Risk Management in Banks With Specil Reference To Karur Vysya Bank

A PROJECT REPORT ON ANALYSIS OF RISK MANAGEMENT IN BANKS WITH
SPECIAL REFERENCE TO KARUR VYSYA BANK
A Project submitted to
UNIVERSITY OF MUMBAI
For partial completion of the degree of
BACHELOR IN COMMERCE
(ACCOUNTING AND FINANCE)
Under the faculty of commerce.
By
Ms. ANJALI NARSHIV SINGH
Under the guidance of
MR. MACNOBLE D’CRUZ
St. Gonsalo Garcia College,
Behind Vasai cricket ground,
Vasai-401201
2019-2020
DECLARATION
I, the undersigned Ms. ANJALI NARSHIV SINGH hereby, declare that the work embodied in
this project work titled “ANALYSIS OF RISK MANAGEMENT IN BANKS WITH
SPECIAL REFERENCE TO KARUR VYSYA BANK”, forms my own contribution to the
research work carried out under the guidance of Mr. MACNOBLE D’CRUZ is result of my own
research work and has not been previously submitted to any other University for any other
Degree/Diploma to this or any other University.
Wherever reference has been made to previous work of others, it has been clearly indicated as such
and included in the bibliography.
I, hereby, further declare that all information of this document has been obtained and presented in
accordance with academic rules and ethical conduct.
NAME OF THE LEARNER,

ANJALI NARSHIV SINGH
CERTIFIED BY,
PROF. MACNOBLE D’CRUZ

ST. GONSALO GARCIA COLLEGE OF ARTS AND COMMERCE
BEHIND VASAI CRICKET GROUND, VASAI.
DIST. PALGHAR-401201
CERTIFICATE
This is to certify that Ms. ANJALI NARSHIV SINGH has worked and duly completed her
project work for the degree of Bachelor in Commerce (Accounting and Finance) under the
faculty of commerce in the subject of project work and her project is entitled, “ ANALYSIS OF
RISK MANAGEMENT IN BANKS WITH SPECIAL REFERENCE TO KARUR VYSYA
BANK”.
I further certify that the entire work has been done by the learner under my guidance and
that no part of it has been submitted previously for any Degree or Diploma of any
University. It is her own work and facts reported by her personal findings and
investigations.
PRINCIPAL, COORDINATOR,
DR. SOMNATH VIBHUTE PROF. RUBINA D’MELLO
PROJECT GUIDE, SIGNATURE OF

MACNOBLE D’CRUZ THE EXTERNAL
ACKNOWLEDGMENT
To list who all have helped me is difficult because they are so numerous and the depth is so
enormous.
I would like to acknowledge the following as being idealistic channels and fresh dimensions in
the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me chance to do this project.
I would like to thank my Principal Mr. Somnath Vibhute for providing the necessary facilities
required for completion of this project.
I take this opportunity to thank our coordinator Mrs. Rubina D’mello for her moral support and
guidance.
I would also like to express my sincere gratitude towards my project guide Mr. Macnoble
D’cruz whose guidance and care made the project successful.
I would like to thank my College library, for having provided various reference books and
magazines related to my project.
Lastly, I would like to thank each and every person who directly and indirectly helped me in the
completion of the project especially my Parents and Peers who supported me throughout my
project.
EXECUTIVE SUMMARY
In the present chapter an attempt has been made to study the risk profile of the banking sector and
understand various categories of risks the banks are exposed to. The significant transformation of the
banking industry in India is clearly evident from the changes that have occurred in the financial
markets, institutions and products. While deregulation has opened-up new vistas for banks to
argument revenues, it has entailed greater competition and consequently greater risks. Cross border
flows and entry of new products, particularly derivatives instruments, have impacted significantly on
the domestic banking sector forcing banks to adjust the product mix, as also to effect rapid changes
in their processes and operations in order to remain competitive to the globalized environment. These
developments have facilitated greater choice for consumers, who have become more discerning and
demanding compelling banks to offer a broader range of products through diverse distribution
channels. The traditional face of banks as mere financial intermediaries has since altered and risk
management has emerged as their defining attribute. The primary functions of the banks are:
Manage the market risk the bank faces. This could mean market risk on account of interest rate or
market risk on account of foreign exchange.
Manage the credit risk the bank faces. This could mean risk that a change in the credit quality of a
counterparty will affect the value of a bank’s position.
Manage the operational risk the bank faces. This could mean potential losses resulting from
inadequate systems, management failure, faulty control, fraud and human error.
Risk management includes the management of all kind of risks that a bank is exposed to. However,
banks focus on the management of above mentioned risks because they are the most severe ones. The
project discusses on various risk that a bank is exposed to and the techniques that are used by banks
with special reference to KARUR VYASA BANK to manage these risks.
TABLE OF CONTENTS
S.NO. PARTICULARS PAGE NO.

CHAPTER 1. INTRODUCTION
1.1 DEFINITION OF RISK 1
1.2 MEANING OF RISK MANAGEMENT 2
1.3 RISK MANAGEMENT FRAMEWORK 4
1.4 RISKS IN BANKING SECTOR 4
1.5 IMPORTANCE OF RISK MANAGEMENT IN BANKING 7
SECTOR
1.6 OBJECTIVES OF THE STUDY 9
1.7 TYPES OF RISKS 10
CHAPTER 2. CONCEPTUAL FRAMEWORK

2.1 PROCESS OF RISK MANAGEMENT 22
2.2 TECHNIQUES OF RISK MANAGEMENT 25
2.3 RISK MANAGEMENT OF BANKING RISKS 28
2.4 REVIEW OF LITERATURE 32
CHAPTER 3. PROFILE OF THE COMPANY

3.1 Banking sector in India 36
3.2 KARUR VYSYA BANK 36
CHAPTER 4. DATA ANALYSIS AND INTERPRETATION 42
CHAPTER 5. CONCLUSION 63
5.1 FINDINGS 65
5.2 SUGGESTIONS 66
BIBLIOGRAPHY 69
ANALYSIS OF RISK MANAGEMENT IN BANK
CHAPTER 1. INTRODUCTION
1.1 DEFINITION OF RISK
In order to study and understand the term risk management, risk alone, and especially in case
of banking, has to be defined first.
Risk means different things to different people. For some it is financial (exchange rate,
interest call money rates), mergers of competitors globally to form more powerful entities and
not leveraging IT optimally and for someone else an event or commitment which has the
potential to generate commercial liability or damage to the brand image. Since risk is accepted
in business as a tradeoff between reward and threat, it does not mean that taking risk bring
forth benefits as well. In other words, it is necessary to accept risks if the desire is to reap the
anticipated benefits.
Risk in its pragmatic definition, therefore, includes both threats that can materialize and
opportunities which can be exploited. This definition of risk is very pertinent today as the
current business environment offers both challenges and opportunities to organizations, and
it is up to an organization to manage these to their competitive advantage.
More specifically, financial risk in a banking organization is the possibility that the
outcome of an action or event could bring up adverse impacts on profitability of several
distinct sources of uncertainty. These outcomes could either result in a direct loss of earnings
/ capital or may result in creating difficulties on bank’s ability to meet its business objectives.
These kinds of difficulties increase the potential that the bank could not manage its ongoing
business or take benefit of opportunities to enhance its business.
ST. GONSALO GARCIA COLLEGE 1 TY. BAF

1.2 DEFINITION OF RISK MANAGEMENT
Risk management is a discipline for dealing with the possibility that some future event will
cause harm. It provides strategies, techniques and an approach to recognizing and confronting
any threat faced by an organization in fulfilling its mission. Risk management maybe as
uncomplicated as asking and answering these three basic questions:
1.What can go wrong?
2.What will we do (both to prevent the harm from occurring and in the aftermath of an incident)?
3.If something happens, how will we pay for it?
Risk management does not aim at risk elimination but enables the organization to bring their
risks to manageable proportions while not severely affecting their income. This balancing act
between the risks levels and profits needs to be well planned. Apart from bringing the risks to
manageable proportions, they should also ensure that one risk does not get transformed into any
other undesirable risk. This transformation takes place due to inter linkage present among the
various risks. The focal point in managing any risk will be to understand the nature of the
transaction in a way to unbundle the risk it is exposed to.
Risk management is a more mature subject in the western world. This is largely a result of
lessons from major corporate failures, most telling and visible being the barings collapse. In
addition, regulatory requirements have been introduced, which expects organizations to have

effective risk management practices. In India, whilst risk management is still in its infancy, there
has been considerable debate on the need to introduce comprehensive risk management practices.
Risk management creates shareholder wealth by avoiding indirect or deadweight costs. They
consist of bankruptcy and distress costs, difficulties in raising funds, disturbing relationships with
stake holders leverage and managerial incentives.
Risk management is a discipline at a core of every financial and encompasses all the activities
that affect its risk profile. It involves identification, measurement, monitoring and controlling
risks to ensure that:
1. The individual who take or manage risks clearly understand it.
2.The organization’s risk exposure is within the limits established by boards of directors
3.Risk taking decision are in line with the business strategy and objectives set by BOD
4.The expected payoffs compensate for the risk taken
5.Risk taking decision are explicit and clear
6.Sufficient capital as per buffer is available to take risk
The acceptance and management of financial risk is inherent to the business of banking and
bank’s role as financial intermediaries. Risk management is commonly perceived does not mean
minimizing risk; rather the goal of risk management is to optimize risk-reward tradeoff.
Notwithstanding the fact that banks are in the business of taking risks, it should be recognized
that an institution need not engage in business in a manner that unnecessarily imposes risk upon
it; nor it should absorb risk that can be transferred to other participants. Rather it should accept
those risks that are uniquely part of the array of bank’s service.

1.3 RISK MANAGEMENT FRAMEWORK:
A risk management framework encompasses the scope of risks to be managed, the process/
systems and procedures to manage risk and the roles and responsibilities of individuals involved
in risk management. The framework should be comprehensive enough to capture all risks a bank
is exposed to and have flexibility to accommodate any change in business activities. An effective
risk management framework includes:
1.Clearly defined risk management policies and procedures covering risk identification,
acceptance, measurement, monitoring, reporting and control.
2.There should be an effective management information system that ensures flow of information
from operational level to top management and a system to address any exceptions observed.
There should be an explicit procedure regarding measures to be taken to address such deviations.
3.The framework should have a mechanism to ensure an ongoing review of systems, policies and
procedures for risk management and procedure to adopt changes.
A well constituted organizational structure defining clearly roles and responsibilities of

individuals involved in risk taking as well as managing it. Banks, in addition to risk management
functions for various risk categories may institute a setup that supervises overall risk management
at the bank. Such a setup could be in the form of a separate department or bank’s Risk
Management Committee (RMC) could perform such functions. The structure should be such that
ensures effective monitoring and control over risks being taken.
1.4 RISKS IN BANKING
Risk manifest themselves in many ways and the risk in banking re a result of many diverse
activities, executed from many locations and by numerous people. As a financial intermediary,
banks borrow funds and lend them as part of their activity. This intermediation activity, of bank
exposes them to a host of risks. The volatility in the operating environment of banks will
aggravate the effects of the various risks. The case discusses the various risks that arise due to
financial intermediation and by highlighting the need of asset-liability management; it discusses
the Gap model for risk management. Banks managements are highly sensitive to treasury risks,

as they arise out of high leverage of the treasury business. The risk of losing capital is much
bigger than, say, in the credit business. The second reason for management’s concern is the large
size of the transaction done, at the sole discretion of the treasurers.
In the course of their operations, banks are invariably faced with different types of risks that
may have a potentially adverse effect on their business. Banks are obliged to establish a
comprehensive and reliable risk management system, integrated in all business activities and
providing for the bank risk profile to be always in line with the established risk propensity.
Risk management system comprises:
1.Risk management strategies and policies, as well as procedures for risk identification and
measurement, i.e. for risk assessment and risk management
2.Appropriate internal organization, i.e. bank’s organizational structure
3.Effective and efficient risk management process covering all risks the bank is exposed to or
may potentially be exposed to in its operations
4.Adequate internal control system
5.Appropriate information system
6.Adequate process of internal adequacy assessment.
In every financial institution, risk management activities broadly takes place simultaneously at
following different hierarchy levels.
1.STRATEGIC LEVEL:
It encompasses risk management functions performed by senior management and BOD. For
instance, definition of risk, ascertaining risk appetite, formulating strategy and policies for
managing risks and establish adequate system and controls to ensure that overall risk remain
within acceptable level and the reward compensate for the risk taken.

