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-Dr. M.P Singh & V.

S Chopra
-Center for Entrepreneur Development
Important trends
 Economic uncertainty
 prospects for GDP growth for 2008 and
 Liquidity management 2009 are 7.9% and 6.9%, respectively
• Borrowing limit from foreign branches from 25% to
 Inflation • Consumer Price(CRR)
(CPI) climbed to 9%
• Cash reserve ratio
 Currency • Commodity
• Injection prices
of 1 trillion are slowing
rupees down
into the market
Depreciated by 24% in the last 12 months
• this helps to ease inflation pressures
 Labour market
 Real estate market 63.3% population is between the ages of 15 and
30% or 340 million people, is below the age of 15
•Real estate demand, supported by middle class
•Depressed by increasing interest rates so far
Foreign Trade policy 2009-14
 TO double our percentage share of Global
merchandise share.
 Use trade expansion as an effective instrument
of economic growth and employment
Short term objective
 To arrest and reverse the declining trend of
exports and provide additional support.
 Export target 15% till 2011 & There after 25%
Foreign Trade policy 2009-14
 Fiscal incentives
 institutional changes
 procedural rationalization
 Diversification of exports Market
 Improvement in infrastructure related to exports
 Bringing down transaction cost
 Refund of all indirect taxes
 Special thrust to employment intensive sector viz
Textile , leather , Handicrafts.
 Directorate of trade remedy measures
 Technology upgradation scheme
•EPCG zero duty scheme
•Town of Export excellence
•TUFS(technology upgradation fund scheme) for textile
 Focus market Scheme
•Incentive raised from 1.25% to 3 %
•Large no of new products have been included
 Focus product scheme
•26 new markets added
•FMS incentive raised from 2.5 to 3%
•Simplification of application
 Market linked Focus product scheme
 Higher allocation is being provided.

 Interest subvention facility

 2%
interest rebate to 7 sp. Sector for
employment generation
 Income tax exemption
100% to EOU / STPI units till 2011
 ECGC assistance

•Cover extended from 90% to 95% till march

 Value addition

Minimum 15% under advance authorization

 Waiver of incentive recovery on write off.

Incentive not recoverable subject to certain condition

Reduction in transaction cost
Maximum fees reduced from Rs. 1.5 Lacs to Rs. 1 Lac.

 Directorate of trade remedy measures

(for MSME’s)
of goods as Packing
per contract Buyer

Inspection Presentation
Export of Docs to the
order Buyer
Culminates into

Shipment Importer’s
(Buyer’s) Bank

Exporter’s (seller’s)
Negotiation Invoice , packing Bank
between Buyer and list , transport Documents
seller document viz.

(Buyer’s) Bank

Collects the
Exporter’s payment remit
(seller’s) Bank it to

Credit the sellers A/c

after deducting their
Seller charges
 Formation of export intl. Sale contract
 Structure of Export order.
 Special condition
 Quality
 Quantity
 Price and payment terms
 Delivery and trade terms
 Documentation
 Invoice
 Insurance
 Transport document
 Bill of Exchange
 General condition
 Force majeure
 Jurisdiction
 Applicable Law
 Penalty clause / liquidated damages
2. Shipment

Buyer 1. Contract of Sale Seller

(Importer) (Exporter)

3. Lodgment
7. Payment
of shipping
5a. Payment 5b. Shipping documents documents

4. Shipping documents

6. Payment Remitting
Presenting Bank
 Risk is the possibility of an unfortunate
 Risk is the possibility of loss.
 Risk is a combination of hazards.
 Risk is uncertainty of loss.
 Risk is the tendency that actual results may
differ from predicted results.
Static Risks Dynamic Risks

1. These losses can be predicted. 1. Dynamic risks are not easily

2. These occur even if there is no predictable.
changes in the economic 2. These result from changes in the
environment. economic environment.
3. These risks can be covered by 3. These are not suitable for
insurance. treatment by insurance.
4. These risks do not benefit the 4. These risks benefit the society.
Financial Risk
This type of risk is concerned with financial loss. Losses due to non-financial risk cannot
be measured in monetary terms.

Non-financial Risk
This type of risks may be during the selection of career, the choice of marriage partner,
etc. These may or may not have any financial implications and are difficult to measure.

Pure Risk
Pure risk are those which have only two outcomes, i.e., loss or no loss. Whereas
speculative risks involves the situation where is a possibility of gain .e.g. investment in

Fundamental Risks
Fundamental risks are those risks which are there because of the problems relating to the
major factors such as exchange of economic, social, cultural, and political.
Business Risk
It is concerned with possible reduction in business value from
any source. Unexpected changes in future net changes in future net
cash flows are major source of fluctuations in business value.

(i) Price Risk : Price risk arises due to magnitude of cash flow due to
changes in out put and input prices. Output price risk due to the risk of
changes in the prices which may change due to the change in the
demand for the goods

(ii) Credit Risk : Credit risk arises because of the delay or failure in
making promised payments by the customers and other parties. Credit
risk is high in case of financial institutions, commercials banks, etc.

