons who help me directly and indirectly to
cover the wide aspect of Research Project.

With Sincere Thanks

Anuj Thakkar
MBA (FT) 2ND YEAR
ROLL NO 212630035
ENROLLMENT NO DX1701978
 CONTENTS

 INTRODUCTION
 LITERATURE REVIEW
 OBJECTIVE
 RESEARCH METHODOLOGY
 ANALYSIS & INTERPRETATION
 FINDINGS, CONCLUSION
 REFERENCES
 RISK MANAGEMENT IN BANKING SECTOR

ABSTRACT
This research paper investigates about the risk management in banking sector.
Risk is a key factor for businesses, because you cannot get profit from any activity
without risk. Since banking risks are a source of unpredicted expenses, their
proper management might stabilize revenues, having the role of shock absorber.
At the same time, strengthening the value of banking shares can only be achieved
through real communication with the financial markets and the implementation
of adequate programs of banking risk management. The paper analyses, for the
beginning, a series of general aspects regarding risk and banking risk
management. Then, we present the conclusions resulting from the quantitative
research descriptive type which had as objective the analysis of knowing the
measures that have to be taken in the banking management for a better
management of risks that might cause bankruptcyand opinions about the NBR
responsibilities to monitor and control the banks in the system.

KEYWORDS
Risk, management, bank.

INTRODUCTION
The Indian banking sector is making great progression in terms of eminence,
quantity, growth and diversification and is keeping up with the updated
technology, ability, stability and thrust of a financial system. Liberalization,
Privatization and Globalization have opened up new methods of business
transaction where risk level is very high. Risk arises from uncertainty. It can be
considered as an unplanned event with economic consequences resulting in loss
or reduced earnings. In Banks and other financial institutions risk is considered
to be the most important factor of earnings. Risk is a predominant factor in the
achievement of goals and in the overall success of an organisation. Risk
assessment forms the foundation of an effective enterprise risk management
program. Risk assessment is a systematic process for identifying and evaluating
events that could affect the achievement of objectives positively or negatively.
The Indian banking sector is making great progression in terms of eminence,
quantity, growth and diversification and is keeping up with the updated
technology, ability, stability and thrust of a financial system. Liberalization,
Privatization and Globalization have opened up new methods of business
transaction where risk level is very high. Risk arises from uncertainty. It can be
considered as an unplanned event with economic consequences resulting in loss
or reduced earnings. In Banks and other financial institutions risk is considered
to be the most important factor of earnings. Risk is a predominant factor in the
achievement of goals and in the overall success of an organisation.
Risk assessment forms the foundation of an effective enterprise risk management
program. Risk assessment is a systematic process for identifying and evaluating
events that could affect the achievement of objectives positively or negatively.
Analysis of Risk and its management has got much importance in the Banking
Industry. The most important challenge faced by the banking industry today is the
challenge of understanding and managing the risk. The very nature of the
banking business is having the threat of risk imbibed in it. Banks’ main role is
intermediation between those having resources and those requiring resources. For
management of risk at corporate level, various risks like credit risk, market risk
or operational risk have to be converted into one composite measure. Therefore,
itis necessary that measurement of operational risk should be in tandem with other
measurements of credit and market risk so that the requisite composite estimate
can be worked out. So, regarding to international banking rule (Basel Committee
Accords) and RBI guidelines the investigation of risk analysis and risk
management in banking sector is being most important. 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 identify ingand controlling threats to its digital assets,
including proprietary corporate data, a customer's personally identifiable
information (PII) and intellectual property.
Every business and organization face the risk of unexpected, harmful events that
can cost the company money or cause it to permanently close. Risk management
allows organizations to attempt to prepare for the unexpected by minimizing risks
and extra costs before they happen. Risks can come from various sources
including uncertainty in international markets, threats from project failures (at
any phase in design, development, production, or sustaining of life- cycles), legal
liabilities, credit risk, accidents, natural causes and disasters, deliberate attack
from an adversary, or events of uncertain or unpredictable root-cause. There are
two types of events i.e. negative events can be classified as risks while positive
events are classified as opportunities. Risk management standards have been
developed by various institutions, including the Project Management Institute,
the National Institute of Standards and Technology, actuarial societies, and ISO
standards. Methods, definitions and goals vary widely according to whether the
risk management method is in the context of project management, security,
engineering, industrial processes, financial portfolios, actuarial assessments, or
public health and safety.
Strategies to manage threats (uncertainties with negative consequences) typically
include avoiding the threat, reducing the negative effect or probability of the
threat, transferring all or part of the threat to another party, and even retaining
some or all of the potential or actual consequences of a particular threat. The
opposite of these strategies can be used to respond toopportunities (uncertain
future states with benefits). Certain risk management standards have been
criticized for having no measurable improvement on risk, whereas the confidence
in estimates and decisions seems to increase. Forexample, one study found that
one in six IT projects were "black swans" with gigantic overruns(cost overruns
averaged 200%, and schedule overruns 70%).