2.MACRO LEVEL:
It encompasses risk management within a business area or across business limes. Generally,
the risk management activities performed by middle management or units devoted to risk reviews
fall into this category.
3.MICRO LEVEL:
It involves “on-the-line” risk management where risks are actually created. These are the risk
management activities performed by individuals who take risk on organization’s behalf such as
front office and loan origination functions.
Banks often classify the losses connected with the banking risks into expected or traditional and
unexpected or non-traditional losses. Expected/ traditional losses are those that the bank knows
with reasonable certainty will occur and arise from the basic functions of banks (e.g. the expected
default rate of corporate loan portfolio or credit card portfolio). Unexpected/ non-traditional
losses are those associated with unforeseen events and arise from the developments in banking
environment domestically or globally- (e.g. regulation, losses due to a sudden down turn in
economy or falling interest rates). Usually banks use their capital to deal with these kinds of
losses.
The types and degree of risks a bank may be exposed depend upon a number of parameters such
as its size, complexity business activities, volume etc. Generally, the banks face Credit, Market,
Liquidity, Operational, Compliance / Legal / Regulatory and Reputation risks which will be
analyzed below.
In all types of risks, there is the possibility to have opportunities for benefit or threats to
success. Risk Management is widely considered to deal with both positive and negative aspects
of risk. Therefore, this attitude faces risk from both perspectives. On the other hand,
conservatives support that consequences are only negative and therefore the management of
safety risk is focused on prevention and elimination of losses.
Banking risks are called the challenges a bank takes for several decisions and are usually used
to define the losses of several distinct sources of uncertainty. The key to face and limit the impact
of risks in banking is to find the source of the uncertainty and the magnitude of its potential

adverse effect on profitability. Profitability refers to both accounting and mark-to-market

measures. The different risks need different approach so a clear definition helps better for the
quantitative measures of risk and their management.
Therefore, the techniques of risk management employed by the commercial banking sector are
based on the enumerating of the risks which the banking industry has chosen to manage and
illustrate how the procedure to manage them is applied in each area. The risk associated with the
revenues of banking services differ by the type of service rendered
1.5 IMPORTANCE
Because taking risk is an integral part of the banking business, it is not surprising that banks
have been practicing risk management ever since there have been banks- the industry could not
have survived without it. The only real change is the degree of sophistication now required to
reflect the more complex and fast - paced environment.
The Asian financial crisis of 1997 illustrates that ignoring basic risk management can also
contribute to economy-wide difficulties. The long period of remarkable economic growth and
prosperity in Asia masked weaknesses in risk management at many financial institutions. Many
Asian banks did not assess risk or conduct a cash flow analysis before extending a loan, but rather
lent on the basis of their relationship with the borrower and the availability of collateral - despite
the fact that collateral was often hard to seize in the event of default. The result was that loans -
including, loans by foreign banks - expanded faster than the ability of the borrowers to repay.
Additionally, because many banks did not have or did not abide by limits on concentrations of
lending to individual firms or business sectors, loans to overextended borrowers were often large
relative to bank capital, so that when economic conditions worsened, these banks were weakened
the most.
Although avoiding failure is a principal reason for managing risk, global financial institutions
also have the broader objective of maximizing their risk-adjusted rate of return on capital, or
RAROC. This means not just avoiding excessive risk exposures, but measuring and managing
risks relative to returns and to capital. By focusing on risk-adjusted returns on capital, global
institutions avoid putting too much emphasis on activities and investments that have high
expected returns but equally high or higher risk. This has led to better management decisions and

more efficient allocation of capital and other resources. Indeed, bank shareholders and creditors
expect to receive an appropriate risk-adjusted rate of return, with the result that banks that do not
focus on risk-adjusted returns will not be rewarded by the market.
A point too often overlooked, however, is that, by focusing on risk-adjusted returns, risk
management also contributes to the strength and efficiency of the economy. It does so by
providing a mechanism that is designed to allocate resources, initially financial resources but
ultimately real resources to their most efficient use. Projects with the highest risk adjusted
expected profitability is the most likely to be financed and to succeed. The result is more rapid
economic growth. The ultimate gain from risk management is higher economic growth. Without
sound risk management, no economy can grow to its potential. Stability and greater economic
growth, in turn, lead to greater private saving, greater retention of that saving, greater capital
imports and more real investment. Without it, not only do we lose these gains, but we also incur
the considerable costs of bank disruptions and failures that follow from unexpected, undesired
and unmanaged risk-taking.
1.5.1 RISK MANAGEMENT PREREQUISITES
There are prerequisites for banks to develop the ability to measure and manage risk
effectively. First, in order to measure risk, the country must have solid accounting and disclosure
standards that provide accurate, relevant, comprehensive and timely information so that banks
can assess the condition and performance of borrowers and counterparties. To ensure accuracy,
accounting systems need to be supplemented by auditing systems and backed up by enforceable
legal penalties for providing fraudulent or misleading information to government agencies and
outsiders. Banks also need reliable information on the credit history of potential borrowers and
on macroeconomic and financial variables that can affect credit and other risks. Additionally,
banks need a staff with sufficient expertise in risk management to identify and evaluate risk.
Implicit in most methods of evaluating credit risk is the assumption that the probability of
repayment depends on the ability of the borrower to repay, in other words, that willingness to
repay is not the issue. If repayment depends on whim, then its probability is difficult if not
impossible to assess. Thus, an adequate legal system and “credit culture”, in which borrowers are

expected to repay and are penalized if they do not, are yet further prerequisites for sound and
accurate risk management. The ability to seize the collateral of borrowers in default is essential
if banks are to have the incentives and ability to mitigate risk. Without the legal infrastructure -
the laws, courts and impartial judges - necessary to enforce financial contracts in a timely manner,
much of risk management would be for nothing, once the initial decision to extend credit was
made. Finally, the potential for conflicts of interest in risk management must be limited. In
particular, regulations are needed that restrict and require disclosure of connected lending to bank
owners, shareholders or management. Without such regulations, the desire for personal gain may
distort the incentives of bank owners and managers to manage risk appropriately.
1.6 OBJECTIVES OF THE STUDY
Risk analysis and risk management has got much importance in the Indian economy during this
liberalization period. The foremost among the challenges faced by the banking sector today is
the challenge of understanding and managing the risk. The very nature of the banking business
is having the threat of risk imbibed in it. Banks main role is intermediation between those having
resources and those requiring resources. For management of risk at corporate level, various risk
like credit risk, market risk or operational risk has to be converted into one composite measure.
Therefore, it is necessary that measurement of operational should be in tandem with other
measurements of credit and market risk so that the requisite composite estimate can be worked
out. So, regarding to international banking rule and RBI guidelines the investigation of risk
analysis and risk management in banking sector is being most important.
The following are the objectives of the study:
1.To identify the various types of risk faced by the banking industry.
2.To examine the process of risk management.
3.To find out the importance of risk management in banking sector.
4.To trace out the system of risk management.

5.To analyze the contingency plans to deal with risk.
6.To examine the techniques adopted by banking industry for risk management.
1.7 TYPES OF RISK IN BANKING SECTOR

Risk to a banker means the perceived uncertainty connected with some event. For example, will
the customer renew his loan? Will deposits grow next month? Will the bank’s stock price and its
earnings increase? Are interest rates going to rise or fall next week and will the bank lose income
or value if they do?
It is often said that profit is a reward for risk bearing. Nowhere is this truer than in the case of
banking industry. Banks are literally exposed to many different types of risks. A successful
banker is one that can mitigate these risks and create significant returns for the shareholders on
a consistent basis. Mitigation of risks begins by first correctly identifying the risks, why they
arise and what damage can they cause.
In view of growing complexity of bank’s business and the dynamic operating environment,
risk management has become very significant, especially in the financial sector. Risk at the apex
level maybe visualized as the probability of a bank’s financial health being impaired due to one
or more contingent factors. While the parameters indicating the bank’s health may vary from net
interest margin to market value of equity, the factor which can cause the important are also
numerous. For instance, there could be default in repayment of loans by borrowers, change in
value of assets or disruption of operation due to reason like technological failure. While the first
two factors maybe classified as credit risk and market risk, generally banks have all risks
excluding the credit risk and market risk as operational risk.

1.7.1.CREDIT RISK:
It is the risk in which a borrower is unable to pay the interest or principal on its debt
obligations. The Basel Committee on Banking Supervision defines credit risk as the potential
that a bank borrower, or counter party, will fail to meet its payment obligations regarding the
terms agreed with the bank. It includes both uncertainty involved in repayment of the bank’s dues
and repayment of dues on time.
There is always scope for borrower to default from his commitments for one or the other reason
resulting in crystallization of credit risk to the bank. These losses could take the form outright
default or alternatively, losses from changes in portfolio value arising from actual or perceived
deterioration in credit quality that is short of default. Credit risk is inherent to the business of
lending funds to the operations linked closely to market risk variables. The objective of credit
risk management is to minimize the risk and maximize bank’s risk adjusted rate of return by
assuming and maintaining credit exposure within the acceptable parameters.

Credit risk consists of primarily two components, viz Quantity of risk, which is nothing
but the outstanding loan balance as on the date of default and the Quality of risk, i.e. the severity
of loss defined by both probability of default as reduced by the recoveries that could be made in
the event of default. Thus, credit risk is a combined outcome of default risk and exposure risk.
The elements of credit risk is portfolio risk comprising concentration risk as well as intrinsic risk
and transaction risk comprising migration/ down gradation risk as well as default risk. At the
transaction level, credit ratings are useful measures of evaluating credit risk that is prevalent
across the entire organization where treasury and credit functions are handled. Portfolio analysis
helps in identifying concentration of credit risk, default/ migration statistics, recovery data.
In general, default is not an abrupt process to happen suddenly and past experience dictates that,
more often than not, borrower’s credit worthiness and asset quality declines gradually, which is
otherwise known as migration. Default is an extreme event of credit migration.
Off balance sheet exposures such as foreign exchange forward contracts, swaps options, etc.
are classified into three broad categories such as full risk, medium risk, and low risk and then
translated into risk weighted assets through a conversion factor and summed up.
The management of credit risk includes:
a) Measurement through credit rating/scoring.

b) Quantification through estimate of expected loan losses.
c) Pricing on a scientific basis.
d) Controlling through effective loan review mechanism and portfolio management.
Since the magnitude of credit risk maybe phenomenal and emerges from different angles, it is
desirable to view the credit risk evenly from three different angles: default risk, exposure risk
and recovery risk.
1.7.1.1.DEFAULT RISK:
A bank disburses a loan or releases non-funded limits as per the requirements of the borrower
after proper execution of documents. The loan document stipulates certain terms and conditions

for repayment of the loan amount. If the borrower fails to adhere to the covenants of the
agreement in repaying the interest component or the principal component it leads to default.
When the value of an asset goes below the value of an outstanding

liability, the default is called an economic default. In such a scenario, the bank has two
alternatives: One, insist for additional collaterals to cover the outstanding liabilities where the
asset value has eroded and Second, initiate the recovery management depending upon the history
of the loan account. The probability of defaults in credit is mostly dependent on credit rating of
the borrower. The severity of losses is dependent on the quality of credit, which is again
dependent on recoveries in case of default and probability of default.
1.7.1.2 EXPOSURE RISK:
An event of default need not necessarily result into a total loss. Hence, a default without
considering recoveries denotes the exposure risk. This exposure risk computes the both funded
and non- funded limits sanctioned to the borrower since default may occur in both funded limits
and non-funded limits. To mitigate the credit risk in this dimension, banks usually fix exposure
limit to each of the borrowers and also the group of entities to which the borrower belongs.
1.7.1.3.RECOVERY RISK:
Credit risk does not always lead to total loss in the credit extended. Certain amount of recovery
is possible but the quantum of recovery is not predictable. This amount depends on factors like
the collateral provided o the bank and the loss in their market value. In lieu of their collaterals,
the industry norm is to provide a third-party guarantee to cover the default. Recovery of the loan
depends on the collateralization of the loan under reference and the third-party guarantee
provided by the borrower. But in both instances, the realization of assets to cover the liability of
the borrower is dependent on various legal issues involved in liquidation of the assets/ guarantee.