Personal Risk
Personal risks are the risks faced by individuals and families.
There are number of personal risks like earning risk, medical expense
risk, liability risks, physical assets risk, financial asset risk and risk of
 Payment Risk
 Credit Risk
 Transport related Risk
 Exchange fluctuation Risk
 Political Risk
 Investment Risk
 Product liability Risk
 Legal Risk
 Cultural Risk
 Riskmanagement is an integrated process of delineating
specific areas of risk, developing a comprehensive plan,
integrating the plan and conducting ongoing evaluation.

 Riskmanagement thus may be defined as “the identification”,

analysis and economic control of those risks which can
threaten the assets or earning capacity of an enterprise.”
Points supporting risk

• Before identification, in fact risk can be measured.

• Its evaluation is possible only after its impact.
• For risk management, systematic methods are required.
• For minimizing cost of handling risks, appropriate cost control devices
should be applied.
• Risk management should focus on assets and earning capacity of the
• Principles of risk management are applicable to all sectors of economy
including service sector.
1. Risk management is a scientific approach to deal with the
problems of pure risks.

2. Risk management considers insurable and uninsurable risks

and use suitable techniques for problems dealing with the
problems dealing with all pure risks.

3. Main emphasis of risk management is on reducing the cost of

handling risk by using appropriate methods.
1. To evaluate the risks of the business.
2. To evaluate the appropriate corporate polices and strategies.
3. To effectively manage the people and process.
4. To formulate plans and techniques to minimize the risks.
5. To give advices and suggestions for handling the risks.
6. To make the people aware about the various types of risks.
7. To economize the handling of risks.
8. To decide about which risks are to be avoided and which to be pursued
according to analysis.
9. To fix the sum assured under the policy and to decide on whether to
insure or not.
10. To select the appropriate to manage the risks.
1. Principle of identification of risk
The firm and individuals may face various types of risks like the firm may
face the risk from competitors because of which sales may go down. Risk
may change in fashion or there may be risk of exceeding the cost.

2. Principle of risk analysis

After, identification of risks, the various from statistical techniques are
utilized to analyze the risks to achieve the various objectives of risk

3. Principles of assessment of risk

Risk cost a lot. Thus, assessment of cost of risk is done so that that cost of risk
may be reduced within control.
Following factors are important to cost of risk:
(i) Risk frequency.
(ii) Money cost of risk.
(iii) Human cost in terms of pain and sufferings.
4. Principle of corrective decision.
In risk management, decision making is a process of involving information, choice of
alternative actions, implementation and evaluation that is directed to the achievement of
Aspects of decision:
(i) To retain the risk as it is which may be achieved with or without a reserve fund.
(ii) To prevent the loss of risk.
(iii) to transfer the risk through insurance, which involves selection of an insurer.

5. Principle of evaluation
This principle states that each available alternative has to be evaluated properly from all
the angles, i.e. financial, market etc.

6. Principle of alternative course action.

After evaluation a specific alternative is chosen which may give the desired result.
7. Principle of control of risk
Effective control is the basis to measure the effectiveness of performance at
various levels of handling risk.

8. Principle of retention of risk

It is related with the decision of retention of risk.

9. Principle of risk transfer

Risk transfer means the transfer of financial effect of risk to other party.
→ Protecting employees from accident.

→ Effective utilization of resources.

→ Minimizing cost of handling.

→ To maintain good relations with society and public.

Cost of Risk
Risk management decisions are based on estimates of cost of losses and thus the cost of

Components of cost of risk

1. Cost of expected losses

The expected losses cover both direct and indirect losses. Direct losses include the cost
of repairing or replacing damaged assets, the cost of paying workers, etc.
Indirect losses include reduction in the net profits that result because of direct losses,
such as the loss of normal profits and continuing extra expense.

2. Cost of control loss

This cost covers the cost of increased precautions and limits on risky activity to reduce
the frequency and severity of accidents and losses.

3. Cost of financing
Cost of loss financing covers the cost of self insurance, the loading in insurance
premiums, and the transaction cost of arranging, negotiating and arranging, negotiating
and enforcing hedging arrangements and other contractual risk transfers.
4. Cost of risk internal risk reduction methods
These are various risk management methods available like insurance hedging and other
contractual risk transfers which reduce the uncertainty.

5. Cost of residual uncertainty

The cost of uncertainty that remains (that is left over), once the firm has selected and
implemented loss control, loss financing and internal risk reduction is called the cost of
residual uncertainty.
Cost of price change risk
Cost of price change risk involves those factors in which pure risk and
other risk, e.g. very important risk for the firms specially operating in the
global environment is the risk of price change which may be due to exchange
Types of risks which a firm faces.
1. Cost of risk and maximization of value firm.
Value of business to shareholders depends fundamentally on the expected,
magnitude, timing and risk associated with future net cash flows that will be
available to provide shareholders with a return on their investment

Net Cash flow = Cash Inflow – Cash outflow

2. Maximizing value by minimizing the cost of risk.

Unexpected increases in losses that are not offset by cash inflows from
insurance contracts, hedging, arrangements or other contractual risk transfers
increase cash outflows and reduces generally cash inflows which will reduce
the value of share of firm

Cost of Risk = Value without risk – Value with risk

Risk management of individuals and cost of risk
The concept of risk management is applicable to individual risk
management decisions ,e.g. when choosing how to manage the risk of
accidents from motor, an individual would consider the expected losses
from accidents, possible loss control activities and loss financing
alternatives, and the cost of these alternatives, and the cost of these
benefits of gathering information.

