Post Graduate Program in Management

Synopsis

RISK MANAGEMENT IN INDIAN BANKING

INDUSTRY

Submitted to:

Dr. T.N Ravi

Submitted by:

Prashant Batra

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09PG095

15/April/2011

1. INTRODUCTION
1.1 Definition of Risk Management
Risk management is the identification, assessment, and prioritization of risks
followed by coordinated and economical application of resources to minimize,
monitor, and control the probability and/or impact of unfortunate events or to
maximize the realization of opportunities. Risks can come from uncertainty in
financial markets, project failures, legal liabilities, credit risk, accidents, natural
causes and disasters as well as deliberate attacks from an adversary. Methods,
definitions and goals vary widely according to whether the risk management
method is in the context of project management, security, engineering,
industrial processes, financial portfolios, actuarial assessments, or public health
and safety.
The strategies to manage risk include transferring the risk to another party,
avoiding the risk, reducing the negative effect of the risk, and accepting some or
all of the consequences of a particular risk.

1.2 Indian Banking System

Banking in India originated in the last decades of the 18th century. The first
banks were The General Bank of India, which started in 1786, and Bank of
Hindustan, which started in 1790; both are now defunct. The oldest bank in
existence in India is the State Bank of India, which originated in the Bank of
Calcutta in June 1806. Post independence The Reserve Bank of India, India's
central banking authority, was nationalized on January 1, 1949 under the terms
of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI,
2005b).
In 1949, the Banking Regulation Act was enacted which empowered the
Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in
India."

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The Banking Regulation Act also provided that no new bank or branch of an
existing bank could be opened without a license from the RBI, and no two
banks could have common directors.
By the 1960s, the Indian banking industry had become an important tool to
facilitate the development of the Indian economy. At the same time, it had
emerged as a large employer, and a debate had ensued about the nationalization
of the banking industry. Indira Gandhi, then Prime Minister of India, expressed
the intention of the Government of India in the annual conference of the All
India Congress Meeting in a paper entitled "Stray thoughts on Bank
Nationalisation." The meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an
ordinance and nationalized the 14 largest commercial banks with effect from the
midnight of July 19, 1969.
In the early 1990s, the then Narsimha Rao government embarked on a policy of
liberalization, licensing a small number of private banks. These came to be
known as New Generation tech-savvy banks, and included Global Trust Bank
(the first of such new generation banks to be set up), which later amalgamated
with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank
and HDFC Bank. This move, along with the rapid growth in the economy of
India, revitalized the banking sector in India, which has seen rapid growth with
strong contribution from all the three sectors of banks, namely, government
banks, private banks and foreign banks.
The Indian financial system comprises the following institutions:
1. Commercial banks
a. Public sector
b. Private sector
c. Foreign banks
d. Cooperative institutions
(i) Urban cooperative banks
(ii) State cooperative banks
(iii) Central cooperative banks

2. Financial institutions
a. All-India financial institutions (AIFIs)
b. State financial corporations (SFCs)

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c. State industrial development corporations (SIDCs)

3. Nonbanking financial companies (NBFCs)

4. Capital market intermediaries

1.3 Risk management in banks
Risk is inherent in any walk of life in general and in financial sectors in
particular. Till recently, due to regulated environment, banks could not afford to
take risks. But of late, banks are exposed to same competition and hence are
compelled to encounter various types of financial and non-financial risks. Risks
and uncertainties form an integral part of banking which by nature entails taking
risks. There are three main categories of risks:
Credit Risk, Market Risk & Operational Risk.
Recently due to financial crises government of India has also been active in
securing that the country’s financial system is created or modified in such a way
as to absorb the impact of these financial crises. Role of Basel’s New Capital
Accord’ and role of capital adequacy, Risk Aggregation & Capital Allocation
and Risk Based Supervision (RBS), in managing risks in banking sector.
Some other categories of risks are Regulatory Risk and Environmental Risk.
Various tools and techniques to manage Credit Risk, Market Risk and
Operational Risk and its various components, are been used which will be
discussed in detail.

1.4 Research Motivation

Due to recent crises in World Financial Market, many countries are looking to
establish a set of policies and risk management tools that will keep check on
external environmental pressures on the banks. India, due to its rigid policies
had less impact than other countries, but still India would like to keep itself in a
strong position in future if these crises come again. Being an emerging
economy, India has to open its door to foreign world, therefore inviting lots of
financial risk with it.
A sound risk management policy in place will make sure that India will always
be safeguarded from these financial risks. This project will focus on how risk
management in banks can be used and in what ways, which will minimize their
impact on investments and growth.

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 2. Research methodology
Research methodology may be defined as a way to systematically solve the
research problem. It consists of research methods, selection criterion of research
study and explanation of using of a particular methods or techniques, so that
research results are capable of being evaluated either by research himself or by
others. A systematic study is conducted on the basis of which the report is
produced.
Here analytical research is used for collection of secondary data. In analytical
research, the researcher has to use facts or information already available and
analyze these to make a critical evaluation.
Data collection method:
a) Primary Data-
• The unstructured interviews are taken to get useful information by
using questionnaire on personal basis.
• Telephonic interviews are taken to get quick and accurate
information from bank officials.
a) Secondary Data-
• Official publications of the Statistical Division, Ministry of
Finance, the Federal Bureaus of Statistics.
• Semi official e.g. State Bank of India and RBI.
• Technical and Trade Journals and Newspapers.
• Research Organizations such as Universities and other institutions.
a) Other few sources of collection of data are though websites. List of few
of them are stated below:
• Rbi.org.in
• Financeindia.org
• Indiastat.com
• Iba.org
• India.gov.in

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 • Nic.in

1. Expected outcome

• To have adequate knowledge of Indian banking structure.

• What is risk management and what are different tools which are applied
or can be applied in Indian banking system.
• Impact of past financial crises and ways by which those situations were
handled.
• Role of BASEL and CAR
• Looking to set a mechanism through which the crises can be well
managed in advance.

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References
Study material available on RBI website, rbi.org.in
Research article available on economic times.com
Research articles available on economist.com
Research papers available on nisearch.com
Research article available on financeindia.com
Introduction to Banking, Vijayaragavan Iyengar, Excel Book
Study material from FTRM (ABS)

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