1.7.2.MARKET RISK:
Market risk maybe defined as the possibility of loss to bank caused by the changes in the
market variables. It is the risk that the value of on/ off balance sheet positions will be adversely
affected by movements in equity and interest rate markets, currency exchange rates and
commodity prices. Market risk is the risk to the bank’s earnings and capital due to changes in the
market level of interest rates or prices of securities, foreign exchange and equities, as well as
volatilities of those prices. Market risk management provides a comprehensive and dynamic
framework for measuring, monitoring and managing liquidity, interest rate, foreign exchange and
equity as well as commodity price risk of a bank that needs to be closely integrated with the
bank’s business strategy.
1.7.3.LIQUIDITY RISK:
Liquidity risk is another kind of risk that is inherent in the banking business. Liquidity risk is
the risk that the bank will not be able to meet its obligations if the depositors come in to withdraw
their money. This risk is inherent in the fractional reserve banking system. Therefore, in this
system, only a percentage of the deposits received are held back as reserves, the rest are used to
create loans. Therefore, if all the depositors of the institution came in to withdraw their money
all at once, the bank would not have enough money. This situation is called a bank run. This has
happened countless times over the history of modern banking.
Modern day banks are not very concerned about liquidity risk. This is because they have the
backing of the central bank. In case there is a run on a particular bank, the central bank diverts
all its resources to the affected bank. Therefore, the depositors can be paid back when they
demand their deposits. This restores depositor’s confidence in the bank finances and the run on
the bank is averted.
Many modern-day banks have faced bank runs. However, none of them have become insolvent
due to a bank run post the establishment of central banks.
Liquidity risk arises on both sides of the balance bank sheet. On the liability side, liquidity risk
represents the inability of banks to satisfy their depositors, especially in period of panic and loss

of trust to the banks which leads to massive deposit withdrawals. On the asset side, liquidity risk
represents the bank’s inability to have the appropriate assets to contract new loans, advances or
facilities, and make new investments in opportunities. So, the perfect combination for a bank’s
viability and the elimination of liquidity risk is the simultaneous maturity of its assets and
liabilities.
Liquidity risk refers to multiple dimensions: inability to raise funds at normal cost, market
liquidity risk and asset liquidity risk. When the credit ability of a bank becomes difficult, the cost
of funding becomes expensive, so the problem extends beyond pure liquidity issues while the
cost of funding is critical for bank’s profitability. And the problem is bigger when is spread to
the whole market where the cost of funding is much higher because of the general unwillingness
to transact. Finally, is very important how liquid the assets are; the more they are, the best serve
the current obligations without external funding.
Liquidity risk might become a major risk for the banking portfolio and maybe end up as the risk
of a funding crisis. That results from unexpected events: a large charge off, loss of confidence,
or a crisis of national proportion such as a currency crisis. Extreme lack of liquidity results in
bankruptcy and that makes liquidity risk a fatal risk. However, extreme conditions are often the
outcome of other risks.
Finally, liquidity risk also exists when a party to a securities instrument may not be able to sell
or transfer that instrument quickly and at a reasonable price, and as a result, incur a loss. So,
liquidity risk includes the possibility that a firm will not be able to unwind or hedge a position.
Liquidity risk consists of funding risk, time risk and call risk.
1.7.3.1.FUNDING RISK:
It is the need to replace net out flows due to unanticipated withdrawal/ non- renewal of deposit.
1.7.3.2.TIME RISK:
It is the need to compensate for non- receipt of expected inflows of funds, i.e. performing assets
turning into non- performing assets.

1.7.3.3. CALL RISK:
It happens on account of crystallization of contingent liabilities and inability to undertake

profitable business opportunities when desired.
1.7.4. INTEREST RATE RISK:
Interest rate risk is the potential negative impact on the net interest income and it refers to the
vulnerability of an institution’s financial condition to the movement in interest rates. Change in
interest rate affect earnings, value of assets, liability off-balance sheet items and cash flow.
Hence, the objective of interest rate risk management is to maintain earnings, improve the
capability, ability to absorb potential loss and to ensure the adequacy of the compensation
received for the risk taken and effect risk return trade off. Management of interest rate risk aims
at capturing the risks arising from the maturity and re-pricing mismatches and is measured both
from the earnings and economic value perspective.
Earning perspective involves analyzing the impact of changes in interest rates on accrual or
reported earnings in the near term. This is measured by measuring the changes in the net interest
income (NII) equivalent to the difference between total interest income and total interest expense.
In order to manage interest rate risk, banks should begin evaluating the vulnerability of their
portfolios to the risk of fluctuations in market interest rates. One such measure is duration of
market value of a bank assets or liabilities to a percentage change in the market interest rate. The
difference between the average duration for bank liabilities is known as the duration gap which
assess the bank’s exposure to interest rate risk. The Asset Liability committee (ALCO) of a bank
uses the information contained in the duration gap analysis to guide and frame strategies. By the
reducing the size of the duration gap, banks can minimize the interest rate risk.
Economic value perspective involves analyzing the expected cash inflows on assets minus
expected cash outflows on liabilities plus the net cash flows on off balance sheet items. The
economic value perspective identifies risk arising from long term interest rate gaps.

The various types of interest rate risks are as follows:
1.7.4.1 Gap/ mismatch risk:
A gap or mismatch risk arises from holding assets, liabilities, and off-balance sheet items with
different principal amounts, maturity dates, or repricing dates, thereby creating exposure to
unexpected changes in the level of market interest rates. This risk arises when there is a temporal
discrepancy between maturity and new price determination.
1.7.4.2. BASIS RISK:
The risk that the interest rate of different assets, liabilities, and off-balance sheet items may
change in different magnitudes is termed a basis risk. The degree of basis risk is fairly high in
banks that create composite assets out of composite liabilities. Basis risk is the result of different
reference interest rates in interest-sensitive positions, with similar characteristics regarding
maturity or repricing.
1.7.4.3. EMBEDDED OPTION RISK:
Embedded option risk results from significant changes in market interest rates that affect banks’
profitability by encouraging prepayment of cash credit/demand loans/term loans. Thus,
optionality risk arises from contract provisions regarding interest-sensitive positions, such as
loans with early repayment options and deposits with early withdrawal options. The exercise of
call/put options on bonds/debentures also leads to optionality risk. Banks should estimate
embedded options and then adjust the gap statements to estimate risk profiles. Banks also have
to periodically carry out stress tests to measure the impact of changes in interest rates.
1.7.4.4. YIELD CURVE RISK:
This risk arises from changes in the shape of the yield curve. Banks base their assets and liabilities
prices on different benchmarks, including Treasury bill rates, fixed deposits, and call money
market rates. When banks use two different instruments that mature at different times for pricing
their assets and liabilities, any nonparallel movements in the yield curves will affect the net
interest margin. The fluctuations in the yield curve are more frequent when the economy moves
through business cycles. Banks should examine the impact of yield curve fluctuations on the

portfolio value and operating income. These risks cover adverse effects on a bank’s income or
underlying economic value resulting from unanticipated shifts in the yield curve.
1.7.4.5 REPRICE RISK:
The scenario of price risk arises when assets are sold before their stipulated maturity period. In
financial terminology, bond prices and yields are inversely related. Price risk occurs when assets
are sold before their stated maturities. Price risk is closely associated with short-term movements
in interest rates. Hence, banks that have active trading books have to focus on formulating
policies to restrict portfolio size, holding period, duration, stop-loss limits, and marking to
market.
1.7.4.6 REINVESTMENT RISK:
Reinvestment risk arises from the uncertainty with regards to the interest rates at which the future
cash flows could be reinvested.
1.7.4.7. NET INTEREST POSITION RISK:
One of the significant factors contributing to the profitability of banks is the size of nonpaying
liabilities. When interest rates are in a downward trend, the interest rate risk is higher for banks
that have more earning assets than paying liabilities. In other words, banks with positive net
interest positions will experience reductions in net interest income as the market interest rate
declines and increases when the interest rate rises.
1.7.5 FOREX RISK:
Foreign exchange risk is the risk that a bank my suffer loss as a result of adverse exchange rate
movement during a period in which it has an open position either spot or forward or both or both
in same foreign currency. Even in case where spot or forward positions in individual currencies
are balanced the maturity pattern of forward transactions may produce mismatches. There is also
a settlement risk arising out of default of the counter party and out of time lag in settlement of
one currency in one center and the settlement of another currency in another time zone. Banks
are also exposed to interest rate risk, which arises from the maturity mismatch of foreign currency

position. The Value at Risk (VaR) indicates the risk that the bank is exposed due to uncovered
position of mismatch and these gap positions are to be valued on daily basis at the prevalent
forward market rates announced by FEDAI for the remaining maturities.
1.7.6.COUNTRY RISK:
This is the risk that arises due to cross border transactions that are growing dramatically in the
recent years owing to economic liberalization and globalization. It is the possibility that a country
will be unable to service or repay debts to foreign lenders in time. It comprises of Transfer Risk
arising on account of possibility of losses due to restrictions on external remittances: Sovereign
Risk associated with lending to government of a sovereign nation or taking government
guarantees: Political Risk when political environment or legislative process of country leads to
government taking over the assets of the financial entity (like nationalization) and preventing
discharge of liabilities in a manner that had been agreed to earlier; Cross Broder Risk arising on
account of the borrower being the resident of the country other than the country where the cross
border asset is booked; Currency Risk, a possibility that exchange rate change, will alter the
expected amount of principal and return on the lending or investment.
1.7.7. OPERATIONAL RISK:

Operational risk is the risk associated with operating a business. Operational risk covers such a
wide area that it is useful to subdivide operational risk into two components:
a. Operational failure risk.
b. Operational strategic risk.
Operational failure risk arises from the potential for failure in the course of operating the
business. A firm uses people, processes or technology to achieve the business plans, and any one
of these factors may experience a failure of some kind. Accordingly, operational failure risk can
be defined as the risk that there will be a failure of people, processes or technology within the
business unit. A portion of failure may be anticipated and these risks should be built into the
business plan. But it is unanticipated and therefore uncertain, failures that give rise to key

operational risks. These failures can be expected to occur periodically, although both their impact
and their frequency maybe uncertain.
Operational strategic risk arises from environmental factors, such as new competitor that
changes the business paradigm , a major political and regulatory regime change, earthquakes and
other such factors that are outside the control of the firm. It also arises from major new strategic
initiatives, such as developing a new line of business or re-engineering an existing business line.
All business relies on people, processes and technology outside their business unit and the
potential for failure exists there too, this type of risk is referred to as external dependency risk.
Operational risk is often defined by what it is not; any risk that is not related to credit, market
and liquidity risk is identified as operational risk. Different banks perceive it in different ways:
1.Any risk that is not categorized as market or credit risk
2.A risk of loss arising from various types of human or technical error.
3.Risk associated with settlement or payment risk and business interruption and legal risk
4.Risk of frauds by employees and outsiders; unauthorized transaction by employees and errors
relating to computer and telecommunication systems
5.The potential exposure to missed opportunities or to unexpected financial, reputational or other

damage resulting from the way in which an organization operates and pursues its business
objectives.
Operational risk arises due to inadequate control systems, operational problems and breaches
in internal controls, fraud and unforeseen catastrophes resulting in unexpected losses for the
banks. Many of the operational risk related functions such as regulatory compliance, finance
management, frauds, IT, legal and insurance are carried out by the staff and thus human resources
itself becomes a cause for operational risk. Financial losses could also arise from external events
such as fires and other disasters. Operational risk is perceived to be highly capable of impacting
business lines that have high volume and high turnover coupled with low margins.

1.7.8 REGULATORY RISK:
When owned funds alone are managed by an entity, it is natural that very few regulators operate
and supervise them. However, as banks accept deposits from public obviously better governance
is expected of them. This entails multiplicity of regulatory controls. Many banks have already
gone for public issue, have a greater responsibility and accountability. As banks deal with public
funds and money, they are subject to various regulations. The very many regulators include
Reserve Bank of India ( RBI), Securities Exchange Board of India ( SEBI), Department Of
Companies Affair (DCA), etc. Moreover, banks should ensure compliance of the applicable
provisions of The Banking Regulations Act, The Companies Act, etc. Thus, all the banks run the
risk of multiple regulatory risk which inhibits free growth of business as focus on compliance of
too many regulations leave too little energy and time for developing new business.

CHAPTER 2. CONCEPTUAL FRAMEWORK
2.1 PROCESS OF RISK MANAGEMENT
Risk management is the practice of defining the risk level an institution desire, identifying the
risk level the institution has and using derivatives and such other financial instruments to control
and adjust the level of risk that the institution is expected to bear.
Risk management is the process by which managers identify, assess, monitor and control risk
associated with a financial institution’s activities. The complexity and the range of financial
products have made risk management more difficult to accomplish and to evaluate.
The basic objective of risk manager is to maximize shareholder’s wealth by maximizing the
profit and optimizing the capital funds by ensuring long term solvency of the banking
organization. The objective of risk management is not to prohibit or prevent risk taking but to
ensure that the risk is consciously taken with full knowledge, clear purpose and understanding so
that it can be measured and mitigated. The purpose of managing risk is to prevent an institution
from suffering unacceptable loss causing an institution to fail or materially damage its
competitive position.
The intensity of environmental changes in economies worldwide have made it necessary for
monetary authorities and regulators all over the world to formulate and prescribe risk
management guidelines and tools/ techniques to regulate risk taking activities of banks and
financial institutions. The broad objectives have been summarized as follows:
1.To impose capital adequacy norms
2.To lay down the fair and equitable competitive playing field for banks by setting common
ground rule and benchmarks.
3.To control and monitor ‘systematic risk’ that may arise due to failure of the whole banking
system.

