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Indian Banking Today and Tomorrow
Risk & Risk-Management - Uncertainty
is inherent in Human World

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Uncertainty is inherent in Human World

"The protection of health and well-being of humans together with the preservation and sustainability of the environment are principal goals of modern societies. As risk associated with technology is a crucial element for triggering public protest, it is of utmost importance to find the balance between risks and benefits, which affects the acceptability of hazardous facilities or activities. Risk-informed decision-making offers a solution to this end, as the whole decision process will obtain social acceptance with the promotion of consistency amongst regulators whose responsibilities may overlap".(article on "Risk Analysis & Risk Management" from Journal "Law, Probability and Risk" published by Oxford University Press)

We do not know exactly or accurately what will happen to us tomorrow. But this is not so in the physical world. Occurrences in the physical world are exact and uniform. Sequence, there, also decides consequence. The exact and mathematically accurate Laws of Physics and Chemistry are on account of this "Uniformity of Nature". Water quenches thirst to everyone, everywhere and on everyday. The physical world is thus predictable. We learn by wisdom that chain of occurrences or results are related as causes and effects. The same cause produces the same effect. Life on earth and growth of our civilisation are possible because of this unique self-enforced discipline of Mother Nature.

On the other hand the prevailing disposition in the human world is the "Law of Probability". Our efforts may or may not bring desired results. But we are not deterred. We observe and analyse large number of similar instances and draw tendentious patterns or trends that will shape the coming events. This assimilation helps us to forecast results near accurately and chart our course of action. Otherwise how can an entrepreneur commit and invest scarce resource in a new venture with the hope of reaping positive results in recurring streams spread over a period of future years. We have discovered in this way the laws of economics and other subjects grouped and termed as "humanities". These laws however are inexact, though near accurate. They postulate tendencies and serve as a guiding factor for us to act and to define our line of action or the choice of the best alternative. The Laws of Economics and the principles of Management are defined by using the analytical tools and process of observation and reasoning. This helps to reduce substantially the element of uncertainty. When events do not shape as forecast by us earlier, we again re-analyse the sequence of variances to find what caused the unexpected.

Such variance are caused by unexpected new developments. These are identified as risk factors. By this we learn the type of risk factors we may confront in each one of the ventures we undertake. We face risks not only in the fields of finance and management, but with reference to everything connected with our life - our health, physical welfare etc. The extent of uncertainty in getting results in different spheres is quantified as the extent of probability or "risk content". An assessment of risk involved a given decision of ours is based on the assessment of the extent of uncertainty. Risk analysis is broadly defined to include risk assessment, risk characterization, risk communication, risk management, and policy relating to risk. Risk Analysis provides a focal point for new developments in the perception of risk elements for scientists from a wide range of disciplines. The analysis of risks is being increasingly viewed as a field in itself, and the demand for a more orderly and formal treatment of risks is great. Risk Analysis is designed to meet these needs of organization, integration, and communication

In India our environment hitherto was totally regulated (State controlled) and directed with reference to our industry, banking etc. High tariff walls due to shortage of foreign exchange and forced restriction on imports, protected indigenous industry and created a suppliers' market, where the consumer had no or very limited choice. Similarly Banks operated in an atmosphere where everything was directed and controlled externally (albeit either by RBI or Finance Ministry). The need for studying risk was never felt. Lack of product-quality in Industry or poor service and lack of efficiency in service-centres were never felt seriously, as there was no competition and no alternative choice before the consumer.

But with dismantling of State control over every sector of economy, with deregulation (i.e. supply, demand and prices) to shape on the basis of market forces, Indian Industry and Indian Banking have now come to face a new challenge. Competition results in the survival of the fittest. Industry has to compete with cheaper and more qualitative imported goods with the dismantling of the tariff walls. To survive and to sustain Industry has to learn to be customer-oriented (quality conscious and competitive) Similarly in the liberalised environment competing with the high-tech new generation Banks, the erstwhile commercial banks have to re-orient themselves to the changed situation. Understanding risk in business and learning to control and contain risk is the first step in the new game. Consequently the need to manage risk and the study of risk analysis came to the forefront in India in the mid-Nineties of the last century, where elsewhere in the West the subject became popular in the early Eighties.

In banking interest rates are now deregulated and decided by market conditions. What will happen if the rate charged on advances declines by 2% and that on deposits increases by 2% p.a. It is like a steep increase of 10 to 15% on cost of raw-material with an equal fall in the price of the finished product (selling price) in Industry. This phenomenon can take place in Indian banking today and we call it the interest-rate risk. What happens in business and industry if the current ratio goes adverse i.e. less than 1. It suffers a liquidity crunch. Similar risk can take place in a commercial bank, if there can be a mismatch between assets and liabilities, i.e. more liabilities accruing due at a time and demanding payment against meagre assets readily realisable into cash for satisfying these liabilities. This we call "asset/liability risk". In a business firm receivables may go overdue and get blocked. Similar problem in Banking is credit risk. Fluctuations in foreign exchange rate affects both industry and banks.

The subjects of risk analysis and risk management are discussed in the following pages to draw valid precepts and to equip with the best standards to meet, control and reduce different types of risks in Industry and Banks.

Risk Assessment & Risk Management - Project Profile

The Project on Risk Assessment & Risk Management includes 46 articles spread in seven sub-titles. The significance of this topic in a deregulated economy open to global-level competition is brought in this introductory article. The general scope of the topic with reference industry & business is discussed in the first four articles. Risk Management in commercial Bank is introduced in the 5th article, and thereafter different guidelines of RBI relating to the diverse risks faced by Commercial Banks in India today in the deregulated environment are dealt with a detailed analysis of these risk.

Implementation of these risk management practices results in Indian Banking adhering to globally recognised best standards

S No. Module Name Content Description
1 Risk assessment & Risk Management - General Topics Relevant for all Organisations

Elements of risk-oriented human world; Introduction to risk-analysis and risk-management plus two contributed articles on "Enterprise-wide strategic Risk Management" and "Risk Management for Managers

2 Risk Management in Commercial Banks

Risks faced by commercial banks; risks faced in electronic-banking; articles by RBI executives on Risk-management in Commercial Banks.

3 Asset - Liability Management ( ALM ) System Guidelines of RBI to Commercial Banks

Guidelines of RBI to SCBs regarding management of Asset-Liability Mismatch Risk

4 Credit Risk Management

RBI Guidelines to SCBs regarding assessing & managing Credit-Risks

5 RBI Guidelines on Market Risk> Guidelines of RBI to SCBs on managing market oriented risks
6> Counter-party & country risks

RBI Guidelines on Counterparty & country risk management

7 Risk Based Supervision & Risk based Internal Audit

RBI Guidelines on Risk Based Supervision and Risk Based Internal Audit

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