RISK MANAGEMENT

Prof.H.DAS

DEFINITION
The techniques used to minimize and prevent accidental loss to a business. The process of identifying, assessing, and controlling, risks arising from operational factors and making decisions that balance risk cost with mission benefits. Also called Risk management Risk signifies danger and is something to be avoided

Classification of risks
Industry & services risks Management and operations risks

Market risks Political risks

Credit risks

Contd. Liquidity risks Disaster risks

System risks Legal risks

Industry & services risks

Services risks Market structure

Business dynamics
Customer relations risks customer

Management and operations risks

Risks to property Clear and well defined work processes Changes in technology R&D risks Agency network risks Environment and pollution control regulations. Locational benefits near by metros, railway stations, ports, cities,etc

Market risks
Raw materials rate Quantities,quality,suppliers, lead times interest rates risks and forex risks namely, fluctuations risks and interest rates risk in respect of foreign exchange transactions

Political risks
Elections

War risks
Country /area risks Insurance risks like fire,strikes,riots and civil commotion, marine risks, cargo risks etc Fiscal/monetary policy risks including taxation risks

CREDIT POLICY
Credit worthiness risks

Risks in settlement of dues by clients Provisions for doubtful bad debts

Liquidity risks
Financial solvency and liquidity risks

Borrowing limits, delays cash/ reserve management risks

Tax risks

Disaster risks
Natural risks like fires, floods, earthquakes, etc Man made risks factor rising under the factories act, mines act , etc risk of failure of effective disaster management plans formulated by the company

System risks
System capacities

System reliability
Obsolescence risks Data integrity risks

Coordinating and interface risks

Legal risks
Contract risks

Contractual liability Frauds

Judicial risks Insurance risks

Risk management process

A. Help and ensure that all the foreseeable risks involved re actually understood And accepted before important decisions re taken. B. Monitor new projects and ongoing operation to ensure that they continue to develop satisfactorily, and no problems or new risks emerge C. Better informed decision making-for example in assessing new opportunities

D. Less chance of major problems in new and ongoing activities

E. Increased likelihood of achieving corporate objectives

Managing The Risk

Tolerate Treat Transfer

Terminate
Take the opportunity

Steps in risk management

Identification of risk

Evaluation/ measurement of risk

Handling of risks

Implementation of risk management decision

Risk identification
Any business exists in an atmosphere of perpetual change The process of risk identification must be an ongoing one and any failure in proper risk identification would result in passive retention of the risk by the company Risk identification information: Asset information such as list of assets, its original cost ,book value, replacement value etc.

Process information regarding raw materials, process and nature of plants

Liability information such as liability to its employees and liability to public

Risk evolution/ measurement

A. The probability or chances that losses will occur B. The impact the losses would have upon the financial affairs of the firm should they occur C. The ability to predict the losses that will actually occur during the budget period D. Risk retention Risk retained as part of deliberate management strategy after conscious evaluation of possible losses and causes. This is known as active form of risk retention Risk retention occurred through negligence .this is known as passive form of risk retention

Contd
E Risk transfer :
Insurance does not protect a firm against perils occurring ; it offers restoration , atleast in part of any resultant economic losses.

F Implementation of decision

Risk handling
In every country there are governmental and official regulations regarding health and safety at work: fire precautions, hygiene , the construction and operation of vehicles, food and drink and many other matters relating to property, personal injury and other risk. Example: motor vehicles ACT and the ESI ACT

Risk reduction
The only cautionary note regarding risk reduction is that as far as possible expenditure should be related to potential future saving in losses and other risk costs; in other words, risk prevention generally should be evaluated in the same way as other investment projects