C:\fakepath\1. introduction to risk managment

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C:\fakepath\1. introduction to risk managment

  1. 1. What does Risk stand for? <ul><li>Uncertainties transforming into adverse outcomes </li></ul><ul><li>Adverse in relation to planned objective or expectations </li></ul>
  2. 2. Risk Management defined: <ul><li>RM involves framing of policies, </li></ul><ul><li>procedures, and practices involved in </li></ul><ul><li>identification, analysis, assessment, </li></ul><ul><li>control and avoidance, minimisation </li></ul><ul><li>or elimination of unacceptable risks. </li></ul>
  3. 3. Risk Management Strategies <ul><li>Risk assumption. </li></ul><ul><li>Risk Avoidance. </li></ul><ul><li>Risk Retention. </li></ul><ul><li>Risk Transfer. </li></ul>
  4. 4. Major source of uncertainty <ul><li>Business </li></ul>Commodity Prices Labour Costs Interest Rates Currency $ Taxes Consumer Preferences Technology Economic Policies Political Conditions Weather
  5. 5. Business : A series of activities running over a time horizon <ul><li>Conventional Banking </li></ul><ul><li>business business </li></ul><ul><li>Acquiring materials Selling Deposits </li></ul><ul><li>Processing Buying Loans </li></ul><ul><li>Storing Margins </li></ul><ul><li>Marketing Distribution of </li></ul><ul><li>Sales profits </li></ul><ul><li>Revenue </li></ul><ul><li>Distribution of profits </li></ul>
  6. 6. H ow do uncertainties effect businesses? <ul><li>Cash Inflows </li></ul><ul><li>Sales volume or sale price. </li></ul><ul><li>Cash Outflows </li></ul><ul><li>Input costs, raw materials etc. </li></ul><ul><li>Processing costs, wages, storage, </li></ul><ul><li>Cost of funds, taxes. </li></ul>
  7. 7. Where do uncertainties manifest ultimately? <ul><li>Profit or earnings or a business </li></ul><ul><li>Net worth or value of a firm </li></ul>
  8. 8. Earnings of a bank: Deposits Borrowings interest expenses Loans Investment Interest income earnings
  9. 9. Earnings – value of a firm Earnings taxes dividends Reserves & Surplus Balance Sheet
  10. 10. Risk Management: Objectives <ul><li>Risk return integration </li></ul><ul><li>Lower risk management costs </li></ul><ul><li>Fairly stable earnings </li></ul><ul><li>Uninterrupted operations </li></ul><ul><li>Continued growth </li></ul><ul><li>Safety of Capital funds </li></ul><ul><li>Regulatory Compliance </li></ul><ul><li>Competitive advantage </li></ul><ul><li>Peace of mind </li></ul>
  11. 11. Stable Earnings: <ul><li>Consistent Growth. </li></ul><ul><li>Good Reputation. </li></ul><ul><li>Marketability. </li></ul><ul><li>Investor attraction. </li></ul><ul><li>Listing privilege. </li></ul>
  12. 12. Un-interrupted Operations <ul><li>Avoid systemic crisis. </li></ul><ul><li>Avoid external interventions. </li></ul><ul><li>Avoid take-over threats. </li></ul><ul><li>Enhance market share. </li></ul>
  13. 13. Safety of capital funds <ul><li>Consider a hypothetical bank with following </li></ul><ul><li>structure:- </li></ul>Assume that bank suffers Rupee 4.5 lakh in loan losses. Which means 4.74% of loan losses equals about 45% of equity wipe out. Cash 5 Loans 95 Total: 100 Equity 10 Deposits 90 Total: 100 Assets (in lakhs rupees) Liabilities (in lakhs rupees)
  14. 14. Net worth of a bank <ul><li>Assets - external liabilities = owners equity </li></ul><ul><li>Small changes </li></ul><ul><li>in the value of assets/liabilities </li></ul><ul><li>Large changes </li></ul><ul><li>In the value of owners equity </li></ul>
  15. 15. Why Risk Management? <ul><li>Navigating a ship in a stormy sea. </li></ul><ul><li>Danger of capsizing. </li></ul><ul><li>Choppy sea needs to calmed. </li></ul>
  16. 16. Management of Financial Risks: <ul><li>Risk Identification </li></ul><ul><li>Risk Measurement </li></ul><ul><li>Risk Pricing </li></ul><ul><li>Risk Monitoring & Control </li></ul><ul><li>Risk Mitigation </li></ul>
  17. 17. <ul><li>Thank You ! </li></ul>

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