Risk Management in Indian Banking sector

Introduction
Risk involves the chance an investment's actual return will differ from the expected return.
Risk includes the possibility of losing some or all of the original investment. Different
versions of risk are usually measured by calculating the standard deviation of the historical
returns or average returns of a specific investment.

Risks can come from various sources including uncertainty in financial markets, threats from
project failures (at any phase in design, development, production, or sustainment life-
cycles), legal liabilities, credit risk, accidents, natural causes and disasters, deliberate attack
from an adversary, or events of uncertain or unpredictable root-cause.

In ideal risk management, a prioritization process is followed whereby the risks with the
greatest loss (or impact) and the greatest probability of occurring are handled first, and risks
with lower probability of occurrence and lower loss are handled in descending order. In
practice the process of assessing overall risk can be difficult, and balancing resources used
to mitigate between risks with a high probability of occurrence but lower loss versus a risk
with high loss but lower probability of occurrence can often be mishandled.

Indian banking sector

Banking in India, in the modern sense, originated in the last decades of the 18th century.
Among the first banks were the Bank of Hindustan, which was established in 1770 and
liquidated in 1829–32; and the General Bank of India, established in 1786 but failed in 1791.

The Indian banking sector is broadly classified into scheduled and non-scheduled banks. The
scheduled banks are those included under the 2nd Schedule of the Reserve Bank of India
Act, 1934. The scheduled banks are further classified into: nationalized banks; State Bank of
India and its associates; Regional Rural Banks (RRBs); foreign banks; and other Indian private
sector banks. The term commercial banks refers to both scheduled and non-scheduled
commercial banks regulated under the Banking Regulation Act, 1949.

Risk management in Indian banks is a relatively newer practice, but has already shown to
increase efficiency in governing of these banks as such procedures tend to increase the
corporate governance of a financial institution. In times of volatility and fluctuations in the
market, financial institutions need to prove their mettle by withstanding the market
variations and achieve sustainability in terms of growth and well as have a stable share
value. Hence, an essential component of risk management framework would be to mitigate
all the risks and rewards of the products and service offered by the bank. Thus the need for
an efficient risk management framework is paramount in order to factor in internal and
external risks. In India, the banking sector is considerably strong at present but at the same

Time, banking is considered to be a very risky business. In the post LPG period, the banking
sector has witnessed tremendous competition not only from the domestic banks but from
foreign banks alike. Infact, competition in the banking sector has emerged due to
disintermediation and regulation. The liberalized economic scenario of the country has
opened various new avenues for increasing revenues of banks. In order to grab this
opportunity, Indian commercial banks have launched several new and innovated products,
introduced facilities like ATMs, Credit Cards, Mobile banking, Internet banking etc. Apart
from the traditional banking products, it is seen that Mutual Funds, Insurance etc. are being
designed/ upgraded and served to attract more customers to their fold. The Reserve Bank of
India has been using CAMELS rating to evaluate the financial soundness of the Banks. The
CAMELS Model consists of six components namely Capital Adequacy, Asset Quality,
Management, Earnings Quality, Liquidity and Sensitivity to Market risk.

Conclusion
Risk is indispensable for banking business; proper assessment of risk is an integral part of a
bank’s risk management system. Banks are focusing on the magnitude of their risk exposure
and formulating strategies to tackle those effectively.
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