Risk Managment in Commercial Banks

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“RISK MANAGEMENT IN COMMERCIAL BANKS”
(A CASE STUDY OF PUBLIC AND PRIVATE SECTOR BANKS) - ABSTRACT ONLY Prof. Rekha Arunkumar Faculty (Finance), MBA Programme

ABSTRACT: “Banks are in the business of managing risk, not avoiding it……… ……… ……..” Risk is the fundamental element that drives financial behaviour. Without risk, the financial system would be vastly simplified. However, risk is omnipresent in the real world. Financial Institutions, therefore, should manage the risk efficiently to survive in this highly uncertain world. The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution. Credit risk is the oldest and biggest risk that bank, by virtue of its very nature of business, inherits. This has however, acquired a greater significance in the recent past for various reasons. Foremost among them is the wind of economic liberalization that is blowing across the globe. India is no exception to this swing towards market driven economy. Better credit portfolio diversification enhances the prospects of the reduced concentration credit risk as empirically evidenced by direct relationship between concentration credit risk profile and NPAs of public sector banks. “……… bank’s success lies in its ability to assume and ……… ……A aggregate risk within tolerable and manageable limits”.

First Author; Prof. Rekha Arunkumar Ph.D., from University of Mysore (awaiting result by September ’ 05), PGDCA, M.Com., B.B.M., Faculty in Finance (10 years of experience), MBA Programme, Bapuji Institute of Engineering & Technology (affiliated to Visveswaraya Technical University) Davangere – 4. Karnataka

Second Author; Dr. G. Kotreshwar Ph.D., M.Com., ICWAI., Professor of Commerce (25 years of experience) University of Mysore, Manasagangotri Mysore – 6.

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RISK MANAGEMENT IN COMMERCIAL BANKS
(A CASE STUDY OF PUBLIC AND PRIVATE SECTOR BANKS)

“Banks are in the business of managing risk, not avoiding it…… … …… ..” ….… 1. PREAMBLE: 1.1 Risk Management: The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution. Credit risk is the oldest and biggest risk that bank, by virtue of its very nature of business, inherits. This has however, acquired a greater significance in the recent past for various reasons. Foremost among them is the wind of economic liberalization that is blowing across the globe. India is no exception to this swing towards market driven economy. Competition from within and outside the country has intensified. This has resulted in multiplicity of risks both in number and volume resulting in volatile markets. A precursor to successful management of credit risk is a clear understanding about risks involved in lending, quantifications of risks within each item of the portfolio and reaching a conclusion as to the likely composite credit risk profile of a bank. The corner stone of credit risk management is the establishment of a framework that defines corporate priorities, loan approval process, credit risk rating system, risk-adjusted pricing system, loan-review mechanism and comprehensive reporting system. 1.2 Significance of the study: The fundamental business of lending has brought trouble to individual banks and entire banking system. It is, therefore, imperative that the banks are adequate systems for credit assessment of individual projects and evaluating risk associated therewith as well as the industry as a whole. Generally, Banks in India evaluate a proposal through...
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