RISK MANAGEMENT IN BANKING SECTOR

1.1 INTRODUCTION

Risk: the meaning of ‘Risk’ as per Webster’s comprehensive dictionary is “a chance of

encountering harm or loss, hazard, danger” or “to expose to a chance of injury or loss”. Thus,

something that has potential to cause harm or loss to one or more planned objectives is called

Risk.

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 –

 Assess what could go wrong

 Determine which risks are important to deal with

 Implement strategies to deal with those risks

1.2 IMPORTANCE

Risk management underscores the fact that the survival of an organization depends

heavily on its capabilities to anticipate and prepare for the change rather than just waiting for

the change and react to it. The objective of risk management is not to prohibit or prevent risk

taking activity, but to ensure that the risks are consciously taken with full knowledge, purpose
and clear understanding so that it can be measured and mitigated. It also prevents an institution

from suffering unacceptable loss causing an institution to suffer or materially damage its

competitive position. Functions of risk management should actually be bank specific dictated

by the size and quality of balance sheet, complexity of functions, technical/ professional

manpower and the status of MIS in place in that bank.

1.3 SIGNIFICANCE OF STUDY

Risk Management is the application of proactive strategy to plan, lead, organize, and

control the wide variety of risks that are rushed into the fabric of an organization’s daily and

long-term functioning. Like it or not, risk has a say in the achievement of our goals and in the

overall success of an organization. Present project is to make an attempt to identify the risks

faced by the banking industry and the process of risk management. This project also examined

the different techniques adopted by banking industry for risk management. To achieve the

objectives of the study data has been collected from secondary sources i.e., from Books,

journals and online publications, identified various risks faced by the banks, developed the

process of risk management and analyzed different risk management techniques. Finally, it can

be concluded that the banks should take risk more consciously, anticipates adverse changes

and hedges accordingly, it becomes a source of competitive advantage, and efficient

management of the banking industry.

2. RATIONALE

Risk Analysis and Risk Management has got much importance in the Indian Economy

during this liberalization period. The foremost among the challenges faced by the banking
sector 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, it is 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.

3. OBJECTIVES

The following are the objectives of the study:

 To identify the risks faced by the banking industry.

 To trace out the process and system of risk management.

 To examine the techniques adopted by banking industry for risk management.

 Covering different aspects of risk assessment

 Identifying keys for effective risk management

4. HYPOTHESIS

 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.

 Future complexity is expected because banks diversify their operations. It is expected

that banks will diversify their operations to generate additional income sources,

particularly fee-based income i.e. non-interest income, to improve returns.

 The banks that would prefer to adopt the Standard Approach should try to adopt

Advanced Approach.

5. RESEARCH METHODOLOGY

The present research is exploratory in nature as it aims at diagnosing the current situation of

financial risks and its impact on Indian banking and financial sector. And finally discovering

new ideas for managing risk in banks.

A survey research is normally based on sample survey. The present work uses sample survey

method.

Data collection

Primary information: Personal interview/ Questionnaire

Secondary information: Through internet, Manuals, Journals, Audit/Annual reports, Bank

websites.

5.1 PRIMARY DATA:

 Primary data is the real findings which here collected by personal interview/

questionnaires. For the given project, the primary data collected has more importance. This

type of information is collected through personal interviews and questionnaires which is more

popular and effective technique for correct data collection.

5.2 SECONDARY DATA:

Secondary data is data which is collected from already assembled data and there is no

need to collect it from outside. This data is collected from internet, manuals, journals,

audit/annual reports and bank websites.

6. EXPECTED CONTRIBUTION

Several studies have been carryout on the role of risk management on financial

performance. In his study, the “role of risk management on financial performance in banking

institutions” with the objectives of assessing the determinants of risk management and

analyzing the indicators of financial performance of banking sector. It is found that risk

management has a significant effect on organizational effectiveness among the construction of

bank institutions. The study found that good management of risk management enhances

performance of banking institutions. The study also found that risk management leads to good

financial reports and also leading to better decision- making of the investors.

The study entitled 'The contribution of risk management to the growth of financial

report in Microfinance’ was carried out. The main objective of the study was to analyze credit

risk management practices employed by banking, cause of operation of borrowers and propose

the corrective measures in order to reduce the level of credit risk, exposed that because of the

many clients that are borrowers with computerized accounting system more importantly its
ability to produce and present relevant and faithful representative financial reports to end users.

The government of Rwanda is assisting microfinance to transfer into a common computerized

accounting system. This is going to serve as a platform in which all the rural microfinance in

the country are going to be networked to each other to facilitate faster and efficient banking. It

is concluded that risk management is necessary to identifying, analyzing, assessing, treating,

monitoring and communicating of organization.

7. CONCLUSION

Risk is an opportunity as well as a threat and has different meanings for different users.

The performance of a bank from the viewpoint of profitability is not very meaningful unless

the same is accounted for along with the risk. After economic liberalization, the banks were

free to introduce new products and free to charge price their products with varying risk

associated with the instrument. Thus, the banking industry is exposed to different risks which

can adversely affect its profitability and financial health. Therefore, risk analysis and its

management have emerged as a new and challenging area in banking business. Reform process

and the guidance of Basel Committee have directed the Indian banking industry in the right

path so far risk management is concerned. They have adopted best structures, processes and

technologies available worldwide and have moved from strength to strength.

8. CHAPTERISATION

1. INTRODUCTION

1.1. Introduction

1.2. Importance
 1.3. Significance of the study

2. RATIONALE

3. OBJECTIVES

4. HYPOTHESIS

5. RESEARCH METHODOLOGY

5.1. PRIMARY DATA

5.2. SECONDARY DATA

6. EXPECTED CONTRIBUTION

7. CONCLUSION

BIBLIOGRAPHY

WEB SITES
 www.rbi.org
 www.google.com
 www.sbi.co.in

BOOKS

 Hand Book on Risk management & Basel II norms

ARTICLES

 Risk Management in Banks. -- R S Raghavan Chartered Accountant.

 Basel Norms challenges in India –Swapan Bakshi