Risk Management

D V Deshpande
Professor, VAMNICOM
dvdesh@gmail.com

1
 What is risk?
Risk in banking can be defined as an unplanned event
with financial consequences resulting in loss or reduced
earnings.
Risk is the possibility of something adverse happening.
Risk comes from uncertainty or unpredictability of the
future.
Risk can be defined as the volatility of the potential
outcome.

2
 What is risk management

Risk management refers to the

practice of identifying potential
risks in advance, analyzing them
and taking precautionary steps to
eliminate or reduce (mitigate) the
risks
3
 Risk management contd..
How risk is managed?
• Applying a range of management techniques- like:
• taking out insurance
• Using derivatives
• Hedging currency risk
• Re-plan the whole project.

After the risks have been identified, risk management

attempts to lessen their effects.

4
 Components of risk management
system
• Risk Identification: naming and defining each type
of risk associated with a transaction or type of
product or service;
• Risk Measurement: estimation of the size &
probability of potential loss under various scenarios
• Risk Control: framing of policies and guidelines that
define the risk limits at the individual level & also for
a particular transaction

5
 Types of risks

• Credit or Default Risk

• Operational Risk
• Market Risk
• Liquidity Risk
• Interest Rate Risk

6
 Credit Risk
• Risk of non recovery of loan or the risk of reduction
in the value of asset.
• It includes the pre-payment risk resulting in loss of
opportunity to the bank to earn higher interest
income
• Can arise due to excess exposure to a single
borrower, industry or geographical area
• Element of country risk: the risk of losses being
incurred due to adverse foreign exchange reserve
situation or adverse political or economic situations
in another country

7
 Interest Rate Risk
• It arises due to fluctuations in the interest rates
• It can result in reduction in the revenues of the bank
due to fluctuations in the interest rates which are
dynamic and which change differently for assets and
liabilities
• With the deregulated era interest rates are market
determined and banks have to fall in line with the
market trends even though it may stifle their Net
Interest margins

8
 Liquidity Risk
• Liquidity is the ability to meet commitments as and
when they are due and ability to undertake new
transactions when they are profitable
• Liquidity risk may arise in following situations:
• Net outflow of funds arising out of
withdrawals/non renewal of deposits
• Non recoveryof cash receipts from recoveryof
loans
• Conversion of contingent liabilities into fund based
commitment
• Increased availment of sanctioned limits

9
 Regulatory/ compliance Risk

• Risk of change in policy of the

Govt/ RBI/ Supreme court or
other bodies
• Plan ‘B’ is required
• Compliance Risk

10
 Organisational mechanisms to
manage risks in banks
• Board of Directors
• Risk committee
• Risk Management Department
• Chief Risk Officer
• Risk Management Policy of the
bank
11
 Risk is inherent to banking and
has to be managed in a dynamic
fashion

12
THANK YOU!

13