A Study on Risk Management in Banking Industry Essay
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Risk management is relatively new and emerging practice as far as Indian banks are concerned and has been proved that it’s a mirror of efficient corporate governance of a financial institution. Globalization and significant competition between foreign and domestic banks, survival and optimizing returns are very crucial for banks and financial institutions. However, selecting the efficient customer and providing innovative and value added financial products and services are another paramount factors.
In a volatile and dynamic market place for achieving sustainable business growth and shareholder’s value, it is essential to develop a link between risks and rewards of all products and services of the bank.
Hence, the banks should have efficient risk management framework to mitigate all internal and external risks. The objective of this study is to envisage ideal framework of bank-wide risk management for Indian Banks. The presence of accurate measures of bank-wide risk management practice increase shareholder’s returns and allows the risk-taking behavior of bank to be more closely aligned with strategic objectives. Bank-wide risk management practice should aim to enhance the drivers of shareholder’s value such as:
– 0 Growth;
1 Risk adjusted performance measurement;
2 Consistency of earnings; and
3 Quality and transparency of management.
The important steps of the efficient framework of banking concern should ensure all risks are identified, prioritized, quantified, controlled and managed in order to achieve an optimal risk-reward profile. This entails ideal and dedicated coordination of risk management across the bank’s various business units. However, the approach to monitoring and enforcing the adherence of business units within the bank may vary. The factors that influence this decision are: –
4 The feasibility decisions of the business unit. 5 The regulatory requirements in respect of the business unit. 6 The cost of effective monitoring and controlling steps. Risk management is a line function that needs to be addressed by each individual cost center and business unit. However, a centralized bank-wide risk management framework has certain advantages for the Bank.
The advantages are: –
7 Improving capital efficiency by providing an objective basis for allocating resources reducing expenditures on immaterial risks and exploring natural hedges and portfolio effects; 8 Supporting informed decision making by uncovering areas of high potential adverse impact on drivers of share value, and identifying and exploiting areas of risk-based advantage context. 9 Building investor confidence by establishing a process to stabilize results by protecting them from disturbances, and demonstrating proactive risk stewardship 10 Define cost and profitability centers
11 Profitability and cost allocation on customer, product, services and branch wide Most of the banks do not have dedicated risk management team, policy, procedures and framework in place. Those banks have risk management department, the risk manager’s role is restricted to pre-fact and post-fact analysis of customer’s credit and there is no segregation of credit, market, operational and strategic risks. There are few banks have articulated framework and risk quantification. However, the outputs are far from the stressed or actual losses due to usage of un-compatible implications.
The traditional lending practices, assessment of credits, handling of market risks *, treasury functionality and culture of risk-rewards are hauls of public sector banks. Where as private sector banks and financial institutions are some-what better in this context.
The sheer size and wide coverage of banks is a big hurdle to integrate and generate a cost effective real time operational data for mapping the risks. Most of the financial institutions processes are encircled to ‘functional silos’ follows bureaucratic structure and yet to come up with a transparent and appropriate corporate governance structure to achieve the stated strategic objectives.
There are many banks like HSBC, Citibank, Deutsche bank have bank-wide risk management practice which contributed in their global success whereas banks and institutions like Sumitomo Corp, Barings, Bank of America, CSFB and UTI have failed due to lack of efficient bank-wide risk management practice (compliance and operational risks). So the above comments emphasis the necessity of having bank-wide risk management to achieve the stated strategic objectives in a competitive, volatile and dynamic market conditions in an emerging Indian economy. We believe the above-described bank-wide risk management framework is easy workable, cost effective and efficient process without any hassles or hurdles of high-tech tools and techniques