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Risk Management in Indian Banking sector

Bankersadda Banking Awareness Of Risk Management in Indian Banking sector.Risk Management in banking sector is related to various credit risks which the banks may likely to face. There are many risks related to liquidity, market, market risk, credit risk, interest risks etc. Here we are going to explain these risks in detail which will be helpful for the candidates who are going to prepare for the examination. These are very important from the point of view of upcoming examination of banks. Currently the LIC AAO and other banking examination is in the row and candidates should perform well in these examination. Banking awareness is one of the important part of general awareness and it is merged with the GA. This points are very useful for IBPS PO and clerk exam 2016 notification .Questions are always asked form this section ad number of questions are not fixed. they can ask upto 20 questions from this section ad it is good idea to have some knowledge about the current affairs, banking awareness, Indian market, regulators, RBI etc from where the questions are always asked. Candidates are required to know the details which are give below on Indian market and banking systems. These risks exists everywhere and candidates need to study these risks I details.

Type of risks in banking sector

Here the risks are classified under various categories. These are as under:

  • Liquidity Risk
  • Interest Rate Risk
  • Market Risk
  • Credit or Default Risk
  • Operational Risk

Liquidity Risk:

It can be of various types. The lack of liquidity in market due to wrong government policy, economic crisis or the policy ad rates implemented by the reserve bank of India to absorb excess liquidity from the market etc. he liquidity risk of banks arises from funding of long-term assets by short-term liabilities, thereby making the liabilities subject to rollover or refinancing risk.

Liquidity risk can be further classified as the following categories:

(a) Funding Risk: Funding Liquidity Risk is defined as the inability to obtain funds to meet cash flow obligations. For banks, funding liquidity risk is crucial. This arises from the need to replace net outflows due to unanticipated withdrawal/ non-renewal of deposits (wholesale and retail).

(b) Time Risk: Time risk arises from the need to compensate for non-receipt of expected inflows of funds i.e., performing assets turning into non-performing assets.

(c) Call Risk: Call risk arises due to crystallisation of contingent liabilities. It may also arise when a bank may not be able to undertake profitable business opportunities when it arises.

Interest rate risk:

These type of risks arises out of Net Interest Margin or the Market Value of Equity (MVE).  its impact is on the earnings of the bank or its impact on the economic value of the bank’s assets, liabilities and Off-Balance Sheet (OBS) positions. Interest rate Risk can take different forms.

Market Risks:

These type of risks are very common. As the market is fluctuating and it depend on the economical condition of the country. there are always market risks in the banking systems. If the markets are going down, the share price of the banks will also go down ad consequently the banks will likely to charge more interest rates from this exists customers and also they are likely to increase the service cost on its customers.  The term Market risk applies to (i) that part of IRR which affects the price of interest rate instruments, (ii) Pricing risk for all other assets/ portfolio that are held in the trading book of the bank and (iii) Foreign Currency Risk.

Market risk is further classified into 2 categories:

  1. Forex Risk: Forex risk is the risk that a bank may suffer losses as a result of adverse exchange rate movements during a period in which it has an open position either spot or forward, or a combination of the two, in an individual foreign currency.
  2. Market Liquidity Risk: Market liquidity risk arises when a bank is unable to conclude a large transaction in a particular instrument near the current market price.

Credit risk:

It is one of the most common type of risks. Credit risk occurs when the customer default on their loans and their inability to pay the loa amount to the bank. such inability and insolvency results in the credit risks for the banks.

Steps to reduce the credit risks

  1. Banks are continuously accessing the worth of the customers and their eligibility to avail the loan before granting them loan of any amount
  2. By using credit rating systems, and utilizing the existing global systems, the maintain the credit in better way
  3. Banks are fixing various limits like benchmarking Current Ratio, Debt-Equity Ratio, Debt Service Coverage Ratio, Profitability Ratio etc.

Operational risk:

These risks arise out of the performance, internal staff, operations of the bank which may result in lack of credit, theft etc. These are guided under various systems ad currently BASEL has given its guidelines to reduce operational risks.

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