Today, The Indian Economy is in the process of becoming a world class economy. The Indian banking industry is making great advancement in terms of quality, quantity, expansion and diversification and is keeping up with the updated technology, ability, stability and thrust of a financial system, where the commercial banks play a very important role, emphasize the very special need of a strong and effective control system with extra concern for the risk involved in the business. Globalization, Liberalization and Privatization have opened up a new methods of Financial transaction where risk level is very high. In banks and financial institutions risk is considered to be the most important factor of earnings. Therefore they have to balance the Relationship between risk and return.
In reality we can say that management of financial institution is nothing but a management of risk managing financial risk systematically and professionally becomes an even more important task. Rising global competition, increasing deregulation, introduction of innovative products and delivery channels have pushed risk management to the forefront of today's financial landscape. Ability to gauge the risks and take appropriate position will be the key to success. It can be said that risk takers will survive, effective risk managers will proper and risk averse are likely to perish. The risk arises due to uncertainties, which in turn arise due to changes taking place in prevailing economic, social and political environment and lack of non-availability of information concerning such changes. Risk is an exposure to a transaction with loss, which occurs with some probability and which can be expected, measured and minimized. In financial institutions risk result from variations and fluctuations in assets or liability or both in incomes from assets or payments and on liabilities or in outflows and inflows of cash. Today, banks are facing various types of risks that financial Intermediaries are exposed to, in the course of their business, which can be presented through following chart: Credit Risk: Credit risk is defined as the possibility of losses associated with decrease in the credit quality of the borrower or the counter parties. In the bank's portfolio, losses stem from outside default due to inability or unwillingness of the customer or the counter party to meet the commitments, losses may also result from reduction in the portfolio value arising from actual or perceived deterioration in credit quality Market Risk: Market risk is the risk of incurring losses on account of movements in market prices on all positions held by the banks. Liquidity risk of banks arises from funding of long term assets (advances) by short term sources (deposits) changes in interest rate can significantly affect the Net Interest Income (NII). The risk of an adverse impact on NII due to variations of interest rate may be called interest rate risk. Forex risk is the risk of loss that bank may suffer on account of adverse exchange rate movements against uncovered position in foreign currency. Non-Financial Risk: Non-financial risk refers to those risks that may affect a bank's business growth, marketability of its product and services, likely failure of its strategies aimed at business growth etc. These risks may arise on account of management failures, competition, non-availability of suitable products/services, external factors etc. In these risk operational and strategic risk have a great need of consideration. Operational Risk: It may be defined as the risk of loss resulting from inadequate or failed internal process people and systems or because of external events. Risk Management in Bank: Basel Committee Approach: In order to help the banks to recognize the different kinds of risks and to take adequate steps to overcome the under capitalization of banks assets and lessen the credit and operational risks faced by banks. Banks of...
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