LITERATURE REVIEW
1. Dr. Khalil Elian Abdelrahim (2013), in his study ‘Effectiveness of Credit
Risk Management of Saudi Banks in the Light of Global Financial Crisis:
Qualitative Study‘analysed the features of credit risk management, determinants
of effectiveness of credit risk management and the most serious challenges facing
the effectiveness of credit risk management of Saudi Banks. CAMEL model was
used for analysing the effectiveness of credit risk management. He has found
out that major challenges of effectiveness of credit risk management are low
quality of assets, inadequate training, weak Risk Management refers to the
Practice of identifying potential risk in advance, analysing them and taking
precautionary measures to reduce the risk. Risk arises from uncertainty. It can
be considered as an unplanned event with financial consequences resulting in
loss or reduced earnings. The most important challenge faced by the banks today
is the challengeof understanding and managing the risk. The present paper tries to
understand the various types of risks faced by the bank and how the risk can be
controlled. It also examines the process of risk management and the different
techniques adopted by the banking industry. The study which is conceptual in
nature and is based upon data collected from secondary sources. It can be
concluded that the success of the organization will be depending upon how
efficiently the enterprise takes care of the entire risk management system. It
ensures that the risks are consciously taken with full knowledge, clear purpose
and understanding -so that it can be measured and mitigated. Key 136 corporate
governance, lack of credit diversification, granting of credit ceiling exceeding
customer capacity of repayment absence of risk premium on risky loans, absence
of serious analysis of customer’s financial position, corruption of some credit
officers, priority of profit at expense of credit safety. He has recommended that
Saudi Banks should have an overall comprehensive strategy of credit risk
management and should adopt sophisticated mitigating techniques of credit risk.
It is advised to strengthen the role of credit risk committee and should be ready
to implement Base III Accord by the year 2015.
2. Corporate Governance and Risk Management in the Banking Sector of Ghana
was conducted by Seyram Pearl- Kumesh, Yakubu Awadu Sare and Bawnah
Bernard to examine the degree to which banks in Ghana use risk management
practices and corporate governance in dealing with different types of risk. Bank
accepts risk in order to earn profits. Risk management is crucial in case of banks
as risk is inherent in the banking activities as they accept deposits and lend them
out or invests these funds in other investment portfolios; they face risk that other
organization would not face. They have found out that the major risk management
process identified by the selected six banks in efficient corporate governance and
risk management includes understanding of risk and risk management, risk
identification, risk assessment and analysis, risk monitoring and controlling
system. The major finding of the study is that almost all the selected banks
believe that, Bard of Directors is not directly responsible for risk management.
The important types of risks are credit risk, operating risk, solvency risk,interest
rate risk and liquidity risk. They have also found out that Board of Directors do
not assume direct responsibility for risk management, but its governance
activities can contribute significantly to effective risk management.

OBJECTIVE
The objective of this research paper is to
 understand the different types of risk faced by the banks,
 to examine the process of risk management,
 to find out the importance of risk management.

RESEARCH METHODOLOGY
Research methodology is a systematic way of solving a research problem. It can
be understoodas a science to learn how research is done scientifically.
DESIGN
The design of the study used in this study is Descriptive Research Design, which
deals with specifics.
HOW TO LEARN TO INSTALL
Information can be collected in two main types-
1. Primary data-

The data used in the research was initially obtained through the researcher's direct
efforts through surveys, interviews and direct observations.
2. Secondary data-

Secondary research data was previously collected and can be accessed by

researchers. Here, I use secondary data.
SECONDARY DATA
The second data is the data already collected from the main sources and it was
found that the researchers used it for their research. That is the kind of data that
has already been collected inthe past. Secondary Information is the information
collected by a non-user. It's not original in the beginning.
Here, secondary data may be collected by a third party. It takes advantage of the
information gathered from previous research, and uses it to conduct new research.
DATA INTERPRETATION AND RESULT ANALYSIS
TYPES OF RISK
Risk is defined as the possibility that an event will occur and adversely affect the
achievement of objectives. The important types of risk applicable to the
BankingSector are:
Credit Risk—Borrower or counter party will fail to meet its responsibilities
according to the agreed terms.
Market Risk -- Risk due to the movement in market price. It includes loss due to
fluctuations in interest rate or stock price or loss due to international currency
exchange rate or loss due to fluctuations in agricultural, industrial and energy
commodities.
Operational Risk – Risk of loss resulting from insufficient or unsuccessful
internal processes, people and system or from external events.
Liquidity Risk – Risk arises due to the inability to meet its day to day cash
transactions. It occurs when long term assets are funded by short term liabilities.
Reputational Risk—Probable loss of the organization’s reputational capital due to
the activities conducted by the bank, rumors about the bank, willing or
unconscious noncompliance with regulation, data manipulation, bad customer
service etc.
Business Risk—Possibility that a company is not able to perform according to the
expectation. Systematic Risk -- Risk that does not affect a single bank but
affectsthe whole industry.
Moral Hazard Risk—Risk which occurs when a big bank or large financial
institution takes risk knowing that someone else will have to face the burden of
those risk.

