Presented By

Jasmeeta Setpal
Shagufta Khan
George D’lima
Nilofar Momin
Sumit Manwar
• For some it is

– financial (exchange rate, interest-call money rates),

– mergers of competitors globally to form more powerful entities

and not leveraging IT optimally" and for someone else

– "an event or commitment which has the potential to generate

commercial liability or damage to the brand image".

• Trade off between reward and threat

 K=Knocking
(Measuring,
S=Selection Monitoring,
(Identification) Controlling)
I=Incident
(Outcome)
R=Rare
(Unexpected)
• Risk management is a discipline for dealing with the possibility that
some future event will cause harm.

• It provides strategies, techniques, and an approach to recognizing

and confronting any threat faced by an organization in fulfilling its
mission

– What can go wrong?

– What will we do?

– If something happens, how will we pay for it?

 Type of Risk

Non –
Financial Risk
Financial Risk
 Counterpart /Borrower
Risk

Intrinsic or Industry
Credit Risk Risk
Financial Risk

Portfolio /
Concentration Risk

Interest Rate Risk

Liquidity Risk
Market Risk
Currency Forex Risk

Price Change Risk

 Operational Risk

Strategic Risk

Non - Financial Risk

Funding Risk

Political Risk

Legal Risk

Human Capital
Risk
• Global Competition

• Increasing Deregulation

• Introduction of Innovative products

• Expansion & Diversification at rapid rate

 Counterpart /Borrower
Risk

Intrinsic or Industry
Credit Risk Risk
Financial Risk

Portfolio /
Concentration Risk

Interest Rate Risk

Liquidity Risk
Market Risk
Currency Forex Risk

Price Change Risk

• Risk of loss that may occur from failure of the counter - party to make
payments

• It includes non performance by a counter party in a variety of Off

Balance Sheet contracts such as forward contracts / interest rate swaps, etc.

• Differs from market risk due to obligor behavior considerations -

The five “C’s” of Credit - Capital, Capacity, Condition, Collateral and

Character

• Credit events include bankruptcy, failure to pay, loan restructuring, loan

moratorium, accelerated loan payments.
• The risk that one party in a contract will default or otherwise not
fulfill his/her obligations (more than 90 days)

• For example, if A agrees to lends funds to B up to a certain

amount, there is an expectation that A will provide the cash, and
B will pay those funds back. There is still the counterparty risk
assumed by them both. B might default on the loan and not pay A
back or A might stop providing the agreed upon funds
•It focuses on the risk inherent in certain lines of business and
loans to certain industries

• It addresses the susceptibility to historic, predictive, and

lending risk factors which affect future performance

• Lending elements focus on how the collateral and terms

offered in the industry or line of business affect the intrinsic
risk

• For example, commercial real estate construction loans are

inherently more risky than consumer loans

s
• The risk associated with single exposure or group of exposures
with the potential to produce large losses to threaten a bank's core
operations

• It may arise in the form of single name concentration or

industry concentration
• The exposure ceiling limits would be :
- 15 % of capital funds in case of a single borrower
- 40 % of capital funds in the case of a borrower group with
additional 10% for infrastructure projects undertaken by the
group

• The threshold limit should not exceed six to eight times of the
capital funds of the bank
• It is a setup of comprehensive risk scoring system on a six to nine point
scale

• It is designed to reveal the overall risk of lending, critical input for

setting pricing and non-price terms of loans for review and management of
loan portfolio

• The risk rating should reflect the underlying credit risk of the loan book
• RAM is an internal rating software offered by CRISIL designed to assist
a bank or financial institution in complying with the requirements under
the internal ratings based approach
• Measurement of loan risk in terms of interest rates and other fees

• The interest rate on a loan is determined the time value of money and
the lender's estimate of the probability

• Factors for consideration :

- Borrower's credit score

- Employment status
• It benefits adverse impact of concentration of exposures to a
particular borrower, sector or industry

• Banks should evolve proper systems for identification of credit

weaknesses well in advance

• The distribution of borrowers in various industry, business

group and conduct of rapid portfolio reviews helps to mitigate
credit risk
• Possibility of loss caused by changes in the market variables such

– Interest rate,

– Foreign exchange rate,

– Equity price

– Commodity price.

• It is the risk of losses in, various balance sheet positions arising from
movements in market prices.
• The possibility of loss to a bank caused by changes in the
market variables

• Market risk includes the risk of the degree of volatility of

market prices of bonds, securities, equities, commodities,
foreign exchange rate etc.

• It also addresses the issues of Banks ability to meets its

obligation as and when due, in other words, liquidity risk.
• Interest rate risk:

• Adversely affect a bank's financial condition

– Impact of changes in interest rates is on the Net Interest Income

(NII).

– The economic value of a bank's assets, liabilities and off-balance

sheet positions get affected due to variation in market interest
rates.

• The interest rate risk when viewed from these two perspectives is
known as 'earnings perspective' and 'economic value' perspective,
respectively.
• Analyzing the impact of changes in interest rates on

– accrual earnings

– reported earnings.

