Let’s discuss the relatively new topic of risk management in banks. There is no doubt that it is a new practice, but it has proven to significantly increase the efficiency with regards to bank governance as it stimulates the corporate governance of the banks. When the other sectors are in turmoil, financial institutions need to be stable and prove their capabilities by taking market volatility in their stride. Thus, the objective of risk management, especially in Indian banks is to reduce the rewards and risks of all the services and products, which are offered by the bank. Thus, in order to take into account external and internal risks, a management framework for managing risk efficiently is necessary.
There is no doubt that the financial sector in India is undergoing a tremendous change. The recession which the world is facing is complicating the situation even further, thus, increasing the needs for risk management. Risk management if implanted earlier, would have indeed saved the world from a financial catastrophe such as the 2008 sub-prime crisis. The US recession forced banks to factor in and implement policies to enable risk management functions in banks. The need of risk management was felt by Indian banks due to globalization, competition from private and foreign banks, innovative financial and banking products.
Indian banks are rapidly expanding. As India builds new cities and towns, banks are exploring new avenues for growth. Indian banks have innovated in terms of quality, human resources and technology. However, with the sheer growth in size, brings the increased risks, and this is especially veracious at the onset of liberalization and globalization. The bank earning depends on how it is able to manage the risks. The returns are larger if the risks are larger and thus, it is quite necessary for the bank to find a equilibrium between risk and returns. If the bank is averse to risks, if will make its capital base, safer.
Types of risks
Uncertainty and financial loss are what ‘risk’ means in a bank. The RBI has categorized risks into three contours