4.To develop and prescribe appropriate business and supervisory practices
5.To protect the interest of depositors and other stakeholders of banks.
The RBI has mandated that top management of banks to attach considerable importance to
improve the ability to identify, measure, monitor and control the overall level of risks undertaken.
It has also laid down broad parameters of risk management function as follows:
1.Organizational structure
2.Comprehensive risk management approach
3.Risk management policies approved by the Board which should be consistent with the broader
business strategies, capital strength, management expertise and overall willingness to assume risk
4.Guidelines and other parameters used to govern risk taking including detailed structure of
prudential limits
5.Strong MIS for reporting, monitoring and controlling risk
6.Well laid procedures, effective control and comprehensive risk reporting framework
7.Separate risk management framework independent of operational departments and with clear
delineation of levels of responsibility for management of risk
8.Periodical review and evaluation.
To overcome the risk and to make banking functions well, there is a need to manage all kinds of
risks associated with the banking. Risk management becomes one of the main functions of any
banking service risk management consists of identifying the risk and controlling them, means
keeping the risk at acceptable level. These levels differ from institution to institution and country
to country. The basic objective of risk management is to stake holders; value by maximizing the
profit and optimizing the capital funds for ensuring long term solvency of the banking
organizations.

RISK MANAGEMENT PROCESS
RISK ORIGINATION WITHIN THE BANK

Credit risk
Market risk
Operational risk
RISK IDENTIFICATION
Identify risk
Understand and analyze risk
RISK ASSESSMENT AND MEASUREMENT

Assess the risk impact
Measure the risk impact
RISK CONTROL
Recommendations for risk control
Risk mitigation through control techniques
Deputation of competent officers to deal with the risks
RISK MONITORING
Supervise the risk
Reporting on progress
Compliance with regulations follow up
RISK -RETURN TARDE OFF

Balancing of risk against returns.

2.2 TECHNIQUES OF RISK MANAGEMENT
2.2.1.GAP ANALYSIS:
It is an interest rate risk management tool based on the balance sheet which focuses on the
potential variability of net interest income over specific time intervals. In this method a maturity/
re-pricing schedule that distributes interest sensitive assets, liabilities and off- balance sheets
positions into time bands according to their maturity (if fixed rate) or time remaining to their next
re-pricing (if floating rate) is prepared. These schedules are then used to generate indicators of
interest rate sensitivity of both earnings and economic value to changing interest rates. After
choosing the time intervals, assets and liabilities are grouped into these time buckets according
to maturity (for fixed rates) or first possible re-pricing time (for flexible rate). The assets and
liabilities that can be re-priced are called as rate sensitive assets (RSAs) and rate sensitive
liabilities (RSLs) respectively. Interest sensitive gap (DGAP) reflects the difference between the
volume of rate sensitive asset and the volume of rate sensitive liability are given by:
GAP = RSAs – RSLs

The information on GAP gives the management an idea about the effects on net income due to
changes in the interest rate. Positive GAP indicates that an increase in future interest rate would
increase the net interest income as the change in interest income is greater than the change in
interest expenses and vice-versa.
The interest rate GAP shows the risk of rate exposure. Typically, financial institutions use it to
develop hedge positions, often through the use of interest rate futures. GAP calculations are
dependent on the maturity date of the securities used, and the period remining before the
underlying securities reach maturity.
A negative GAP, or a ratio less than one, occurs when a bank’s interest rate sensitive liabilities
exceeds its interest rate sensitive assets. A positive GAP, or ratio greater than one, is the opposite,

where a bank’s interest rate sensitive assets exceed its interest rate sensitive liabilities. A positive
GAP means that when rates rises, a bank’s profits or revenue will likely arise.
2.2.2 DURATION GAP ANALYSIS:
It is another measure of interest rate risk and managing net interest income derived by taking into
consideration all individual cash inflow and outflows. Duration is value and time weighted
measure of maturity of all cash flows and represents the average time needed to recover the
invested funds. Duration analysis can be viewed as the elasticity of the market value of an
instrument with respect to interest rate. Duration gap (DGAP) reflects the differences in the
timing of asset and liability cash flows and given by,
DGAP = DA -u DL
Where, DA = average duration of the asset
DL = average duration of the liabilities
U = liabilities/assets ratio
When interest rate increases by comparable amounts, the market value of assets decrease more
than that of liabilities resulting in the decrease in the market value of equities and expected net
interest income and vice-versa.
2.2.3 VALUE AR RISK (VaR):
It is one of the newer risk management tools. The Value at Risk (VaR) indicates how much a
firm can lose or make with a certain probability in a given time horizon. VaR summarizes
financial risk inherent in portfolios into a simple number. Though VaR is used to measure market
risk in general, it incorporates many other risks like foreign currency, commodities and equities.
VaR is defined as an estimate of potential loss in a position or asset/liability or portfolio of
asset/liability over a given holding period at a given level of uncertainty.

2.2.4. RISK ADJUSTED RATE OF RETURN ON CAPITAL (RAROC):
It gives an economic basis to measure all the relevant risks consistently and gives manager tool
to make the efficient decisions regarding risk/return tradeoff in different assets. As economic
capital protects financial institutions against unexpected losses, it is vital to allocate capital for
various risks that these institutions face. Risk Adjusted Rate of Return (RAROC) analysis shows
how much economic capital different products and businesses need and determines the total
return on capital of a firm. Though risk adjusted rate of return can be used to estimate the capital
requirements for market, credit and operational risks, it is used as an integrated risk management
tool.
2.2.5. SECURITIZATION:
It is a procedure studied under the systems of structured finance or credit linked notes.
Securitization of a bank’s assets and loans is a device for raising new funds and reducing bank’s
risk exposures. The bank pools a group of income earnings assets (like mortgage) and sells
securities against these in the open market, thereby transforming illiquid assets into tradeable
assets backed securities. As the returns from these securities depends on the cash flows of the
underlying assets, the burden of repayment is transferred from the originator to these pooled
assets.
2.2.6. SENSITIVITY ANALYSIS:
It is very useful when attempting to determine the impact, the actual outcome of a particular
variable will have if it differs from what was previously assumed. By creating a given set of
scenarios, the analyst can determine how changes in one variable(s) will impact the target
variable.

2.2.7. INTERNAL RATING SYSTEM:
An internal rating system helps financial institutions manage and control credit risks they face
through lending and other operations by grouping and managing the credit-worthiness of
borrowers and the quality of credit transactions.
2.3 RISK MANAGEMENT ON BANKING RISKS
Although, the risk management process is mainly the one presented above, each banking risk has
to be managed separately with the methods and models that are exclusively designed for each
one. The study of bank risk management process is essentially an investigation of how to manage
these risks. In each case, the procedure outlined above is adapted to the risk considered so as to
standardize, measure, constrain and manage each of these risks. In the paragraphs that follow,
the most popular risk management controls for the risks that are frequently faced, are presented.
2.3.1 MARKET RISK MANAGEMENT:
In the case of market risk management, the most efficient and widely used approaches to risk
measurement are scenario analysis and value-at-risk (VaR) analysis.
In scenario analysis, the analyst makes hypothetical changes in the basic determinants of portfolio
value (e.g. interest rates, exchange rates, equity prices, and commodity prices) and revalues the
portfolio. The resulting change in value is the loss estimate. A typical procedure, called stress
testing, is to use a scenario based on a historically adverse market move having the advantage
that distributional assumption for the risk calculation is not required. On the other hand, it is
subjective and considers that future financial upsets will strongly resemble those of the past.
Stress testing can provide regulators with the desired lower tail estimates, but is of limited utility
in day-to-day risk management and scenario analysis is dependent on having valuation models
that are accurate over a wide range of input parameters, a characteristic found also in VaR
models.
VaR is a generally accepted and widely used tool for measuring market risk that exists in trading
portfolios. It follows the concept that reasonable expectation of loss on its whole trading book

can be deduced by evaluating market rates, prices observed volatility and correlation. VaR is the
maximum loss that a bank can be confident it would lose over a target horizon within a given
confidence level. Its statistical definition is that VaR is an estimate of the value of losses that
cannot be exceeded, with confidence level a% over a specific time horizon.
Generally, there are three ways of computing VaR: the parametric or variance-covariance
method, the historical simulation, which allows for all types of dependency between portfolio
value and risk factors, and Monte Carlo simulation, which uses randomly generated risk factor
returns. Although this appears to give greater flexibility in estimating VaR, the three methods
give different risk estimates for different holding periods, confidence intervals and data windows.
2.3.2 MANAGEMENT OF INTEREST RATE RISK:

There are different techniques such as a) the traditional maturity GAP analysis to measure the
interest rate sensitivity, b) duration GAP analysis to measure interest rate sensitivity of capital,
c) simulation and d) value at risk for measurement of interest rate risk. The approach towards
measurement hedging interest rate risk varies with segmentation of bank’s balance sheet. Banks
broadly bifurcate the asset into Trading Book and Banking book. While trading book comprises
of assets held primarily for generating profits on short term differences in prices/yields , the
banking book consists of assets and liabilities contracted basically on account of relationship or
for steady income and statutory obligations and are generally held till maturity/payment by
counter party.
Thus, while price risk is the prime concern of banks in Trading Books, the earnings or changes
in the economic value are the main focus in banking book.
Value at risk is a method of assessing the market risk using standard statistical techniques. It is a
statistical method of risk exposure and measures the worst expected loss over a given time
interval under normal market conditions at a given confidence level of say 95% or 99%. Thus,
VaR is simply a distribution of probable outcome of future losses that may occur in a portfolio.
The actual result will not be known until the event takes place. Till then it is random variable
whose outcome has been estimated. As far as Trading Book is concerned, bank should be able to
adopt standardized method or internals models for providing explicit capital change for market
risk.

2.3.3 FOREX RISK MANAGEMENT:
By setting appropriates limits-open positions and gaps, stop-loss limits, Day lights as well as
overnights limits for each currency, Individual gap limits an aggregate gap limits, clear cut and
well defined division of responsibilities between front, middle and back office the risk element
in foreign exchange risk can be managed/monitored.
In managing foreign exchange risk, there are not particular methods that are used in practice.
Banks mainly use rather ad hoc approaches in setting foreign exchange and other trading limits
and these are mostly considered as the most effective. Limits are the key elements of the risk
management systems in foreign exchange trading as they are for all trading businesses.
2.3.4 OPERATIONAL RISK MANAGEMENT
Over a period of time, management of credit and market risks have evolved a more sophisticated
fashion than operational risk, as the former can be more easily measured, monitored and
analyzed. And yet the root causes of all the financial scams and losses are the result of operational
risk caused by breakdowns in internal control mechanism and staff lapses. So far, scientific
measurement of operational risk has not been evolved. While measurement of operational risk
and computing capital charges as envisaged in the Basel proposals are to be the ultimate goals,
what is to be done at present is start implementing the Basel proposal in a phased manner and
carefully plan in that direction. The incentives for banks to move the measurement chain is not
just to reduce regulatory capital but more importantly to provide assurance to the top management
that the bank holds the required capital.
2.3.5 HEDGING WITH CREDIT DERIVATIVES
Risk transfer is a popular risk management technique being used today. One of the alternatives
available to a bank in managing credit risk is the use of credit derivatives. Credit derivative
facilitate risk transfer. The birth of credit derivatives arose from the needs of investment bankers.

