Risk management is one of the Responsible work done by banks. It becomes more important as the banking system in India plays a vital role in economic management. There are several factors given by the government considering risk management in banking. This RBI plays a vital role and issues the guidelines for Risk assessment and management. Risk is an incident related to finance, interest, a market which results in loss or affects earnings. There is another term called risk pre-position it means the uncertainty of the trade-in market.
What is Risk Management?
The early-stage assessment is related to the schemes, loans, interest rates, and expected earnings. It may result in a profit or loss hence remains uncertain.
What are the different types of Risks?
1. Liquidity Risk:-
Liquidity Risk occurred due to long term funding of the short term asset. It is risky if the refunding or refinancing is required. They are three categories.
a. Funding risk:-
It is an inability to obtain the funds to regulate cash flow. It is one of the crucial risks of banks. It can occur due to the unexpected withdrawal or non-renewal of deposits.
b. Time Risk:-
it is due to the unexpected change of performing assets into the nonperforming asset.
c. call Risks:-
It happens due to the banks are not able to grab the profitable projects.
2. Interest rate risk:-
It is due to the net margin that got affected by the change in interest. It occurs in two ways by affecting the bank income and affecting the economic position.
3. Market Risk:-
The most common causing risk is market risk. In these, the consistent change in the market value causes devaluation.
a. Forex Risk:-
It is due to the change in currency value
b. Market Liquidity Risk:-
The bank is unable to perform large transactions due to the current market price.
4. Credit Risk:-
The customer is unable to repay the amount of the value of the assets to the bank. It is a common risk found in many banks. The common causes are the change in foreign prices, Economy fluctuation, and the change in exchange rates.
5. Operational Risk:-
Operational risk is the loss due to the failure of internal assets, people, and due to external activity.
The source of the operational risk is increasing automation, interlinking of financial transactions.
There are two types of operational risk:-
1. Transaction Risk:-
It is a risk due to the failed internal business process, frauds, and stopped business.
2. Compliance Risk:-
It is the risk of damage to the banks’ internal policies, bank laws, and standard operating procedures.
1. Strategic Risk:-
It is the risk caused by ambiguity market research or understanding. It is due to strategic illiteracy.
2. Reputation Risk:-
It is due to the vision of the public on the bank.
3. Systematic Risk:-
It is a risk on the entire market segment and depends on the sector.
4. Unsystematic Risk:-
It is the risk related to the investment in the specific industry.
What are the different parameters to analyze Risk management?
As per the RBI directives, there are the following types of risk management.
1. Capital adequacy:-
Capital adequacy is the minimum amount available by the bank as balance. It is vital to consider the shareholders of the bank. It also represents the minimum amount that the bank has against the credit investment in the market. It is to ensure the depositors and flexibility of the cash flow.
2. Asset quality:-
Asset quality is the quality assurance by the loans distributed and the capital earnings of the bank. It also shows the stability of the bank when encountered with a few financial risks. Asset quality is also to examine based on the asset’s current value to the bank sanctioned valuation. Its final calculation through investment policies and procedures.
Management quality assessment happens through the response of the bank to financial stress. Factors employees respond to daily activity, regulating internal and external assets.
4. Earning Quality:-
Earning quality examines the bank’s current capacity to tackle the financial returns on investment, growth, valuations, stability, margins, and quality of the existing assets.
Liquidity assessment happens through the interest rate based on the cash. It also depends on how the asset transfer into the cash flow and short-term financial resources.
6. Sensitivity to market risk:-
Sensitivity is measured by how much risks can affect the bank. Its calculation of the credit flow. The loan allocations for the agricultural, credit card, energy, medical fields. Investment in foreign exchange, commodities, equity, derivatives included.
Risk management in banks governed by the RBI with the international ” CAMEL ” rules. Many of the banks are planning their future schemes based on risk management. It plays a vital role in deciding the policies of the bank.