• This is measured by measuring the changes in the

– Net Interest Income (NII)

– Net Interest Margin (NIM) i.e. the difference between the

total interest income and the total interest expense.
• Analyzing the changes of impact on interest on the
– Expected cash flows on assets - expected cash flows on liabilities.

– Risk to networth arising from all repricing mismatches and other

interest rate sensitive positions.

– Risk arising from long-term interest rate gaps. (Future cash flows)
• The risk that a bank may suffer losses as a result of adverse
exchange rate movements during a period

– Either spot or forward,

– Combination of the two, in an individual foreign currency.

• Exchange rate changes will alter the expected amount of

principal and return of the lending or investment

• Banks may suffer losses as a result of changes in

premium/discounts of the currencies concerned.
• Banks also face the risk of default of the counterparties or
settlement risk.

• Banks also face another risk called time-zone risk

– Time-lags in settlement of one currency in one center and the

settlement of another currency in another time-zone.

• The forex transactions with counterparties from another country

also trigger sovereign or country risk.
• The two important issues that need to be addressed in this
regard are:

– Nature and magnitude of exchange risk .

– Exchange managing or hedging for adopted be to strategy.

• Bank Deposits have a much shorter contractual maturity than
loans bcz of which

– liquidity management needs to provide a cushion to cover

anticipated deposit withdrawals.

• Liquidity risk consists of Funding Risk, Time Risk & Call

Risk.
• Funding Risk : It is the need to replace net out flows due to
unanticipated withdrawal/nonrenewal of deposit

• Time risk : It is the need to compensate for non-receipt of

expected inflows of funds, i.e. performing assets turning into
non-performing assets.

• Call risk : It happens on account of crystalisation of contingent

liabilities and inability to undertake profitable business
opportunities when desired.
• The risk of loss resulting from a decline in the value of assets due to
changes in the prices of securities, etc.(value at risk)

1. Price risk associated with equities

– “General market risk” refers to the sensitivity of an portfolio

– “Specific” risk refers to that portion of the stock’s price volatility

– The general market risk cannot be eliminated through portfolio

diversification while specific risk can be diversified away.

2. Commodities price risk is due to the reason that concentration of

supply can magnify price volatility.
 Operational Risk

Strategic Risk

Non - Financial Risk

Funding Risk

Political Risk

Legal Risk

Human Capital
Risk
• Operational Failure risk • Operational Strategic risk
(Internal operational ) (External operational)
1. People 1. Political

2. Process 2. Taxation

3. Technology 3. Government

4. Societal

5. Competition ,etc
Policy Measuring Reporting
• Risk methodology • Risk analysis
identification • Exposure
• Business management
process
• A possible source of loss that might arise from the pursuit of
an unsuccessful business plan For example, strategic risk might
arise from making poor business decisions, from the
substandard execution of decisions, from
inadequate resource allocation, or from a failure to respond
well to changes in the business environment
• Risk relates to a financial institution’s ability to raise the necessary
cash to roll over its debt

• To meet the cash, margin, and collateral requirements of

counterparties, and (in the case of funds) to satisfy capital
withdrawals.

• Funding liquidity risk is affected by various factors such as the

maturities of the liabilities, the extent of reliance of secured sources
of funding, the terms of financing,
And the breadth of funding sources including the ability to access
public market such as commercial paper market

Funding can also be achieved through cash or cash equivalents,

“buying power ,” and available credit lines.
• Political Stability

• Economic Stability

• For Ex:- Sub –Prime crisis in US

Inadequate employee proficiency

• Knowledge & skill

• Competence

• Training

• Academic approach
Employee failure
• Malice--deliberate intention to harm the employer.
• Fraud--deliberate deceit with intention to benefit the employee.
• Integrity--incapable of distinguishing between right and wrong.
• Professionalism--lack of appropriate standard of conduct or demeanour.
• Negligence--lack of proper care or attention.
• Error--employee unintentional mistake.
• Information use--inappropriate use of information or restricted information
search.
• Productivity--inefficient throughput by employee.
Inappropriate culture

– Control

– Teamwork

– Continuous improvement

Employer failure

– Structure & supervision

– Staff numbers

– Succession planning

– Communication flow
• Legal Risk is risk from uncertainty due to legal actions or
uncertainty in the applicability of interpretation of the
contracts, laws or regulations.

• Legal risk is the rising consumer grievances about the services

rendered by the banks.

• Outsourcing of certain activities, by banks has helped

customer service, banks have to address the legal risks that
may arise owing to breach of confidentiality or any fraud.
• Legal risks may result in

• (i) claims against institution

• (ii) fines, penalties, punitive damages

• (iii) unenforceable contracts resulting from defective

documentation

• (iv) loss of institutional reputation.

• The business world is highly dynamic. Risks continue to crop up
every day, and institutions are always developing strategies of
mitigation the effects of these risks.

• Risk issues threaten the customer base of Bank and other financial
institutions as well as their own internal processes that direct the
quality of services they deliver.

• Risk Profile of an individual should be verified before Lending .

• Loopholes in the rules and regulation should be checked and rectify

it.