While credit risk is one of the oldest and best understood risk in finance, the emergence of credit
derivatives as a tool for hedging credit risk is of recent origin.
The structure of credit derivatives is designed to isolate and transfer credit risk and also to provide
liquidity by making it an independent tradable commodity. Credit derivatives therefore allow
banks to manage credit risk separately from funding. They are an example of the way modern
financial markets unbundled financial claims into their constituent elements allowing them to be
traded in standardized wholesale markets and re-bundled into new composite products that better
meet the needs of investors.
Lack of fungibility, industry and geographical concentration of credit, restrictive and inflexible
legal covenants and client relationship have been issues of much concern and major impediments
for banks to reduce or transfer credit risk. Credit derivatives are seen to be somewhat similar to
insurance contracts, but they differ in two important aspects. Unlike in an insurance contract, in
the case of credit derivative, one need not have an insurable interest in the asset nor one need
actually incur loss to prefer a claim on the occurrence of a predefined “credit event”. Further,
those buying a credit derivative can trade in and trade out of their contracts in a way that is not
possible in the insurance market.
2.3.6 CREDIT RISK MANAGEMENT
It is obvious that solving asymmetric information problems in banking is a way to manage credit
risk. The most usual methods is screening (collection of financial information about potential
borrowers before the transaction), specialization (knowledge of particular credit markets and
particular potential borrowers), monitoring the activities of the borrower, enforcing the covenants
in the loan contract, having long term relationships, collaterals and compensating balances (ex.
mortgages where home is collateral) and finally credit or loan rationing (refusal lending to
borrowers even though they are willing to borrow).
To continue with credit risk management tools, credit scoring and RAROC (risk-adjusted return
on capital) method help to decide whether a loan is accepted, rejected or requires more attention.
Credit scoring is a popular one, and is a technical method of assigning a score that classifies
potential borrowers into risk classes according to their economic, or other, characteristics and

RAROC is a technique that is used extensively as a management performance tool to evaluate

the economic profit generated mainly from a loan. RAROC is compared with a benchmark rate
in order the final decision to be made. Additionally, Credit metrics model (JP Morgan’s Credit
metrics TM, 1997) which is based on a transition matrix of probabilities that measures the
probability that the credit rating of a loan or any dept security will change over the term of the
loan or maturity of credit instrument, is widely used.
Another approach to credit risk management is by credit risk mitigation tools. Securitization is
one of the more visible forms and involves selling registered, rated securities in the capital
markets. The aim is to transfer the credit risk which is involved in a specified loan portfolio to
the institutional investors and insurance companies while bank is gaining liquidity (loans
decrease by the same amount). An alternative to the process of securitization is to insure the bank
asset by a credit default swap (CDS). The party buying credit protection pays a periodic fee to
another party who agrees to reimburse the purchaser of credit protection in the event of failure
to repay either the capital value of the debt or related interest within a specified time period.
Proportionally, counterparty risk takes place.
2.4 REVIEW OF LITERATURE
SWARANJEET ARORA made an attempt to identify the factors that contribute to credit risk
analysis in Indian banks and to compare credit risk analysis practices followed by Indian public
and private sector banks, the empirical study has been conducted and views of employees of
various banks have been tested using statistical tools. Present study explored the phenomenon
from different perspectives and revealed that credit worthiness analysis and collateral
requirements are the two important factors for analyzing credit risk. From the descriptive and
analytical results, it concluded that Indian banks efficiently manage credit risk. The results also
indicate that there is significant difference between the Indian public and private sectors banks
in analyzing Credit risk.

T. VEERABHADRA RAO in his study assessed the risk management, regulation and
supervision of the financial sector in general and the banking sector in particular is of paramount
importance for the orderly growth of the economy. The present study is undertaken to assess the
impact of such risk management and risk- based supervision measures introduced by the Reserve
Bank of India (RBI) in the post reform period. The main objective of study is to evaluate the
benefits of these measures on the overall working of the scheduled commercial banks (SCBs)
belonging to the three sectors viz. Public sector, Private sector and Foreign banks.
Dr. KRISHN A. GOYAL made an attempt to discuss in depth the importance of risk
management process and throws light on challenges and opportunities regarding implementation
of BASEL-II in Indian Banking Industry. The fast -changing financial environment exposes the
banks to various types of risks. The concept of risk and management are core of financial
enterprise. Rising global competition, increasing deregulation, introduction of innovative
products and delivery channels have pushed risk management to the forefront of today’s financial
landscape. The banking industry is exposed to various risks such as forex volatility risk, variable
interest rate risk, market play risk, operational risk, credit risk etc. which can adversely affect its
profitability and financial health. Risk management has thus emerged as a new and challenging
area in banking.
Dr. YOGITA S. MEHRA analyzed the impact of size and ownership of banks on the range of
operational risk management practices used by the banks through execution of survey
comprising of questionnaire. The study aimed to explore the range of practices used by Indian
banks in management of operational risk essential for achievement of Advanced Measurement
Approach (AMA) for cross section of Indian Banks and perform a comparative analysis with
AMA compliant banks worldwide the study provides a conclusive evidence of heightened
awareness and due importance given to operational risk by banks.
BODLA, B. S; VERMA, RICHA designed a paper to study the implementation of the credit
risk management framework by commercial banks in India. The results show that the authority

for approval of credit risk vests with Board of Directors in case of 94.4% and 62.5% of the
public sector and private sector banks respectively. For credit risk management, most of the
banks (if not all) are found performing several activities like industry study, periodic credit
calls, periodic plant visits, developing MIS, risk scoring and annual review of accounts.
However, the banks in India are abstaining from the use of derivatives products as risk hedging
tools. The survey has brought out that irrespective of sector and size of bank, credit risk
management framework in India is on the right track and is fully based on the RBI’s guidelines
issued in this regard.
USHA, JANAKIRAMANI assessed in detail the status of operational risk management in the
Indian banking system in the context of BASEL-II. The expected coverage of banking assets
and the approach adopted for operational risk capital computation is compared broadly with the
position of the banking system in Asia, Africa and the Middle East. A survey conducted on
twenty- two Indian banks indicates insufficient internal data, difficulties in collection of
external loss data and modeling complexities as significant impediments in the implementation
of operational risk management framework in banks in India. The survey underscores the need
to devote more time and resources if banks desire to implement the advanced approach under
BASEL -II.
REKHA ARUNKUMAR AND G. KOTESHWAR in their study felt that the credit risk is the
oldest and the biggest risk that banks face by virtue of their very nature of business inherit. The
pre-dominance of credit risk is the main component in the capital allocation. As per their
estimate credit risk takes the major part of the risk management apparatus accounting for over
70% of all risks. As per them market risk and operational risk are important, but more attention
needs to be paid to the credit risk management in banks.
MRUDUL GOKALE elaborately dealt with the subject of capital adequacy in banks. As per
him, banks mostly give adequate focus for the credit risk aspect. There is shift from the
qualitative risk assessment to the quantitative management of risk. In tune with the regulatory

insistence on capturing risks for the purpose of capital charge, sophisticated risk models are
being developed. These models help banks to near accurately quantify the potential losses
arising from different risks viz. credit risk, market risk and operation risks. This will enable the
regulator to ascertain whether individual bank has accurately compiled the risk profile of assets.

CHAPTER 3. PROFILE OF THE BANK
3.1 BANKING SECTOR IN INDIA
The banking industry sector is characterized by intensive competition considering both the cost
and the products. For this reason, the banks are forced to identify and adopt new and more
efficient ways to fight their competitors and to gain more customers that will be retained and
loyal. In this way, banks make efforts to reduce costs and make better offers by screening
borrowers and differentiating the prices accordingly so as to maximize the profits and minimize
the losses-risks. Generally, in the past the banks were product oriented which means that were
interested in selling as more products as possible without paying much attention to their
customer’s ability to pay back. In this way, they were interested to take as much market share as
possible so as to exploit the relative cost advantages and to continue to grow. Nevertheless, in
the recent high speed and evolutional times, the expansion of business, deregulation and
globalization of financial activities generated new financial products and increased level of
competition even more. That made necessary an effective and structured risk management
process in financial institutions. A bank’s ability to measure, monitor, and steer risks
comprehensively is becoming a decisive parameter for its strategic positioning. The risk
management framework, experience on the process, and internal controls, used to manage risks,
depends on the nature, size and complexity of bank’s activities. Nevertheless, there are some
basic principles that apply to all financial institutions irrespective of their size and complexity of
business and are reflective of the strength of an individual bank's risk management practices.
3.2 KARUR VYSYA BANK
Karur Vysya Bank is a Private-sector bank in India. It has completed 100 years of operation
and is one of the leading banks in India, headquartered in Karur in Tamil Nadu. It was set up in

1916 by M. A. Venkatarama Chettiar and Athi Krishna Chettiar. The bank primarily operates in
treasury, corporate/wholesale banking and retail banking segments.
KVB provides services such as personal, corporate, agricultural banking and services to NRIs
and MSME. Under personal banking, the bank provides housing loan, personal loan; insurance;
and fixed deposits among others. Under corporate banking, KVB provides services like corporate
loans; demat account, multicity current account and general insurance among others. Schemes
provided by KVB under agricultural banking include Green Harvester, Green Trac and KVB
Happy Kisan among others. Under MSME, the bank provides products such as KVB MSME
Cash, KVB MSME Term Loan, KVB MSME Vendor Bill Discounting and KVB MSME
Standby Term Loan among others. The bank had added more branches and 10 ATMs during the
year thus bringing the total to 798 branches and 1,780+ ATMs as on 1 July 2018. It introduced a
number of initiatives in FY16 like reloadable cards, kisan credit cards, automatic passbook kiosk,
e-book, etc. The latest being introduction of fast tag and UPI based payment system. Total
business volume is 1,00,000+ crore as of December 2017.
'The Karur Vysya Bank Limited', popularly known as KVB was set up on 25 July 1917 by Mr.
M.A Venkatarama Chettiar and Mr. Athi Krishna Chettiar, to capitalize on the previously
unexploited market of traders and agriculturists in and around Karur, a town in Tamil Nadu.

Though the bank started with a seed capital of ₹1 lakh, as with most banks, the seed capital has
grown, as have the services sold. The bank is managed and guided by the Board of Directors
drawn from different fields.
Realizing that there is more money elsewhere, the bank expanded out of Karur and established
approximately 668 branches in other States and Union Territories in order to gain a pan-India
presence.
Shri K.K. Balu was appointed as an Additional Director of the Bank on 27 January 2012
The Bank has celebrated its Centenary celebrations on 10 September 2016 at Chennai
with President of India Pranab Mukherjee as Chief guest.
3.2.1 Summarized Balance Sheet of Karur Vysya Bank
(RS.IN CRORE)
PARTICULARS MARCH MARCH MARCH

2019 2018 2017
EQUITIES AND LIABILITIES
SHAREHOLDER’S FUNDS
EQUITY SHARE CAPITAL 159.86 145.33 121.86
TOTAL SHARE CAPITAL 159.86 145.33 121.6
REVALUATION RESERVE 0.00 0.00 0.00
RESERVES AND SURPLUS 6,262.94 6,188.86 4,913.83
TOTAL RESERVES AND SURPLUS 6,26.94 6,188.86 4,913.83
TOTAL SHAREHOLDER’S FUND 6,422.80 6,264.19 5,035.70
DEPOSITS 59,867.95 56,90.09 53,699.1
BORROWINGS 1,565.34 2,381.67 1,695.65
OTHER LIABILITIES AND1,484.02 1,393.17 1,376.46
PROVISIONS
TOTAL CAPITAL AND 69,340.11 66,929.12 61,807,62
LIABILITIES

ASSETS
CASH AND BALANCE WITH RBI 2,934.68 2,960.07 2,790.47
BALANCE WITH BANKS, MONEY 762.36 1,336.83 1,554.62
AT CALL AND SHORT NOTICE
INVESTMENTS 14,881.59 15,803.21 14,857.48
ADVANCES 48,580.81 44,800.15 40,907.72
FIXED ASSETS 582.99 528.19 418.61
OTHER ASSETS 1,597.68 1,500.67 1,278.71
TOTAL ASSETS 69,340.11 66,929.12 61,807.62
OTHER ADDITIONAL
INFORMATION
NUMBER OF BRANCHES 789.00 790.00 711.00
NUMBER OF EMPLOYEES 7,368.00 7,956.00 7400.00
CAPITAL ADEQUACY RATIO(%) 16.00 14.00 13.00
KEY PERFORMANCE
INDICATORS
TIER I (%) 14.00 14.00 12.00
TIER II (%) 2.00 1.00 1.00
ASSETS QUALITY
GROSS NPA 4,449.57 3,015.76 1,483.81
GROSS NPA(%) 9.00 7.00 4.00
NET NPA 2,420.34 1,862.83 1,033.46
NET NPA (%) 5.00 4.00 3.00
NET NPA TO ADVANCES (%) 5.00 4.00 3.00
CONTINGENT LIABILITIES AND
COMMITMENTS
BILLS FOR COLLECTION 2,341.84 2,316.05 2,921.43
CONTINGENT LIABILITIES 10,137.07 14,387.61 11,957.96

