Risk Management In Banks

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II. TYPES OF RISKS
When we use the term “Risk”, we all mean financial
risk or uncertainty of financial loss. If we consider risk in
terms of probability of occurrence frequently, we measure
risk on a scale, with certainty of occurrence at one
end and certainty of non-occurrence at the other end.
Risk is the greatest where the probability of occurrence
or non-occurrence is equal. As per the Reserve Bank of
India guidelines issued in Oct. 1999, there are three
major types of risks encountered by the banks and these
are Credit Risk, Market Risk & Operational Risk.



III CREDIT RISK
Credit Risk is the potential that a bank
borrower/counter party fails to meet the obligations on
agreed terms. There is always scope for the borrower to
default from his commitments for one or the other reason
resulting in crystalisation 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.


A) Tools of Credit Risk Management.
The instruments and tools, through which credit risk
management is carried out, are detailed below:
a) Exposure Ceilings: Prudential Limit is linked to
Capital Funds – say 15% for individual borrower
entity, 40% for a group with additional 10% for infrastructure
projects undertaken by the group,
Threshold limit is fixed at a level lower than
Prudential Exposure; Substantial Exposure, which is
the sum total of the exposures beyond threshold limit
should not exceed 600% to 800% of the Capital
Funds of the bank (i.e. six to eight times).
b) Review/Renewal: Multi-tier Credit Approving
Authority, constitution wise delegation of powers,
Higher delegated powers for better-rated customers; discriminatory
time schedule for review/renewal, Hurdle
rates and Bench marks for fresh exposures and periodicity
for renewal based on risk rating, etc are formulated.
c) Risk Rating Model: Set up comprehensive risk scoring
system on a six to nine point scale. Clearly define
rating thresholds and review the ratings periodically
preferably at half yearly intervals. Rating migration is
to be mapped to estimate the expected loss.