Risk is inherent part of Banks business. Effective Risk Management is critical to any Bank for achieving financial soundness.

Bank has an integrated approach for management of risk and in tune with this, formulated policy documents taking into account the business requirements / best international practices or as per the guidelines of the national supervisor.

 Risk can be defined as the potential that events,

expected or unexpected, may have adverse impact on the banks earning or capital or both.
Risk and Expected returns are positively

related,Higher the risk Higher the expected returns.

A bank has many risks that must be managed carefully, especially since a bank uses a large amount of leverage

These policies address the different risk classes viz., Credit Risk, Market Risk and Operational Risk.

RISKS

Categories of Risks Credit Risk Interest Risk Market Risk Liquidity Risk Solvency or Capital risk Operational Risk

Although banks share many of the same risks as other businesses, the major risks that especially affect banks are risks, credit default risks, and liquidity risk, interest rate

Credit Risk faced by bank of lending funds to individual, corporate,Trade, Industry,agriculture, transport or banking firm

Credit default risk occurs when a borrower cannot repay the loan. Eventually, usually after a period of 90 days of nonpayment, the loan is written off. Banks are required by law to maintain an account for loan loss reserves to cover these losses.

Interest Rate Risk:A bank's main source of profit is converting the liabilities of deposits and borrowings into assets of loans and securities. It profits by paying a lower interest on its liabilities than it earns on its assetsthe difference in these rates is the net interest margin.

Foreign Exchange Risk: International banks trade large amounts of currencies, which introduces foreign exchange risk, when the value of a currency falls with respect to another. A bank may hold assets denominated in a foreign currency while holding liabilities in their own currency. If the exchange rate of the foreign currency falls, then both the interest payments and the principal repayment will be worth less than when the loan was given, which reduces a bank's profits.

An operational risk is, as the name suggests, a risk arising from execution of a company's business functions. It is a very broad concept which focuses on the risks arising from the people, systems and processes through which a company operates. It also includes other categories such as fraud risks, legal risks, physical or environmental risks.

Operational risk arises from faulty business practices or when buildings, equipment, and other property required to run the business are damaged or destroyed. For instance, banks in the vicinity of the World Trade Center suffered considerable losses as a result of the terrorist attacks on September, 11, 2001, which knocked out power and communications in the surrounding area. Barings Bank collapsed because its audit controls did not detect the calamitous losses suffered by its rogue trader, Nick Leeson, early enough to prevent its collapse.

Thanks

Regulatory Capital: When banks calculate their RC requirement and eligible capital, they have to consider regulatory definitions, rules and guidance. From a regulatory perspective, the minimum amount of capital is a part of a bank's eligible capital. Total eligible capital according to regulatory guidance under Basel II is provided by the following three tiers of capital: Tier 1 (core) capital: broadly includes elements, such as common stock, qualifying preferred stock, and surplus and retained earnings. Tier 2 (supplementary) capital: includes elements, such as general loan loss reserves, certain forms of preferred stock, term subordinated debt, perpetual debt, and other hybrid debt and equity instruments. Tier 3 capital: includes short-term subordinated debt and net trading book profits that have not been externally verified.