Risk in banking sector.
The structure of the paper is three-fold, where we begin by what is risk in banking scenario and its effects on internal operations of a bank, followed by the various types of risk in Indian banks and what can be done or the measurements taken and finally the future look.
The Indian Financial System is tasting success of a decade of financial sector reforms. The economy is surging and has gathered the critical mass to convert it into a force to reckon with. The regulatory framework in India has sparked growth and key structural reforms have improved the asset quality and profitability of banks. Growing integration of economies and the markets around the world is making global banking a reality. The RBI requires all banks to comply with the standardized approach of the BASEL II accord by 31st March, 2007. This paper attempts to project the implications of this transition and its effects on the internal operations of a bank followed by its effects on the banking industry and the economy.
What is Risk?
For the purpose of these guidelines financial risk in a banking organization is possibility that the outcome of an action or event could bring up adverse impacts. Such outcomes could either result in a direct loss of earnings / capital or may result in imposition of constraints on bank’s ability to meet its business objectives
Regardless of the sophistication of the measures, banks often distinguish between expected and unexpected losses. Expected losses are those that the bank knows with reasonable certainty will occur (e.g., the expected default rate of corporate loan portfolio or credit card portfolio) and are typically reserved for in some manner. Unexpected losses are those associated with unforeseen events (e.g.Losses due to a sudden down turn in economy or falling interest rates).
Types of risk in banks:
In the course of their operations,...