Risk management in banking sector of India.

1. Pravas Ranjan Mahapatra
Pgdm 13-15/31

2. An Introduction to Risk Management
 Risk Management is the process of measuring or
assessing the actual or potential dangers of a
particular situation.

3. Type of Risks in Banking Sector
 Operational.
 Credit.
 Market risk
 Regulatory risk

4. Operational Risk
 Internal Fraud.
 External Fraud.
 Damage to Physical Assets
 Clients, Products and
Business Practices
 Loans.
 Equities
 Letters of credit
 Interbank transactions
Credit Risk
Risk due to an
uncertainty in a
counterparty’s ability to
meet its obligations in
accordance with agreed
upon terms.
The risk of loss
resulting from
inadequate or failed
internal processes,
people and systems, or
from external events.

5. Market risk
 RBI has defined market risk as the possibility of loss to
a bank caused by changes in the market rates/ prices.
 RBI Guidance Note focus on the management of
liquidity Risk and Market Risk, further categorized
into interest rate risk, foreign exchange risk,
commodity price risk and equity price risk.
 Market risk includes the risk of the degree of volatility
of market prices of bonds, securities, equities,
commodities, foreign exchange rate etc.

6. Regulatory risk
 As banks accept deposit from public obviously better
governance is expected from them.
 This entails multiplicity of regulatory controls. Many
Banks, having already gone for public issue, have a
greater responsibility and accountability in this regard.
 As banks deal with public funds and money, they are
subject to various regulations.
 The various regulators include Reserve Bank of India
(RBI), Securities Exchange Board of India (SEBI),
Department of Company Affairs (DCA), etc.
 More over, banks should ensure compliance of the
applicable provisions of The Banking Regulation Act,
The Companies Act, etc.

7. Risk Management in Banks
Old risk management New risk management
 Risk reduction through
safety, quality control and
hazard education.
 Alternative risk financing,
including self-insurance and
captive insurance.
 The purchase of traditional
insurance products.
 Treats derivatives as a
problem as much as a
solution.
 Focuses on reporting,
oversight and segregation of
duties within the
organization.
Risk management is the process of monitoring and addressing
the potential for loss.

8. Regulatory Responses from the
Financial Services Community
 Basel II.
 Sarbanes-Oxley Act of 2002.
 Gramm-Leach-Bliley Act.
 Bank Secrecy Act/Anti-Money Laundering.
 Insider Trading Rules.
 Bank Bribery Act.
 Federal Conflicts of Interest Statutes.
 Various record retention and reporting requirements.

9. We were at the stage where in a very short period of time, one
of the world’s biggest banks would have to shut the door and
switch off the electricity."