3.2.2 Summarized Profit & Loss A/C
(RS. IN CRORE)
PARTICULARS MARCH MARCH MARCH

2019 2018 2017
INCOME
INTEREST/DISCOUNT ON 4,596.38 4,420.81 4,401.69
ADVANCES/BILLS
INCOME FROM INVESTMENTS 1,150.59 1,122.93 1,106.04
INTEREST ON BALANCE WITH RBI AND 42.90 77.21 87.77
OTHER INTER-BANK FUNDS
OTHERS 25.95 78.70 26.86
TOTAL INTEREST EARNED 5,815.82 5,699.65 5,622.35
OTHER INCOME 962.77 899.93 782.22
TOTAL INCOME 6,778.59 6,599.59 6,404.57
EXPENDITURE
INTEREST EXPENDED 3,453.00 3,401.54 3,548.65
PAYMENTS TO AND PROVISIONS FOR 761.17 639.08 607.96
EMPLOYEES
DEPRECIATION 101.22 17.41 85.89
OPERATING EXPENSES (EXCLUDES 752.42 764.23 591.10
EMPLOYEE COST AND DEPRECIATION)
TOTAL OPERATING EXPENSES 1,614.81 1,420.72 1,284.95
PROVISION TOWARDS INCOME TAX 85.71 206.71 394.88
PROVISION TOWARDS DEFERRED TAX 25.65 -48.74 -117.39
OTHER PROVISIONS AND 1,388.55 1,273.68 687.49
CONTINGENCIES
TOTAL PROVISIONS AND 1,499.91 1,431.65 964.98
CONTINGENCIES

TOTAL EXPENDITURE 6,567.72 6,253.91 5,79.58

NET PROFIT/LOSS FOR THE YEAR 210.87 345.67 605.98
PROFIT / LOSS BROUGHT FORWARD 54.26 193.31 2.20
TOTAL PROFIT/LOSS AVAILABLE 265.12 538.98 608.18
FOR APPROPRIATIONS
APPROPRIATIONS
TRANSFER TO/FROM STATUTORY 52.80 87.00 152.00
RESERVE
TRANSFER TO/FROM CAPITAL 22.17 12.05 73.87
RESERVE
TRANSFER TO/FROM REVENUE AND 22.50 160.00 164.00
OTHER RESERVES
DIVIDEND AND DIVIDEND TAX FOR 0.00 0.00 0.00
THE PREVIOUS YEAR
EQUITY SHARE DIVIDEND 52.56 43.59 0.00
TAX ON DIVIDEND 0.00 147.09 0.00
BALANCE CARRIED OVER TO 59.57 54.26 193.31
BALANCE SHEET
TOTAL APPROPRIATIONS 265.12 538.98 608.18
OTHER INFORMATION
EARNINGS PER SHARE
BASIC EPS (RS) 2.64 4.98 9.95
DILUTED EPS (RS) 2.64 4.98 9.95
DIVIDEND PERCENTAGE
EQUITY DIVIDEND RATE (%) 30.00 30.00 130.00

CHAPTER 4. DATA ANALYSIS AND
INTERPRETATION
KVB has an operational track record of more than 10 decades with an established retail franchise
in South India. The bank’s branch network stood at 782 as of December 2018, of which 83% are
in Tamil Nadu, Andhra Pradesh, Telengana and Karnataka. The bank’s Board comprises of 11
members, including the managing director and chief executive officer and 5 independents.
CAPITAL ADEQUACY AND CAPITAL STRUCTURE
Under Basel III banks are required to maintain a minimum Pillar 1 Capital to Risk-weighted
Assets Ratio (CRAR) of 9% on an on-going basis (other than Capital Conservation Buffer (CCB),
Counter Cyclical Capital Buffer (CCCB) etc.). Banks are required to maintain CCB of 1.875%
and to achieve a level of 2.50% by 31.03.2020.
Capital funds are classified into Tier-I and Tier-II capital under the capital adequacy framework.
Tier-I Capital:
The Bank’s Tier I capital shall consist of Common Equity Tier I (CET 1) and admissible
Additional Tier I (at 1) capital. CET 1 capital must be at least 5.5% of risk-weighted assets
(RWAs) i.e. for Credit risk + Market risk + Operational risk on an ongoing basis and AT 1 capital
can be a maximum of 1.5%, thus making total Tier I capital to be at least 7%.
In addition to the minimum CET 1 capital of 5.5% of RWAs, banks are also required to maintain
CCB in the form of CET 1 capital, progressively from Financial Year 2015-16, to reach a level
of 2.5% of RWAs, by 31.03.2020.
Tier I capital includes paid-up equity capital, share premium, statutory reserves, capital reserves,
other disclosed free reserves and balance in Profit and Loss account at the end of the previous
financial year. Profits in current financial year may be included in Tier I on fulfillment of certain
conditions regarding incremental provisions for non-performing assets.

Equity Capital
The Bank has authorized share capital of Rs. 200 crore comprising of 100,00,00,000 equity
shares of Rs. 2/- each. As on 30.06.2019 the Bank has Issued, Subscribed and Paid-up capital of
Rs. 1600 million constituting 79,99,87,642 shares of Rs. 2/- each.
Tier II Capital:
The Bank’s Tier II capital includes provisions for standard assets and debt instruments (Tier II
bonds) eligible for inclusion in Tier II capital.
Provisions or loan-loss reserves held against future, presently unidentified losses, which are
freely available to meet losses which subsequently materialize, will qualify for inclusion within
Tier II capital. Tier II capital will also include debt capital instruments issued by banks and
premium, if any, and Revaluation Reserves.
Tier II bonds Details of subordinated debt instruments issued by the Bank and outstanding as on
30.06.2019 is as under:
(Rs.in million)
ISSUE DEEMED COUPON TENOR AMOUNT AS ON

SERIES DATE OF RATE (IN 30.06.2019
ALLOTMENT (% P.A) MONTHS)
1. September 25, 9.86 120 1500.00
2005
2. MARCH 12, 11.95 123 4870.00
2019

Composition of Capital – Tier I and Tier II: (Rs. in million)
1.Tier I capital
1.1 Paid up share capital 1,599
1.2 Reserves 61,213
1.3 GROSS TIER I CAPITAL (1.1 + 1.2) 62,812
1.4 Deductions 398
1.5 TOTAL TIER I CAPITAL (1.3-1.4) 62,414
2.Tier II capital
2.1 subordinated debt 6,370
2.2 general provisions and revaluation reserves 1,792
2.3 investment reserve and investment fluctuation 839
reserve
2.4 GROSS TIER II CAPITAL (2.1+2.2+2.3) 9,001
2.5 Deductions 1,500
2.6 TOTAL TIER II CAPITAL (2.4-2.5) 7,501
3.Debt capital instruments eligible for inclusion in
Basel III Tier II capital
3.1 Total amount outstanding 4,870
3.2 Of which amount raised during the current year -
3.3 amount eligible to be reckoned as capital funds 4,870
4.Subordinated debt eligible for inclusion in lower
Tier II capital
4.1 Total amount outstanding 1,500
4.2 Of which amount raised during the current year -
4.3Amount eligible to be reckoned as capital funds 1,500
5.Other deductions from capital
5.1 Other deductions from capital 1,500
6.Total eligible capital
6.1 Total eligible capital (1.5+2.6) 69,915

CAPITAL ADEQUACY ASSESSMENT PROCESS
The Bank has a process for assessing its overall capital adequacy in relation to the Bank’s risk
profile and a strategy for maintaining its capital levels. The process ensures that the Bank has
adequate capital to support all the material risks and an appropriate capital cushion. The Bank
identifies, assesses and manages comprehensively all risks that it is exposed to through robust
risk management framework, control mechanism and an elaborate process for capital calculation
and planning.
The Bank has formalized and implemented a comprehensive Internal Capital Adequacy
Assessment Process (ICAAP). The Bank’s ICAAP covers the process for assessment of the
adequacy of capital to support current and projected business levels / risks.
The Bank has a structured process for the identification and evaluation of all risks that the Bank
faces, which may have a material impact on its financial position. The Bank considers the
following risks as material risks it is exposed to in the normal course of its business and therefore,
factors these while assessing / planning capital:
1. CREDIT RISK 2. MARKET RISK 3. OPERATIONAL RISK
4. LIQUIDITY RISK 5. INTEREST RATE 6. CONCENTRATION

RISK RISK
7. STRATEGIC RISK 8. REPUTATIONAL

RISK
The Bank has also implemented a Board approved Stress Testing policy. Stress Testing involves
the use of various techniques to assess the Bank's potential vulnerability to extreme but plausible

("stressed") business conditions. Typically, this relates, among other things, to the impact on the
Bank’s profitability and capital adequacy. Stress Tests are conducted on the Bank’s on and off
balance sheet exposures to test the impact of Credit risk, Market risk, Liquidity risk and Interest
Rate Risk in the Banking book (IRRBB). The 3 stress test results are put up to the Risk
Management Committee (RMC) of the Board for their review and guidance. The Bank
periodically assesses and refines its stress tests in an effort to ensure that the stress scenarios
capture material risks as well as reflect possible extreme market moves that could arise as a result
of market conditions. The stress tests are used in conjunction with the Bank's business plans for
the purpose of capital planning in the ICAAP. In line with the RBI guidelines for implementing
the New Capital Adequacy Framework under Basel III, the Bank has successfully migrated to
the framework from April 1, 2013.
In accordance with the RBI’s requirement, the Bank has continued to adopt Standardized
Approach (SA) for Credit Risk and Basic Indicator Approach (BIA) for Operational Risk to
compute capital as on 30.06.2019. Besides this, the Bank continues to apply the Standardized
Duration Approach (SDA) for computing capital requirement for Market Risk. RBI has
prescribed banks to maintain a minimum CRAR of 11.5% with regard to credit risk, market risk
and operational risk.
CAPITAL ADEQUACY AS ON 30.06.2019
The total Capital to Risk Weighted Assets Ratio (CRAR) as per Basel III guidelines works to
15.99% as on 30.06.2019 (as against minimum regulatory requirement of 10.875%). The Tier I
CRAR stands at 14.27%. The Bank has followed the RBI guidelines in force to arrive at the
eligible capital, risk weighted assets and CRAR. Capital requirements for Credit Risk, Market
Risk and Operational Risk:

(Rs. In million)
1. Capital requirement for credit risk
• Portfolio subject to standardized approach 39,489
• Securitization exposures
2. Capital requirement for market risk 1,834
Standardized duration approach 1,089
• Interest rate risk 49
• Foreign exchange risk (including gold) 696
• Equity risk
3. Capital requirement for operational risk
Basic indicator approach 6,238
TOTAL CAPITAL REQUIREMENTS AT 10.875% (1+2+3) 47,561
Total capital 69,915
CRAR % 15.99%
Tier I CARR % 14.27%
CET 1% 14.27%
RISK EXPOSURE AND ASSESSMENT
The Bank is exposed to various types of risk such as Credit, Market, Operational, Liquidity,
Interest Rate, Reputational, Legal and Strategic risk. The Bank has separate and independent
Risk Management Department in place which oversees the management of all types of risks in
an integrated fashion.
The objective of risk management is to have optimum balance between risk and return. It entails
the identification, measurement and management of risks across the various businesses of the
Bank. Risk is managed through framework defined in policies approved by the Board of
Directors and supported by an independent risk management function which monitors and takes
corrective action so that the Bank operates within its risk appetite. The risk management function

attempts to anticipate vulnerabilities through quantitative or qualitative examination of the

embedded risks in various activities. The Bank continues to focus on refining and improving its
risk management systems. In addition to ensuring compliance with regulatory requirements, the
Bank has developed robust internal systems for assessing capital requirements keeping in view
the business objectives.
The Board of Directors (BOD) approves the strategies and policies for Risk Management, based
on recommendations of the Risk Management Committee (RMC) of the Board set up to focus
upon risk management issues. The Risk Management Committee of the Board reviews various
aspects of risk arising from the businesses undertaken by the Bank. Operating level risk
committees comprising of senior management viz. Asset Liability Management Committee
(ALCO), the Operational Risk Management Committee (ORMC), Market Risk Management
Committee (MRMC) and the Credit Risk Management Committee (CRMC) oversee specific risk
areas. These committees in turn provide inputs for review by the Risk Management Committee
(RMC) of the Board.
Risk Management Committee (RMC) of the Board:
The Risk Management Committee of the Board is the primary tier to oversee implementation of
Board approved strategies and policies, recommend setting up of tolerance limits wherever
required, monitor implementation of strategies and policies, as well as adherence to prescribed
tolerance limits etc. The RMC oversees the functioning of Executive level Committees for risk
management.
Executive Level Committees:
At Executive Management level, the organizational responsibilities for implementing and

monitoring Board approved strategies and policies and adhering to prescribed tolerance limits
etc. are as under:

S.N. EXECUTIVE COMMITTEE CHAIRMAN

LEVEL LEVEL AREA
1. Asset liability All aspects of asset Chief Operating
management liability management, Officer
committee (AMC) monitoring and control,
interest rate review, etc.
2. Credit Risk All aspects of credit risk MD and CEO
Management management,
Committee (CRMC) monitoring and control
3. Market risk All aspects of market Chief Operating
management risk management, Officer
committee (MRMC) monitoring and control
4. Operational risk All aspects of Chief Operating
management operational risk Officer
Committee (ORMC) management,
monitoring and control.
CREDIT RISK
Credit risk is defined as the possibility of losses associated with diminution in the credit quality
of borrowers or counterparties. In a bank’s portfolio, losses stem from outright default due to
inability or unwillingness of a customer or counterparty to meet commitments in relation to
lending, trading, settlement and other financial transactions.

