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

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. The steps in risk management process are: 1. Determining objectives: - determination of objectives is the first step in the risk management function. The objective may be to protect profits, or to develop competitive advantage. 2. Identifying Risks :- Every organization faces different risks, based on its business, what type of risk the organization is having one need to identify that. 3. Risk Evaluation: - Once the risks are identified, they need to be evaluated for ascertaining their significance. The significance of a particular risk depends upon the size of the loss that it may result in, and the probability of the occurrence of such loss. 4. Development of policy: - Based on the risk tolerance level of the firm, the risk management policy needs to be developed. 5. Development of strategy: - Based on the policy, the firm then needs to develop the strategy to be followed for managing risk. A strategy is essentially an action plan, which specifies the nature of risk to be managed and the timing. 6. Implementation: - Once the policy and the strategy are in place, they are to be implemented for actually managing the risks. 7. Review: - The function of risk management needs to be reviewed periodically, depending on the costs involved. The factors that affect the risk management decisions keep

changing, thus necessitating the need to monitor the effectiveness of the decisions taken previously.

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 Banks 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

Credit Risk Credit Risk is defined as the possibility of losses associated with diminution in the credit quality of borrowers or counterparties. In a banks portfolio, losses stem from outright default due to inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, settlement and other financial transactions. Credit risk emanates from banks dealings with individuals, Corporate, bank, financial institution or a sovereign. Credit Risk may take the following forms: In the case of direct lending; principal / and or interest amount may not be repaid In the case of treasury operations; the payment or series of payments due from the counter parties under the respective contracts may not be forthcoming or ceases In the case of securities trading businesses: funds / securities settlement may not be effected

 In the case of cross-border exposure: the availability and free transfer of foreign currency funds may either cease or restrictions may be imposed by the sovereign. Market Risk Market Risk may be defined as the possibility of loss to a bank caused by changes in the market variables. Market Risk is the risk to the banks earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange and equities, as well as the volatilities of those prices. Segments of Market Risk Liquidity Risk: Liquidity risk is the potential inability to meet the banks liabilities as they become due. It arises when the banks are unable to generate cash to cope with a decline in deposits or increase in assets. It originates from the mismatches in the maturity pattern of assets and liabilities. Interest Rate Risk: Interest rate risk is the risk where changes in market interest rates might adversely affect a banks financial condition. The immediate impact of changes in interest rates is on the Net Interest Income. Foreign Exchange Risk: Foreign Exchange Risk may be defined as the risk that a bank may suffer losses as a result of adverse exchange rate movements during a period in which it has an open position, either spot or forward, or a combination of the two, in an individual foreign currency. Operational risk Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events. Internal processes include activities relating to accounting, reporting, operations, tax, legal, compliance and personnel management etc. Broadly the following can be grouped under Operational Risk 1. Internal Fraud 2. External Fraud 3. Non adherence of systems and procedures 4. Poor documentation 5. Business disruption due to Computer Systems failure 6. Lack of succession planning

7. Failure of customer due diligence HOW RISK IS MANAGED An independent Risk Management department is functioning for effective risk management enterprise wide. Risk is managed through following three Apex committees viz., (i) Credit Risk Management Committee (CRMC) (ii) Asset and Liability Management Committee (ALMC) and (iii) Operational Risk Management Committee(ORMC) These committees work within the overall guidelines and policies approved by the Risk Management Committee of the Board. The Bank has put in place various policies to manage the risk. To analyze the risk enterprise wide and with the objective of integrating all the risks of the Bank Integrated Risk Management Policy has also been put in place. The important risk policies comprise of Credit Risk Policy, Asset and Liability Management Policy, Operational Risk, Management Policy, Business Continuity Planning, Whistle Blower Policy and Policy on Corporate Governance. The risk management systems are in place to identify and analyze the risks at the early stage, set and maintain prudential limits and manage them to face the changing risk environment. Software driven rating mechanism is in place to confirm the rating to ensure credit quality. An entry level scoring system is also put in place. Loan Review Management Committee reviews the Loan Review Mechanism and Credit Audit functions periodically. In addition, Standard Assets Monitoring Committee reviews the Special Mention Accounts to initiate timely action to prevent slippage of standard assets to non-performing assets. The liquidity risk is managed through studying structural liquidity on a daily basis, which is being discussed in the Funds and Investments Committee and reviewed every month by ALMC .The interest rate risk is managed through monthly interest rate sensitivity statements monitored by ALMC. The mid offi ce, directly reporting to independently. Risk Management Department, monitors treasury transactions