IMPORTANCE OF RISK MANAGEMENT IN BANKS

Because taking risk is an integral part of the banking business, it is not surprising
that banks have been practicing risk management ever since there have been
banks - the industry could not have survived without it. The only real change is
the degree of sophistication now required to reflect the more complex and fast-
paced environment. The Asian financial crisis of 1997 illustrates that ignoring
basic risk management can also contribute to economy-wide difficulties. The long
period of remarkable economic growth and prosperity in Asia masked
weaknesses in risk management at many financial institutions. Many Asian banks
did not assess risk or conduct a cash flow analysis before extending a loan, but
rather lent on the basisof their relationship with the borrower and the availability
of collateral - despite the fact that collateral was often hard to seize in the event
of default. The result was that loans - including,loans by foreign banks - expanded
faster than the ability of the borrowers to repay. Additionally, because many
banks did not have or did not abide by limits on concentrations oflending to
individual firms or business sectors, loans to overextended borrowers were often
large relative to bank capital, so that when economic conditions worsened, these
banks were weakened the most. Although avoiding failure is a principal reason
for managing risk, global financial institutions also have the broader objective of
maximizing their risk-adjusted rate of return on capital, or RAROC. This means
not just avoiding excessive risk exposures, but measuring and managing risks
relative to returns and to capital. By focusing on risk-adjusted returns on capital,
global institutions avoid putting too much emphasis on activities and investments
that have high expected returns but equally high or higher risk. This has led to
better management decisions and more efficient allocation of capital and other
resources. Indeed, bank shareholders and creditors expect to receive an
appropriate risk-adjusted rate of return, with the result that banks that do not focus
on risk-adjusted returns will not be rewarded by the market. A point too often
overlooked, however, is that, by focusing on risk-adjusted returns, risk
management also contributes to the strength and efficiency of the economy. It does
so by providing a mechanism that is designed to allocate resources, initially
financial resources but ultimately real resources to their most efficient use.
Projects with the highest risk adjusted expected profitability is the most likely to
be financed and to succeed. The result is more rapid economic growth. The
ultimate gain from risk management is higher economic growth. Without sound
risk management, no economy can grow to its potential. Stability and greater
economic growth, in turn, lead to greater private saving, greater retention of that
saving, greater capital imports and more real investment. Without it, not only do
we lose these gains, but we also incur the considerable costs of bank disruptions
and failures that follow from unexpected, undesired and unmanaged risk-taking.
RISK MANAGEMENT PREREQUISITES
There are prerequisites for banks to develop the ability to measure and manage risk
effectively. First, in order to measure risk, the country must have solid
accounting and disclosure standards that provide accurate, relevant,
comprehensive and timely information so that banks can the condition and
performance of borrowers and counterparties. To ensure accuracy, accounting
systems need to be supplemented by auditing systems and backed up by
enforceable legal penalties for providing fraudulent or misleading information to
government agencies and outsiders. Banks also need reliable information on the
credit history of potential borrowers andon macroeconomic and financial
variables that can affect credit and other risks. Additionally, banks need a staff
with sufficient expertise in risk management to identify and evaluate risk.
Implicit in most methods of evaluating credit risk is the assumption that the
probability of repayment depends on the ability of the borrower to repay, in
other words, that willingness to repay is not the issue. If repayment depends on
whim, then its probability is difficult if not impossible to assess. Thus, an
adequate legal system and “credit culture”, in which borrowersare expected to
repay and are penalized if they do not, are yet further prerequisites for sound and
accurate risk management. The ability to seize the collateral of borrowers in
default is essential if banks are to have the incentives and ability to mitigate risk.
Without the legal infrastructure - the laws, courts and impartial judges -
necessary to enforce financial contractsin a timely manner, much of risk
management would be for nothing, once the initial decision to extend credit was
made. Finally, the potential for conflicts of interest in risk management must be
limited. In particular, regulations are needed that restrict and require disclosure
of connected lending to bank owners, shareholders or management. Without
such regulations, thedesire for personal gain may distort the incentives of bank
owners and managers to manage risk appropriately.