Risk management information system (RMIS)

RMIS is designed to help the functions of risk management. These are
software tools. RMIS emphasis upon management of insurance
policies, exposure data, claims management, monitoring of safety and
financial losses.

Uses of RMIS
1. For reporting
2. For claim adjustment process review
3. For examination about reasons of accidents.
Problems of RMIS
 Incompatibility of software
 Poor system documentation
 Impurity of data
 Lacks of service
 Obsolesce
 Inflexibility of system
 Problems of proprietary

Remedies for the above problems:

 Clear and comprehensive specifications
 Need assessment in proper manner
 Reference checks, including on-site inspection
 Financial check
 Standard software configuration, such as DOS or Windows
 Internal access to system expert.
 Solid vendor account team.
Organization of risk management in business
Risk management is becoming a very important function of
management. In small organizations, the risks management is
taken care of by the president or owner. In large organizations,
risk management may be a separate department which may be
handled by a separate risk manager or director of risk

Process of Risk Management

1. To define the objectives of the risk management
2. To identify all significant risks
3. To evaluate the potential frequency and severity of losses.
4. To develop and select and managing risks
5. To implements the methods chosen for risk management
6. To monitor the performance and suitability of the risks
management methods and strategies on an ongoing basis.
Methods of Risk Management

1. Loss Control
Loss control are those which reduce expected cost of losses by reducing the
frequency of losses and/or the severity losses that occur.

2. Loss financing
Loss financing are the methods used to funds to pay for or offset losses that
occur. It includes:
a. Retention
b. Insurance
c. Hedging
d. Other contractual risks transfers.

3. Internal risk reduction

Business can reduce risks internally too through following:
a. Diversification, and
b. Investment in information.
The most important step for risk management is to
identify the risks, i.e. to determine where the risks for
the company lie. The risks may be various types like
risk to property, fixed assets and property, other areas
of potential loss like risk for the property which is
borrowed or taken on lease or there may be some
unusual risks like due to flood, earthquake or extra
Type of Property of Loss Liability losses
Loss 1. What types of property are 1. What property might be
Direct subject to damage or harmed by the firm (customers,
losses disappearance? suppliers and others)?
2. What are the factors responsible
2. How these parties be harmed ?
for loss?
3. What is the value of property be 3. What are the cost of defenses?
exposed to loss?
4. What is the cost of defenses?
4. Will the property be replaced if it
is lost?

1. Will the firm the firm have to 1. Will revenues decline in

raise external funds to replace response to decline in response
uninsured property? to possible damage to the
2. Assuming replacement, will the firm’s reputations?
firm suspend or cut back
operations after direct loss? a. What is the potential
Indirect magnitude of this loss.
3. If the firm reduces or stops the
Losses operations, b. What is the actions might
a. What would be the duration reduce the resulting indirect
and how much normal profit losses and what at cost?
could be lost?
b. What operation expenses 2. Will products and services
would continue even after likely be abandoned or the
suspension or slowdown products reinsured losses?
Type of Property of Loss Liability losses
Loss 3. Will the firm have to raise
c. Will revenue losses continue after
Indirect normal levels of production are resumed additional capital in the event
and, if so, what actions might reduce that cash flows decline?
these losses and at what cost?

4. If the firm continues operating at 4. Could large uninsured losses

pre-loss levels, push the firm into financial
(a) what facilities or resources distress?
will be needed?
(b) what would be the additional cost
from using alternative facilities or
Various other losses
Losses to human resources.
Human resources losses refers to the losses in the value of firm due to injuries,
disabilities, death retirement and turnover of workers. Because of contractual
commitments and compulsory benefits, firms often compensate employees injuries,
disabilities, death and retirement.

Losses of liability
Liability losses relate mainly to legal liability losses occur due to relationships with
many parties like suppliers, customers, employees, costs associated with liability
suits can impose substantial losses on firms.

Loss from external economic forces

This type of losses occur because of the changes in the prices of input or outputs.
Identification of Individual Earnings
1. Drop in family exchange
There may be drop in the earnings of family due to the death or disability of earning
member or due to retirement.
2. Medical expenses
Due to the health risk, there is a big medical expenses, this risk can be covered by
many ways.
3. Personal liability
Individuals can be sued and held for damages inflicted on others. This risk is mainly
for automobile.

Methods of risk identification.

Risk identification can be divided into two steps:
(1) The risk perception that is liability to perceive that there is an exposure.

(2) The identification of the operative cause or perils, coupled to the likely result.
Thank You
By: Dr. M P Singh
V.S Chopra