Operational risk is managed by integrating the operational risk management systems into day to day management processes and adopting various risk mitigating strategies. The risk perception in various products / procedures is critically analyzed. Stress tests are conducted periodically for the credit risk, liquidity risk and interest rate/exchange rate risk. Policy on Internal Capital Adequacy Assessment Process (ICAAP) is put in place whereby the Bank identifies/measures and allocates Capital for various residual risks identified under Pillar II on quarterly basis and is reviewed by the Board half yearly. The CRAR position of the Bank is reviewed by the Board on a half yearly basis and assessment for the next three years is also provided based on projected business position. In compliance with the Reserve Bank of India guidelines on Basel II Pillar 3 Market Discipline, the Bank has put in place a Disclosure Policy duly approved by the Board and the disclosures on Quarterly / Half-yearly / Annual basis as per the policy are made in the Banks Website / Annual Report. RISK MANAGEMENT COMMITTEE Risk Management Committee was constituted on January 18, 2003. The functions of the Risk Management Committee include the following: To devise the policy and strategy for integrated risk management containing various risk exposures of the Bank including the Credit Risk. To co-ordinate between the Credit Risk Management Committee (CRMC), the Asset Liability Management Committee (ALMC) and Operational Risk Management Committee (ORMC) and other risk committees of the Bank. The responsibility of the Committee includes: Setting policies and guidelines for market risk measurement, management and reporting Ensuring that market risk management processes (including people, systems, operations, limits and controls) satisfy Banks policy Reviewing and approving market risk limits, including triggers or stop-losses for traded and accrual portfolios Appointment of qualifi ed and competent staff; ensuring posting of qualifi ed and competent staff and of independent market risk manager/s etc.

CREDIT RISK MANAGEMENT The Bank has put in place the Credit Risk Management Policy and the same has been circulated to all the branches. The main objective of the policy is to ensure that the operations are in line with the expectation of the management and the strategies of the top management are translated into meaningful directions to the operational level. The Policy stipulates prudential limits on large credit exposures, standards for loan collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring and evaluation, provisioning and regulatory / legal compliance. The Bank identifies the risks to which it is exposed and applies suitable techniques to measure, monitor and control these risks. While the Board / Risk Management Committee of the Board devises the policy and fixes various credit risk exposures, Credit Risk Management Committee implements these policies and strategies approved by the Board / RMC, monitors credit risks on a bank wide basis and ensures compliance of risk limits. The Bank studies the concentration risk by (a) fixing exposure limits for single and group borrowers (b) rating grade limits (c) industry wise exposure limits The Bank considers rating of a borrowal account as an important tool to manage the credit risk associated with any borrower and accordingly a two dimensional credit rating system was introduced in the Bank. Software driven rating / scoring models for different segments have been customized to suit the Banks requirements. Credit Rating 1. Obligor Rating Financial Parameters Managerial Parameters Industrial Parameters

 Operational Parameters 2. Facility Rating (Collateral Securities) AAA AA A BBB BB B C D E Lowest Risk Lower risk Low Risk Moderate risk Entry Level High risk Higher risk Highest risk Absolute risk Caution risk