The Bank adopts the definition of ‘past due’ and ‘impaired credits’ (for accounting purposes) as
defined by Reserve Bank of India under Income Recognition, Asset Classification and
Provisioning (IRAC) norms.
Credit Risk Management
Credit Risk Management Committee (CRMC) headed by MD & CEO is the top-level functional
committee for managing credit risk. The committee is responsible for implementation of Credit
Policy approved by the Bank’s Board. The committee considers and takes decision necessary to
manage and control credit risk within the overall quantitative prudential limits approved by the
Bank’s Board. The Committee is entrusted with the responsibilities to formulate standards for
presentation of credit proposals, financial covenants, rating standards and benchmarks.
The Bank has adopted an integrated approach to credit risk management, which encompasses:
1. Establishment and articulation of corporate priorities
2. Institution and inculcation of an appropriate credit culture
3. Determination of specific credit risk strategy and profile
4. Implementation of appropriate credit risk controls
5. Monitoring the effectiveness of credit risk controls
The Bank has implemented the Standardized approach for regulatory capital measurement for
credit risk.
Credit Risk Strategy and Risk Profile:
The bank has adopted a credit risk strategy and risk appetite, which is in line with its risk taking
ability to ensure conservation and growth of shareholder funds, with a proper balance between
risk and reward. Financial resources are allocated to optimize the risk reward ratio.

There is a clearly articulated definition of acceptable credit risk, based upon:
1. Identification of target markets/segments
2. Establishing of characteristics of desirable customers within the target market
3. Assessing whether adequate resources are available to support the business
4. Ensuring that all legal and regulatory requirements are complied with
5. Ensuring that the portfolio is consistent with the Bank’s strategy and objectives especially in
relation to risk concentration, maturity profile and liquidity management.
Credit Risk Controls:
Credit risk controls focus on identification, measuring, monitoring and managing the assumed
risks and include:
1.A documented credit policy and credit risk rating policy
2. Approval process with delegated authorities
3. Asset quality and risk rating system and its verification
4. Effective loan disbursement mechanism to minimize the legal risk
5. Effective loan administration to ensure past-due management and bad loan detection
6. A loan review mechanism
7. Portfolio management tools to manage portfolio risks
Management of credit risk is at three levels:
1. Strategic or Portfolio level, so as to ensure that no single event can have a significant adverse
impact.
2. Established credit policy to have a minimum standard for assuming risk

3. Reliance on the competence of trained staff to make sound credit decisions
The Bank relies upon formal and conventional credit risk assessment, viz.:
1. The ability and willingness of borrowers to repay.
2. Dependence primarily on cash flows for repayment with security taken to provide a secondary
source of repayment.
3. Quality of data and analysis thereof forms the basis of assessment and not external reputation
or unsubstantiated beliefs.
4.Rational assessment of probability of default and assessment of ‘Worst Case Scenario’.
5. Transparency and communication of all relevant facts (negative as well as positive) necessary
for making an informed credit decision.
6. Documentation of all assessment, rationale and decisions.
7. Know Your Customers ’KYC’ forms the bedrock of initiating and sustaining any relationship.
Total gross credit risk exposure:
(Rs. In million)
Category Domestic Amount
Fund based
5,65,081
Non-fund based 44,074
Total
6,09,155

Note:
1.Fund based credit exposure excludes Cash in hand, Balance with RBI, investments in shares
and bonds etc., deposits placed with NABARD, SIDBI & NHB, Fixed and Other assets.
2. Non-fund based exposure includes outstanding Letter of Credit, Acceptances and Bank
Guarantee exposures.
Exposure includes credit exposure (funded and non-funded credit limits) and investment
exposure (including underwriting and similar commitments). The sanctioned limits or
outstanding, whichever is higher, is reckoned for arriving at the exposure limit. In case of fully
drawn term loans (i.e. where there is no scope for further withdrawal of any portion of the
sanctioned limit), the outstanding is treated as the exposure.
Geographical Distribution of Credit:
(Rs.in million)
STATE FUND STATE FUND

BASED BASED
ANDHRA PRADESH 70,888 CHANDIGARH 661
BIHAR 20 DELHI 1,622
CHHATISGARH 250 GUJRAT 14,743
GOA 348 JHARKHAND 270
HARYANA 3,702 KERALA 9,951
KARNATAKA 31,419 MAHARASHTRA 37,074
MADHYA PRADESH 1,017 PONDICHERRY 3,938
ORISSA 1,572 RAJASTHAN 548
PUNJAB 1,604 TELANGANA 38,802
TAMIL NADU 2,42,173 UTTARAKHAND 39
UTTAR PRADESH 2,770
WEST BENGAL 11,406 TOTAL 4,91,817

CREDIT RISK:
Disclosures for portfolio subject to the Standardized Approach
The Bank has used the ratings of the following domestic external credit rating agencies for the
purpose of risk weighting Bank’s claims on the domestic entities for capital adequacy purpose:
i. CRISIL
ii. CARE
iii. ICRA
iv. India Ratings
v. Brickwork
vi. SMERA
vii. Infomerics
A description of the process used to transfer public issuer ratings onto comparable assets in the
banking book:
Bank has used short term ratings for assets with maturity upto one year and long-term ratings
for assets maturing after one year as accorded by the approved external credit rating agencies.
Bank has not cherry picked ratings. Bank has not used one rating of a CRA (Credit Rating
Agency) for one exposure and another CRA’s rating for another exposure on the same
counterparty unless only one rating is available for a given exposure.
Cash credit exposures have been rated as long-term facility, notwithstanding the repayable on
demand condition.
If an obligor has a long term external credit rating that warrants RW (Risk Weight) of 150%, all
unrated exposures on the same obligor whether long or short is assigned the same 150% RW
unless mitigated by recognized Credit Risk Mitigates.
Bank has used only solicited rating from the recognized CRAs. In case the obligor has multiple
ratings from CRAs, the rating to be used is selected as per RBI guidelines.

If there is only one rating by a chosen credit rating agency for a particular claim, that rating is
used to determine the risk weight of the claim.
If there are two ratings accorded by chosen credit rating agencies that map into different risk
weights, the higher risk weight is applied.
If there are three or more ratings accorded by chosen credit rating agencies with different risk
weights, the ratings corresponding to the two lowest risk weights is referred to and the higher of
those two risk weights is applied. i.e., the second lowest risk weight.
Where RW associated with the rating by a CRA for a specific investment instrument is lower
than one corresponding to unrated exposure, but the Bank’s exposure is not in that instrument
but some other debt, the RW for the rated exposure has been applied to Bank’s unrated exposure
provided the latter ranks pari-passu or senior to the specific rated exposure and the maturity of
Bank’s claim is not later than the rated exposure.
If either the issuer or a single issue has been rated warranting RW equal or higher than unrated
claim, a claim on the same issuer which is unrated but ranks pari-passu or junior to the rated
exposure has been assigned the same RW as the rated exposure.
No recognition of CRM technique has been taken into account in respect of a rated exposure if
that has already been factored by the CRA while carrying out the rating.
For exposure amounts after risk mitigation subject to the standardized approach, amount of the
Bank’s outstanding (rated and unrated) in the following three major risk buckets as well as those
that are deducted as on 30.06.2019 are as follows:

(Rs.in million)
S.N. RISK WEIGHT FUND NON-FUND

BASED BASED
1. BELOW 100% 3,92,090 14,259
2. 100% 1,25,259 12,190
3. MORE THAN 100% 51,756 4,407
TOTAL (1+2+3) 5,69,105 30,856
CREDIT RISK MITIGATION:
Disclosures for Standardized Approach

The Bank has adopted Credit Risk Mitigation (CRM) Techniques and Collateral Management
(CM) guidelines issued by RBI under Master circular – Prudential guidelines on capital
Adequacy and Market Discipline – New Capital Adequacy Framework (NCAF).
The Bank has utilized credit risk mitigation in the form of Bank’s own deposits, LIC Policies,
National Saving Certificate and gold, wherever the collateral is identifiable, marketable &
enforceable and complies with RBI requirements. Sovereign exposures and Sovereign
guaranteed exposures are risk weighted as per RBI directives.
The general principles applicable for use of credit risk mitigation techniques are as under:
1.No transaction in which Credit Risk Mitigation (CRM) techniques are used has been assigned
higher capital requirement than as otherwise identical transaction where such techniques are not
used
2. The Bank has taken care to see that effects of CRM are not double counted. To ensure this no
additional supervisory recognition of CRM for regulatory capital purposes is made available on
claims for which an issue-specific rating is used that already reflects that CRM.

3. Principal-only ratings will not be allowed within the CRM framework. The rating should
cover principal and interest.
The Bank has, therefore, put in place robust procedures and processes to control these risks,
including strategy, consideration of the underlying credit, valuation, policies and procedures
systems, control of Roll-off risks, and management of concentration risk arising from the use of
CRM techniques and its Interaction with the Bank’s overall credit risk profile.
Eligible Financial Collateral:
The following collaterals are used as risk mitigants –
1.Cash margins and fixed deposit receipts of the counterparty with the Bank
2. Gold bullion and jewelry
3. Securities issued by Central and State Governments
4. National Savings Certificates, Kisan Vikas Patras
5. Life insurance policies with a declared surrender value of an insurance company which is
regulated by an insurance sector regulator.
6. Debt securities rated by a chosen Credit Rating Agency in respect of which the banks should
be sufficiently confident about the market liquidity and where they are either:
a) Attracting 100% or lesser risk weight i.e. rated at least BBB (-), when issued by public sector
entities and other entities (including banks and Primary Dealers); or
b) Attracting 100% or lesser risk weight i.e. rated at least PR3/ P3/F3/A3 for short-term debt
instruments.
7. Debt securities not rated by a chosen Credit Rating Agency in respect of which the banks
should be sufficiently confident about the market liquidity where these are:

a) Issued by a bank
b) Listed on a recognized exchange
c) Classified as senior debt
d) All rated issues of the same seniority by the issuing bank are rated at least BBB(-) or A3 by a
chosen Credit Rating Agency; and
8.Units of Mutual Funds regulated by the securities regulator of the jurisdiction of the bank’s
operation and mutual funds where:
a. Price for the units is publicly quoted daily i.e., where the daily NAV is available in public
domain; and
b. Mutual fund is limited to investing in permitted instruments listed.
MARKET RISK IN TRADING
Market risk refers to the uncertainty of future earnings resulting from changes in interest rates,
foreign exchange rates, market prices and volatilities. The Bank assumes market risk in its
lending and deposit taking businesses and in its investment activities, including position taking
and trading. The market risk is managed in accordance with the investment policies, which are
approved by the Board. These policies ensure that operations in securities, foreign exchange and
derivatives are conducted in accordance with sound and acceptable business practices and are as
per the extant regulatory guidelines, laws governing transactions in financial securities and the
financial environment. Market Risk in Trading Book is assessed as per the Standardized Duration
approach. The capital charge for Held for Trading (HFT) and Available for Sale (AFS) portfolios
is computed as per Reserve Bank of India guidelines.
The objectives of market risk management are as follows:
1. Management of liquidity
2. Management of interest rate risk and exchange rate risk.

3. Proper classification and valuation of investment portfolio
4. Adequate and proper reporting of investments and derivative products
5. Compliance with regulatory requirements
Strategies and processes:
To comply with the regulatory guidelines and to have independent control groups there is clear
functional separation of:
1. Trading (Front office)
2. Monitoring and control (Middle office) and
3. Settlements (Back office)
The strategy/guidelines for controlling market risk include:
1. Direct involvement of experienced line management
2. Stringent controls and limits
3. Strict segregation of front, middle and back office duties
4. Comprehensive periodical reporting of positions
5. Regular independent reviews of all controls and limits
6. Rigorous testing and auditing of all pricing, trading and risk management.
The scope and nature of risk reporting and measurement systems:
Reporting – The Bank periodically reports on the various investments and their related risk
measures to the senior management and the committees of the Board. The Bank also periodically
reports to its regulator in compliance with regulatory requirements.

