Risk Management in the Banking Sector For RBI Grade B 2019
RBI Grade B Study Material PDF’s, Notes, Books. Risk Management in the Banking Sector For RBI Grade B 2019. Risk Management in the Banking. Financial Management (FM) for RBI Grade B 2018. Welcome to the LST online Financial Management section. If you are preparing for RBI Grade B Officer 2019 exam, you will come across a section on Financial Management Section. Here we are providing you with “What is Risk Management in Indian Banking Sector”.
This “Risk Management in the Banking Sector For RBI Grade B 2019” is also important for other banking exams such as NABARD Grade A & B, IBPS PO, IBPS Clerk, SBI Clerk, IBPS RRB Officer, IBPS RRB Office Assistant, IBPS SO, SBI SO and other competitive exams.
Risk Management in the Banking Sector
What is Risk!!!!!!! Whenever we hear this word we start panicking & thinking what type of risk it could be i.e. either it is physical risk or financial risk. As per the survey it’s been found a person or an individual has always feared of loosing something of value which majorly consists of finance. And if we see today not only an individual but also organizations fears about loosing their money. As we all know without taking risk no one can grow or earn more but due to modernization and liberalization and growing competition, the rate of risk and uncertainty has also increased. And this has not only created trouble for an individual but also to the banking sectors and financial institutions.
In order to sustain and grow in the market, banks have to mitigate or curb these risks. Thus, risk management concept has come into the picture which will provide guidelines or will act as a roadmap for a banking organization to reduce the risk factor.
Below article will focus on quotients like what is risk management? What type of risks banks face and how they manage through risk management process?
The Banking sector has a pivotal role in the development of an economy. It is the key driver of economic growth of the country and has a dynamic role to play in converting the idle capital resources for their optimum utilisation so as to attain maximum productivity. In fact, the foundation of a sound economy depends on how sound the Banking sector is and vice versa
What is Risk?
A risk can be defined as an unplanned event with financial consequences resulting in loss or reduced earnings. An activity which may give profits or result in loss may be called a risky proposition due to uncertainty or unpredictability of the activity of trade in future. In other words, it can be defined as the uncertainty of the outcome.
In the simplest words, risk may be defined as possibility of loss. It may be financial loss or loss to the reputation/ image
What is Risk Management?
As we all are aware what is risk? But how one can tackle with risk when they face it?? So, the concept of Risk Management has been derived in order to manage the risk or uncertain event. Risk Management refers to the exercise or practice of forecasting the potential risks thus analyzing and evaluating those risks and taking some corrective measures to reduce or minimize those risks.
Today risk management is practiced by many organizations or entities in order to curb the risk which they can face it in near future. Whenever an organization makes any decision related to investments they try to find out the number of financial risk attached with it. Financial risks can be in the form of high inflation, recession, volatility in capital markets, bankruptcy etc. The quantum of such risks depends on the type of financial instruments in which an organization or an individual invests.
So, in order to reduce or curb such exposure of risks to investments, fund managers and investors practice or exercise risk management. For example an individual may consider investing in fixed deposit less risky as compared to investing in share market. As investment in equity market is riskier than fixed deposit, thus through the practice of risk management equit analyst or investor will diversify its portfolio in order to minimize the risk.
Types of Risks
Risk may be defined as ‘possibility of loss’, which may be financial loss or loss to the image or reputation. Banks like any other commercial organisation also intend to take risk, which is inherent in any business. Higher the risk taken, higher the gain would be. But higher risks may also result into higher losses.However, banks are prudent enough to identify, measure and price risk, and maintain appropriate capital to take care of any eventuality. The major risks in banking business or ‘banking risks’, as commonly referred, are listed below –
• Liquidity Risk
• Interest Rate Risk
• Market Risk
• Credit or Default Risk
• Operational Risk
The liquidity risk of banks arises from funding of long-term assets by short-term liabilities, thereby making the liabilities subject to rollover or refinancing risk. It can be also defined as the possibility that an institution may be unable to meet its maturing commitments or may do so only by borrowing funds at prohibitive costs or by disposing assets at rock bottom prices.
Interest Rate Risk
Interest Rate Risk arises when the Net Interest Margin or the Market Value of Equity (MVE) of an institution is affected due to changes in the interest rates. In other words, the risk of an adverse impact on Net Interest Income (NII) due to variations of interest rate may be called Interest Rate Risk. It is the exposure of a Bank’s financial condition to adverse movements in interest rates.
IRR can be viewed in two ways – its impact is on the earnings of the bank or its impact on the economic value of the bank’s assets, liabilities and Off-Balance Sheet (OBS) positions.
The risk of adverse deviations of the mark-to-market value of the trading portfolio, due to market movements, during the period required to liquidate the transactions is termed as Market Risk.This risk results from adverse movements in the level or volatility of the market prices of interest rate instruments, equities, commodities, and currencies.
Default or Credit Risk
Credit risk is more simply defined as the potential of a bank borrower or counterparty to fail to meet its obligations in accordance with the agreed terms. In other words, credit risk can be defined as the risk that the interest or principal or both will not be paid as promised and is estimated by observing the proportion of assets that are below standard. Credit risk
is borne by all lenders and will lead to serious problems, if excessive. For most banks, loans are the largest and most obvious source of credit risk.It is the most significant risk, more so in the Indian scenario where the NPA level of the banking system is significantly high. The Asian Financial crisis, which emerged due to rise in NPAs to over 30% of the total assets of the financial system of Indonesia, Malaysia, South Korea and Thailand, highlights the importance of management of credit risk.
Basel Committee for Banking Supervision has defined operational risk as ‘the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events’. Thus, operational loss has mainly three exposure classes namely people, processes and systems.
Managing operational risk has become important for banks due to the following reasons –
1. Higher level of automation in rendering banking and financial services
2. Increase in global financial inter-linkages
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