PROCESS OF RISK MANAGEMENT

By knowing about the risks, we have found out about the controlling risk in
banking sectors. Credit Risk Management is a significant factor which determines
the survival, growth and profitability of the bank. As Lending is the primary
function of the bank, it is generally encouraged whereby funds being transferred
from the system to productive purpose which results in economic growth. Credit
risk management is defined as the process of identifying, measuring, assessing,
monitoring and controlling credit risk (Basel committee 2000). Risk Management
Process includes the following:
Risk Identification-- understanding the nature of different kinds of risk, the
various situations which can lead to risk and the reasons for the risk. Risk
Assessment and Measurement-- systematic process for recognizing and appraising
events (Possible risks and opportunities) that could affect the
achievement of objectives positively or negatively.

Risk Control—Risk mitigation through control techniques, deputation of

competent officers to deal with risks.

Risk Monitoring—Supervise the risk on a regular basis. The banks have to

develop the parameters on which the transactions are to be tested to ensure that no
risk to viable survival of the financial component or investment of the bank.

Risk Return Trade off -- The organization has to have a proper balancing of risk
against earnings.

FINDINGS
Ways to overcome risks are:
Market Risk
Financial institutions face the possibility of loss caused by changes in market
variables, including interest rate and exchange rate fluctuations, as well as
movements in market prices of commodities, securities and financial derivatives.
These constitute risks that can negatively impact the financial capital of the
institution. Market risk management involves developing a comprehensive and
dynamic framework for monitoring, measuring and managing liquidity, interest
rate, foreign exchange and commodity price risks. This should be integrated with
the institution’s business strategy. In addition, stress testing can assess potential
problem areas in a given portfolio.
Credit Risk
Credit risk is the potential that an entity that borrowed money will default on that
obligation to the financial institution. It may be because of the inability or
unwillingness of the client to honour their part of the bargain in relation to the
financial transaction. To manage credit risk, the institution has to maintain credit
exposure within the acceptable parameters. One effectiveway is via a risk rating
model that gauges how much a bank stands to lose on credit portfolio. Further,
lending decisions are routinely based on the credit score and report of the
prospective borrower.
Operational Risk
Operational risk is associated with the potential negative consequences of the
operations of thefinancial institution, such as those caused by inadequate or failed
internal processes, people and systems, or unforeseeable external events. Internal
operational risks include omissions in the work of employees, inadequate
information management and losses arising from fraud, trading errors or system
failures. External events such as floods, fire and natural disasters alsopose risks.
Operational risk management involves establishing internal audit systems,
assessingand eliminating weak control procedures, familiarizing all levels of staff
with the complex operations and having appropriate insurance cover.

Regulatory Risk
This is to enhance governance and safeguard the public against loss. Banks and
other financial establishments that have gone for public issue face a multiplicity
ofregulatory controls in order to ensure greater responsibility and accountability.
These regulations can inhibit free growth of business as institutions focus on
compliance, leaving little energy and time for developing new business. To
manage regulatory risk, institutions should conduct their business activities
within the regulatory framework.

CONCLUSION
Risk management is a higher priority these days for almost all industry fields. Not
many industries have experienced the effect of risk management more profoundly
than the financial services industry. As experienced as results of economic crisis,
failure to address risk from a holistic perspective will have adverse consequences
for banks, financial institutions and the economy as a whole. Leading executives
recognize that paying close attention to risk management will not only avoid
losses, but will also be a means of competitive advantage. Therefore, risk
management has never been of more vital importance than it is today. Risk is an
opportunity as well as a threat. The Banking industry is exposed to different typesof
risk. The existence of an organization depends heavily on its competences to
forecast and prepare for the change rather than just waiting for the change to
happen and react to it. The essence of risk management is not avoiding or
eliminating risk but deciding which risk to exploit and which one to avoid or
hedge. Risk management covers risk identification, assessment, measurement,
monitoring and controlling all risks inherent in banking business. It is very
important for the organization to have a Risk Management Committee, Credit
Policy committee and Asset Liability committee to anticipate adverse changes and
take the precautionary measures well in advance. Another important aspect isthat
credit appraisal doneby the concerned members on behalf of the institution should
report their reviews to the higher authorities and others also should measure,
monitor and evaluate the risk.
Internal Rating System and Risk adjusted rate of return on capital are to be
followed. Banks should assess credit worthiness before sanctioning loans by
following credit rating techniques. Regular Evaluation and Rating system,
Maximum limit exposure for single or group borrowers, Alertness on the part of
operating staff at all stages of operations including post sanction followup can
reduce the risk to a great extent. It is very vital for the banks to ensure that they
have adequate capital to support all the probable risks in their business. It can be
concluded that the success of the organization will be depending upon how
efficiently the enterprise takes care of the entire risk management system. It
ensures that the risks are consciously taken with full knowledge, clear purpose
and understanding - so that it can be measured and mitigated.

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