Risk Management in Banks

Topics: Risk management, Credit risk, Operational risk Pages: 8 (1647 words) Published: March 4, 2011

A Project Report on
“Credit Risk Management in Kotak Mahindra”



Jaya Sree


1. Introduction.
2. Objectives.
3. Limitations.
4. Methodology.
5. Reference

Introduction of the Topic:

The word ‘credit’ comes from the Latin word ‘credere’, meaning ‘trust’. When sellers transfer his wealth to a buyer who has agreed to pay later, there is a clear implication of trust that the payment will be made at the agreed date. The credit period and the amount of credit depend upon the degree of trust.

Credit is an essential marketing tool. It bears a cost, the cost of the seller having to borrow until the customers payment arrives. Ideally, that cost is the price but, as most customers pay later than agreed, the extra unplanned cost erodes the planned net profit.

Risk is defined as uncertain resulting in adverse outcome, adverse in relation to planned objective or expectation. It is very difficult o find a risk free investment. An important input to risk management is risk assessment. Many public bodies such as advisory committees concerned with risk management. There are mainly three types of risk they are follows • Market risk

• Credit Risk
• Operational risk

Risk analysis and allocation is central to the design of any project finance, risk management is of paramount concern. Thus quantifying risk along with profit projections is usually the first step in gauging the feasibility of the project. once risk have been identified they can be allocated to participants and appropriate mechanisms put in place. [pic]

Market risk is the risk of adverse deviation of the mark to market value of the trading portfolio, due to market movement, during the period required to liquidate the transactions.

Operational risk is one area of risk that is faced by all organization s. More complex the organization more exposed it would be operational risk. This risk arises due to deviation from normal and planned functioning of the system procedures, technology and human failure of omission and commission. Result of deviation from normal functioning is reflected in the revenue of the organization, either by the way of additional expenses or by way of loss of opportunity.

Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms, or in other words it is defined as the risk that a firm’s customer and the parties to which it has lent money will fail to make promised payments is known as credit risk

The exposure to the credit risks large in case of financial institutions, such commercial banks when firms borrow money they in turn expose lenders to credit risk, the risk that the firm will default on its promised payments. As a consequence, borrowing exposes the firm owners to the risk that firm will be unable to pay its debt and thus be forced to bankruptcy. CONTRIBUTORS OF CREDIT RISK:

• Corporate assets
• Retail assets
• Non-SLR portfolio
• May result from trading and banking book
• Inter bank transactions
• Derivatives
• Settlement, etc

• Establishing appropriate credit risk environment
• Operating under sound credit granting process
• Maintaining an appropriate credit administration, measurement & Monitoring • Ensuring adequate control over credit risk
• Banks should have a credit risk strategy which in our case is communicated throughout the organization through credit policy.

Two fundamental approaches to credit risk management:-

- The internally oriented approach centers on estimating both the expected cost and volatility of future credit losses based on the firm’s best assessment. - Future credit losses on a given...
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