If we closely observe the recent finance arena we shall observe that the word “risk” is associated with our day to day life. Now a day, risk has become so important that, more emphasis is given to study risk and mainly how to manage risk. Actuarial science, financial risk management etc are the course related to risk management. Even risk management is given thus importance, that financial institutions are recruiting more and more employee to successfully manage risk. The other word which can replace risk is uncertainty.
Risk can be of different types. And we can categorize risk according to different criteria. Systematic risk is one of the category where as the other category is unsystematic risk.
Individuals own assets, and whenever we are looking at a single institution we can see either owner, partners or else shareholders. But these are not the only assets that, the individual owns. More over each and every asset has certain risk. Risk free asset is obsolete in the universe. So if a person carry a portfolio of asset and thus divide risk among each other the total risk can be managed at certain extent. But this not only the concept of risk management. Risk management has experienced a lot of improvement in the recent year and technology has done miracle in doing successful risk management.
Many of the English words have derived from Latin words. It has been seen that rescum is the original word from where risk is derived. The former refers to the probabilities of danger or any other odd happening in sea. So we can for sure state that, the concept of risk is not a new one (Pyle, 1997).
If we go back to the last century than we shall see that, the sovereign states became active to ensure properly manage financial institutions and the main objective was to manage risk successfully. Thus supervisory bodies were created, which started regulating financial institutions successfully. The bodies started formulating guidelines to manage the FIs so that risk can be managed actively. Risk management doesn’t only mean that actions regarding managing risk. But the banking systems along with the financial institution started finding out risk management includes pointing out the risk, categorizing them on the basis of importance and preparing process or flow chart to reduce it as much as possible. More over the over all process should satisfy the stakeholders of the organization as well as comply with the states law and regulation.
Types of Risk:
Risk which is often referred as uncertainty can be of different types. There is always uncertainty of credit, market again is quite unpredictable. Some time it is seen that, market shifts upward again downward. There is no rigid pattern. So from the statistic point of view, probability of occurrence i.e. the probability of market upward shift and downward shift is variable. Again, many companies face uncertainties due to there operation and management process which also refers to risk. Among the major categories of risks the followings are more emphasize in the finance arena:
1. Credit Risk
2. Market Risk
3. Liquidity Risk
4. Interest Rate Risk
5. Forex Risk
6. Country Risk
7. Operational Risk etc
We are going to discuss each of the categories in brief, and thus will follow towards the risk management practice in brief.
1. Credit Risk:
It is a normal phenomenon that most of us can’t differentiate between credit risk and default risk. The former one refers to credit risk is that one i.e. borrower can’t meet the obligation that a lender provides. So, whenever the borrower starts failing to meet the obligation then the credit quality of the borrower deteriorates. Credit risk has become day to day word in the lending business thus. As a result Credit risk management became very important.
Credit Risk Management:
The Finance specialists have been working since the last century to find out a way to...