Measurement - The Bank has devised various risk metrics for measuring market risk. These are
reported to Asset Liability Management Committee. Some of the risk metrics adopted by the
Bank for monitoring its risks are Value-at-Risk, Earnings at Risk, Modified Duration, Stop Loss
limits amongst others.
The capital requirements for market risk are detailed below:
S.N. RISK CATEGORY CAPITAL

CHARGE
1. INTEREST RATE RISK 1,089
2. FOREIGN EXCHANGE RISK 49
(INCLUDING GOLD)
3. EQUITY RISK 696
CAPITAL REQUIREMENT FOR 1,834
MARKET RISK (1+2+3)
OPERATIONAL RISK
Operational risk is defined as the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events. Operational risk includes legal risk but
excludes strategic and reputational risk.
The Bank has put in place a Board approved Operational Risk Management Policy which outlines
overall framework for management of Operational Risk.
The Bank manages Operational Risk by way of adopting best practices in processes as well as
products. Utmost importance is given on communication and understanding of processes at
transactional level and compliance to same are monitored through effective internal audits.
The Bank’s selection of personnel and systems of rewarding performance are aligned to meet
Bank’s stated key priorities. There is a commitment to training and upgrading of staff skills.
Strong ‘ownership’ of exposures is encouraged, through rewards as well as strong accountability.
The Bank understands the criticality of business continuity in the event of any undesirable/
unforeseen incident and has put in place an exhaustive Business Continuity Plan (BCP) in place

which is subject to periodic drills. The Bank has robust Information Technology set up with
Disaster Recovery (DR) site for critical functions and backups. Further there is a strict adherence
to Information Security Policy across the Bank.
As per the mandate from RBI, the Bank is following the Basic Indicator Approach (BIA) for
assessment of Operational Risk Capital.
Capital requirement for operational risk as per Basic Indicator Approach (BIA) as on 30.06.2019
is Rs. 6,238 million.
INTEREST RATE RISK IN BANKING BOOK
The Board of the Bank, through Asset liability Management Committee has overall responsibility
for management of risks and it sets limits and policies for management of liquidity risk, market
risk including foreign exchange, interest rate and equity risk. The Asset Liability Management
Committee (ALCO), a strategic decision making body, headed by Chief Operating Officer and
comprising of senior executives of the Bank is responsible for deciding the mix and maturity
profile of the assets and liabilities, recommendation of risk policies, setting up of prudential limits
to manage the risks and ensuring compliance with the limits set by the Board. The ALM policy
of the Bank includes the prudential limits on interest rate risk, liquidity risk, foreign exchange
risk and equity risk.
Risk Management Department is monitoring the limits laid down in the ALM Policy through
various reports.
General disclosures for exposures related to counter party credit risk
Counterparty exposure:
Counterparty credit risk in case of derivative contracts arises from the forward contracts. The
subsequent credit risk exposures depend on the value of underlying market factors (e.g., interest
rates and foreign exchange rates), which can be volatile and uncertain in nature. The Bank does
not enter into derivative transactions other than forward transactions.

Credit limits:
The credit limit for counterparty bank is fixed based on their financial performance as per the
latest audited financials. Various financial parameters such as Capital, Net worth etc., are taken
into consideration while assigning the limit. Credit exposures are monitored to ensure that they
do not exceed the approved credit limits.
Credit exposures on forward contracts:
The Bank enters into the forward contracts in the normal course of business for positioning and
arbitrage purposes, as well as for its own risk management needs, including mitigation of interest
rate and foreign currency risk. Derivative exposures are calculated according to the current
exposure method.
Credit exposure:
Notional Gross Potential Total credit

amount positive fair future exposure
value of the exposure
contracts
Forward 49,761 50,277 1,005 51,277
contracts

CHAPTER 5. CONCLUSION
Risk management is a higher priority these days for almost all industry fields. Risk management
underscores the fact that the survival of an organization depends heavily on its capabilities to
anticipate and prepare for the change rather than just waiting for the change and react to it. The
objective of risk management is not to prohibit or prevent risk taking activity, but to ensure that
the risks are consciously taken with full knowledge, clear purpose and understanding so that it
can be measured and mitigated.
Banking is financial intermediation with a lot of inherent risks involved. However total
elimination of risk is not possible in banking as banking works on the principal of ‘No Risk, No
Gain’. Credit risk management is a very important function of modern banking. In the current
volatile environment Credit risk management has become the need of the hour for all banks.
Basel II, in a marked departure from Basel I, recognizes credit quality as a prime factor in risk
weighting process. Basel II divides risk associated with banking into three parts: credit risk,
market risk, operational risk. Risk management and measurement in banks is very important.
Though its need is enriching day by day but only some of the banks uses suitable risk
management and measurement techniques effectively. In near future not only banks but also
companies will need to adopt risk management techniques. It is analyzed that banks need risk to
be management foe effective mitigation and capital allocation. In order to gain advantage banks
should develop an effective robust system and should also improve systems in which various
risks are to be reported.
New technologies for risk data analysis, separate module for managing the risk such as liquidity
risk, credit risk etc. should be setup by the banks. Then only banks can effectively mitigate the
risks.

Risk management prevents an institution from suffering unacceptable losses causing an

institution to fail or materially damage its competitive position. Functions of risk management
should be bank specific dictated by the size and quality of balance sheet, complexity of functions,
technical/professional manpower and the status of MIS in place in that bank. There may not be
one-size-fits-all risk management module for all the banks to be made applicable uniformly.
Balancing risk and return is not an easy task as risk is subjective and not quantifiable whereas
return is objective and measurable. If there exist a way of converting the subjectivity of the risk
into the number then the balancing exercise would be meaningful and much easier.
As such, in the process of providing financial services, commercial banks assume various kinds
of risks both financial and non-financial. Therefore, banking practices, which continue to be deep
routed in the philosophy of securities based lending and investment policies, need to change the
approach and mindset, rather radically, to manage and mitigate the perceived risks, so as to
ultimately improve the quality of the asset portfolio.
As in the international practice, a committee approach may be adopted to manage various risks.
Risk Management Committee, Credit Policy Committee, Asset Liability Committee, etc. are such
committees that handle the risk management aspects. While a centralized department may be
made responsible for monitoring risk, risk controls should actually take place at the functional
departments as it is generally fragmented across credit, funds, investment and operational areas.
Integration of systems that includes both transactions processing as well as risk systems is critical
for implementation. To the extent the bank can take risk more consciously, anticipates adverse
changes and hedges accordingly, to maximize their profit.

5.1 FINDINGS
Following are the findings of the analysis of risk management in banking sector:
1.Credit risk is generally well contained, but there are still problems associated with loan
classification, loan loss provisioning and the absence of consolidated accounts.
2.Market risk and operational risk are clear challenge, as they are relatively new to the areas that
were not well developed under the original Basel capital accord.
3.The new regulations will allow banks to introduce substantial improvements in their overall
risk management capabilities, improving risk-based performance measurement, capital
allocation as portfolio management techniques.
4.Future complexity is expected because banks diversify their operations. It is expected that
banks will diversify their operations to generate additional income sources particularly fee-based
income i.e. non-interest income, to improve returns.
5.Basel II leads to increase in data collection and maintenance of privacy and security in various
issues.
6.The banks that would prefer to adopt the standard approach should try to adopt advanced
approach.

5.2 SUGGESTIONS
Based on the findings of this study that state that risk management and profitability of financial
institutions are perfectly related over the period of study, the following recommendations can be
made:
1.Financial institutions, may it be central bank, commercial banks, micro financial houses, should
practice a sound risk management policy in their organization. This will facilitate the handling
of risk and enhance huge profits to be made thus fostering growth in the industry.
2.The risk management of financial institutions must set adequate liquidity level which will be
as a standard over the years for the sake of profitability, expansion financial worthiness and the
public creditability.
3.Banks must carefully plan for risks, identifies, analyses and assess the potential trouble which
may alter the implementation of company’s policy.
4.Concerning credit risks, banks must investigate the credit demand from borrowers and assess
whether they are financially able to repay the loan in due terms in an optic of reducing credit risk.
5.The banks should review Basel III components and develop a vision, strategy and action plan
for what is expected to be a suitable framework based on how the banking system evolves over
time.

6.The banks need regular engagement for sustained report. A qualified long-term advisor would
be preferable.
7.A workshop should be planned to produce a work map to Basel II compliance.
8.Training and additional assistance to make it easier for the banking system to comply with new
guidelines on market and operational risks.
9.Data privacy and security needs more attention.
10.Every bank should develop its own risk management system based on risk parameters. A risk
management system in banks should be developed for reporting risks on time and there should
be quick disposal of cases of risks within time.
11.Every bank should put in place proper credit risk management policies, process, procedure.
Banks should look after cash flow of the borrowers instead on their asset size.
12.Banks should also have dedicated early warning system or risk management department. The
task of department should be to provide early warning signal regarding credit risk, default risk,
etc.
13.The management should take care about the banking risks through forming special
management and qualified staff for dealing with risks and to improve their level and to give them
more authority to make their decisions and convey their recommendations about risk
management to the top management.

14.Indian private banks are largely Basel II compliant. However, they are still in applying the
standardized approaches in terms of capital computations under Pillar I. It will be in their interest
if its starts implementing the advanced measurement approach, which is more risk sensitive and
which would entail lesser capital provisioning. To achieve these objectives, banks should
improve their spending on IT systems and attempt to improve and train and re-skill their
personnel as a prelude to successful implementation of the Basel accord advanced approaches.
15.The need to improve the strength of financial system in the financial institutions Basel Accord
required implementation I, II, III, effectively.
16.Reserve Bank of India should monitor carefully the policies and practices of loans and interest
rate margins as some banks are charging very high in the name of risk coverage.

BIBLIOGRAPHY
References
www.google.com
www.rbi.gov.in
www.margrabe.com
www.bsi.org
RBI guidelines on risk management (web site)
www.iib.org
www.moneycontrol.com
www.rediffinance.com
www.isda.org
www.riskinstitute.ch
www.geocities.com
www.buinessworld.in

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A PROJECT REPORT ON ANALYSIS OF RISK MANAGEMENT IN BANKS WITH

SPECIAL REFERENCE TO KARUR VYSYA BANK

For partial completion of the degree of

(ACCOUNTING AND FINANCE)

Under the faculty of commerce.

Ms. ANJALI NARSHIV SINGH

Under the guidance of

MR. MACNOBLE D’CRUZ

St. Gonsalo Garcia College,

Behind Vasai cricket ground,

NAME OF THE LEARNER,

PROF. MACNOBLE D’CRUZ

BEHIND VASAI CRICKET GROUND, VASAI.

PROJECT GUIDE, SIGNATURE OF

S.NO. PARTICULARS PAGE NO.

CHAPTER 2. CONCEPTUAL FRAMEWORK

CHAPTER 3. PROFILE OF THE COMPANY

1.1 DEFINITION OF RISK

ST. GONSALO GARCIA COLLEGE 1 TY. BAF

1.2 DEFINITION OF RISK MANAGEMENT

1.What can go wrong?

3.If something happens, how will we pay for it?

ST. GONSALO GARCIA COLLEGE 2 TY. BAF

1. The individual who take or manage risks clearly understand it.

4.The expected payoffs compensate for the risk taken

5.Risk taking decision are explicit and clear

6.Sufficient capital as per buffer is available to take risk

ST. GONSALO GARCIA COLLEGE 3 TY. BAF

1.3 RISK MANAGEMENT FRAMEWORK:

A well constituted organizational structure defining clearly roles and responsibilities of

1.4 RISKS IN BANKING

ST. GONSALO GARCIA COLLEGE 4 TY. BAF

Risk management system comprises:

2.Appropriate internal organization, i.e. bank’s organizational structure

4.Adequate internal control system

5.Appropriate information system

6.Adequate process of internal adequacy assessment.

ST. GONSALO GARCIA COLLEGE 5 TY. BAF

ST. GONSALO GARCIA COLLEGE 6 TY. BAF

adverse effect on profitability. Profitability refers to both accounting and mark-to-market

ST. GONSALO GARCIA COLLEGE 7 TY. BAF

1.5.1 RISK MANAGEMENT PREREQUISITES

ST. GONSALO GARCIA COLLEGE 8 TY. BAF

1.6 OBJECTIVES OF THE STUDY

The following are the objectives of the study:

2.To examine the process of risk management.

3.To find out the importance of risk management in banking sector.

4.To trace out the system of risk management.

ST. GONSALO GARCIA COLLEGE 9 TY. BAF

5.To analyze the contingency plans to deal with risk.

1.7 TYPES OF RISK IN BANKING SECTOR

ST. GONSALO GARCIA COLLEGE 10 TY. BAF

ST. GONSALO GARCIA COLLEGE 11 TY. BAF

The management of credit risk includes:

a) Measurement through credit rating/scoring.

ST. GONSALO GARCIA COLLEGE 12 TY. BAF

When the value of an asset goes below the value of an outstanding

1.7.1.2 EXPOSURE RISK: