The document discusses various types of risks in banking and rural finance, including credit, liquidity, interest rate, and market risks, as well as methods for their assessment and management. Credit risk involves the likelihood of borrower default and is measured using metrics like the expected loss method and Altman Z-score. Liquidity risk is the inability to meet short-term obligations, while market risk refers to potential losses from market factors, with tools like Value at Risk (VaR) used for measurement.

1. Types Of Risks and Its Management
In Banking & Rural Finance

2. What is Risk Management?
Identification of Risks
Assessment of Risks
Prioritization of Risks
minimize monitor control
Probability of unfortunate
events
maximize
Realization of opportunities
Resources

3. Types of Risk in Banking &
Rural Finance
Credit or Default Risk
Liquidity Risk
Interest Rate Risk
Market Risk

4. Credit Risk
 Credit risk is the risk of
default on a debt that
may arise from a
borrower failing to make
required payments
Methods to measure
Expected Loss Method
Altman Z score

5. Credit Risk -Expected Loss
Method
Probability of Default
(PD)
is the likelihood that a loan
will not be repaid and will
fall into default.
The credit history of the
borrower and the nature of
the investment must be
taken into consideration
when calculating PD
Loss Given Default
(LGD)
the credit loss incurred if
an obligor of the bank
defaults.
LGD = 1- RR
Exposure at Default
(EAD)
is equal to outstanding loan
amount (OS) plus the
percentage of unused loan
commitment (COM) drawn-
down by the borrower
EAD = OS + (COM – OS) *
(UGD)

6. Altman Z score
= 1.2*X1 + 1.4*X2 + 3.3*X3 + 0.6*X4 + 0.99*X5
Where :
X1 is Working capital / Total Assets
X2 is Retained Earning / Total Assets
X3 is EBITDA/ Total Assets
X4 is market Value of Equity / Total Liabilities
X5 is Net Sales / Total Assets

7. Liquidity Risk
 Liquidity risk occurs when
an individual investor,
business or financial
institution cannot meet
short-term debt obligations
 Method to measure :-
Liquidity Coverage Ratio
Net Stable Funding Ratio

8. Liquidity Coverage ratio
Types Of Assets Examples Max Cap
Level 1 Cash, central Bank Reserve 100%
Level 2A Corporate Bonds 40%
Level 2B Mortgage, Stocks 15%
Jan 1,
2015
Jan 1,
2016
Jan 1,
2017
Jan 1,
2018
Jan 1,
2019
60%
70% 80%
100%90%

9. Interest Rate Risk
The Potential loss from
unexpected changes in
Interest rate which can
significantly alter the
bank profitability and
market value of equity
Interest Rate Risk
Management
Repricing
Risk
Yield Curve
Risk
Basic Risk
Embedded
Option Risk

10. Market Risk
Market risk is the
possibility for an investor
to experience losses due
to factors that affect the
overall performance of
the financial markets in
which he is involved
Method to measure ; -
Value at Risk

11. For Example :- If VAR(95) = 3%
5% chance to lose max 3% of its market value
Market Risk Management
 Value at Risk (VaR) is a statistical technique used to
measure and quantify the level of financial risk within a
firm or investment portfolio over a specific time frame
Var(95%) -2.898550725 12.4
Var (99%) -4.398826979 2.48
Var(99.5%) -4.593874834 1.24
Value at Risk

12. Bank – MFI Securitization Process
• Securitization is the process of taking an illiquid
asset, or group of assets, and through financial
engineering, transforming them into a security.
• MFI lend money at 20% interest rate
• Bank buy MFI customer loans portfolio at 10%
interest rate
• Difference between MFI and Bank interest Rate in
known as Interest Spread
• MFI get additional source of fund to expand their
loan portfolio

13. Securitization Process
Subscription
Monthly
Payout
Collection
SPV
Obligors
(MF Loans)
Service / Collection
agent (MFs/NBFCS)
Originators
(MFS/NBFCs)
Investor in
PTC
Credit Enhancement Provider
(MFs/NBFCs)
Subordinated Principal /
Over Collateral

14. Techniques to Mitigate Risk in
Securitization
• Waterfall Mechanism:
• Excess Interest Spread
• Credit Enhancement
• Over Collateralization:

15. Thanks