MITIGATION OF CREDIT RISK Mitigation of credit risks and enhancing awareness on identification of appropriate collateral taking into account the spirit of Basel II / RBI guidelines and Optimizing the benefi t of credit risk mitigation in computation of capital charge as per approaches laid down in Basel II / RBI guidelines. The Bank generally relies on Risk Mitigation techniques like Loan participation, Ceiling on Exposures, Escrow mechanism, Forward cover, higher margins, loan covenants, Collateral and insurance cover. Valuation methodologies are detailed in the Credit Risk Management Policy. Bank accepts guarantees from individuals with considerable net worth and the Corporate. Only guarantees issued by entities with a lower risk weight than the counterparty shall be accepted to get the protection for the counterparty exposure. All types of securities eligible for mitigation are easily realizable financial securities. As such, presently no limit / ceiling has been prescribed to address the concentration risk in credit risk mitigates recognized by the Bank

Credit Rating Frame Work (CRF) Credit Rating Framework (CRF) is one of the risk measurement technique the banks use to a great extent under risk management system. This is used primarily to standardise and uniformly communicate the judgement in credit selection procedure and not as a substitute to the vast lending experience accumulated by the Banks professional staff. In line with the guidelines of RBI, the Bank has proposed to bring in all the borrowal accounts (Standard accounts) with limits of Rs.2 lakh and above under the purview of credit risk rating. However, the rating model that will be applied varies according to the type / extent of exposure to suit the borrowers activities. The Bank is utilising their own internal Credit Rating Model for grading the borrowal accounts so far. The grades used in the internal credit risk grading system should represent without any ambiguity, the default risks associated with an exposure. This system shall also enable the Bank to undertake comparison of risk for the purpose of analysis and decision taking. Number of grades used in CRF depends on the anticipated spread in credit quality of the exposure of the Bank. The more the number of grades on the rating scale, the more the requirement of information. Hence, RBI suggest that the Bank can initiate the risk grading activity on a relatively smaller scale initially and introduce new categories as the risk gradation improves. As suggested by RBI the 9 level in the grading scale and the cut off level for Acceptable and unacceptable credit risk are: The calibration on the rating scale will allow prescription of limits on the maximum quantum of exposure permissible for any credit proposal. The quantum would depend on the credit score on the CRF. The Bank normally does not take any fresh exposure in the unacceptable level of scale of risk. Any takeover of fresh borrowers to comply with the following norms: 1) Minimum Current Ratio of 1.33 consistently for the last 3 years. 2) Minimum Current Ratio of 1.17 and 3) Current Ratio of at least 1.00 is stipulated for exceptional cases. As regards exit, the Banks Loan Policy permits for exit even when the account remains under Standard category if any warning signals are seen. The other mode available, if complete exit is felt impossible, by containing the exposure at the same level, risk participation and opt for recovery wherever warranted.

The assignors of risk ratings utilize bench mark or pre specified standards for assessing the risk profile of the borrower, especially, the financial ratios, are directly compared with the specified bench marks. Further assignment of weightage is related to the level of the risk parameters which weigh more for altering the risk profile of the borrower. Mitigation Techniques: The Bank is required to have a system for monitoring the over all composition and quality of the various portfolios since credit related problems in banks is concentration within the credit portfolio. It can take many forms and can arise whenever a significant number of credits have similar risk characteristics. Also the Bank will not necessarily forego booking sound credits solely on the basis of concentration. Bank may use alternatives to reduce or mitigate concentration. Such measures will include a. pricing for additional risk, b. increased holdings of capital to compensate for the additional risk, c. making use of loan participation in order to reduce dependency on a particular sector of economy or group of related borrowers d. Fixing exposure limits for borrowers and for various industrial sectors e. Collateral security in addition to main securities stipulating asset coverage ratio on case to case basis f. Personal Guarantees / Corporate Guarantees having reasonable networth g. Escrow mechanism for meeting the financial commitments on time Other additional mechanisms such as loan sales, credit derivatives, securitization programs and other secondary markets also have been suggested by RBI.